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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 1-14180
LORAL SPACE & COMMUNICATIONS LTD.
C/O LORAL SPACECOM CORPORATION
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
TELEPHONE: (212) 697-1105
JURISDICTION OF INCORPORATION: BERMUDA
IRS IDENTIFICATION NUMBER: 13-3867424
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
has been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in the registrant's 2000 definitive proxy statement.
At March 15, 2000, 249,507,509 common shares were outstanding, and the
aggregate market value of such shares (based upon the closing price on the New
York Stock Exchange) held by non-affiliates of the registrant was approximately
$2.8 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 2000 definitive proxy statement (to be filed
not later than 120 days after the end of the registrant's fiscal year) are
incorporated by reference into Part III.
The financial statements required by Rule 3.09 of Regulation S-X of the
registrant's significant investee, Globalstar, L.P., are incorporated by
reference herein from the Annual Report on Form 10-K filed by Globalstar
Telecommunications Limited and Globalstar, L.P.
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PART I
ITEM 1. BUSINESS
THE COMPANY
OVERVIEW
Loral Space & Communications Ltd. together with its subsidiaries ("Loral"
or the "Company") is one of the world's leading satellite communications
companies, with substantial activities in satellite manufacturing and
satellite-based communications services. We have assembled the building blocks
necessary to provide a seamless, global networking capability for the
information age. Our four operating segments are:
Fixed Satellite Services. Through the Loral Global Alliance, which
currently consists of Loral Skynet, Loral CyberStar, Inc. ("Loral
CyberStar"), our 49% owned affiliate Satelites Mexicanos, S.A. de C.V.
("Satmex"), and our 47% owned affiliate Europe*Star Limited
("Europe*Star"), we have become one of the world's leading providers of
satellite services using geostationary communications satellites. We lease
transponder capacity on our satellites to our customers who use the
capacity for various applications, including broadcasting, news gathering,
Internet access and transmission, private voice and data networks, business
television, distance learning and direct-to-home television, or DTH. The
Loral Global Alliance currently has ten high-powered geosynchronous
satellites in orbit: the seven satellite Telstar fleet and three Satmex
satellites, with footprints covering almost all of the world's population.
Broadband Data Services. Through Loral CyberStar and our 82% owned
subsidiary CyberStar, L.P. ("CyberStar LP", and together with Loral
CyberStar, the "Loral CyberStar Group"), we currently (i) deliver
U.S.-based Internet content via satellite to more than 130 Internet Service
Providers, or ISPs, in more than 32 foreign countries, which reach
approximately seven million residential customers around the world, (ii)
distribute high-speed data over private corporate very small aperture
terminal, or VSAT, networks, which reach approximately 2.5 million
corporate desktops around the world, and (iii) offer business television,
or BTV, services by satellite to corporations. Our broadband strategy will
build on these existing resources and will initially focus on two
attractive opportunities for early market entry: consumer broadband
services and streaming media services.
Satellite Manufacturing and Technology. Space Systems/Loral, Inc.
("SS/L") is one of the world's leading manufacturers of satellites and
space systems, providing its customers with a full suite of services,
including: developing custom designs to meet their requirements,
manufacturing and testing, and arranging for launch services and insurance.
Global Mobile Telephone Service. We are the managing general partner
and 40% owner of Globalstar, L.P. ("Globalstar"). Globalstar owns and
operates a 52-satellite constellation, including four in-orbit spares, that
forms the backbone of a global telecommunications network designed to serve
virtually every populated area of the world. In the first quarter of 2000,
the Globalstar system commenced operations, and as of February 29, 2000,
there were 14 gateways available for service covering 78 countries.
Billable service has commenced in 20 countries, including Austria,
Argentina, Brazil, Canada, Greece, Italy, South Korea, Switzerland and the
United States.
Our strategy is to capitalize on our market position and advanced
technologies to offer value-added satellite-based services as part of the
evolving worldwide communications networks. Where appropriate, we seek to form
strategic alliances with major telecommunications service providers and
equipment manufacturers to enhance and expand our satellite-based service
opportunities. For example, we are a partner in SkyBridge Limited Partnership
("SkyBridge"), a partnership led by Alcatel, that is building a low earth orbit
satellite system for the delivery of broadband and multimedia services
worldwide. We, together with partners, also act as the Globalstar service
provider in Canada, Mexico, Brazil and Russia.
Loral was incorporated on January 12, 1996 as a Bermuda exempt company and
has its registered and principal executive offices at Cedar House, 41 Cedar
Avenue, Hamilton, HM 12, Bermuda.
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FIXED SATELLITE SERVICES
Following our acquisition of the Loral Skynet business from AT&T in March
1997, we have rapidly established ourselves through a series of subsequent
acquisitions and joint venture transactions as one of the world's leading
providers of fixed satellite services. These satellites, which are known as GEO
satellites, fly in geosynchronous earth orbit approximately 22,000 miles above
the Equator. In this orbit, the satellites remain in a fixed position relative
to points on the earth's surface. GEO satellites provide reliable, high
bandwidth services anywhere in their coverage areas and therefore serve as the
backbone for many forms of telecommunications.
In the United States and other developed countries, customers lease
transponder capacity primarily for distribution of network and cable television
programming, for DTH video transmission and for live video feeds from breaking
news and sporting events. In the developing world, a substantial portion of such
capacity is dedicated to long-distance telephone service as well as television
services. GEO satellites are increasingly used throughout the world for
international Internet communications, high-speed data services for businesses
through VSAT networks, and for distance learning and educational television.
Loral Global Alliance
Through the Loral Global Alliance, we offer our customers an integrated
portfolio of satellite capacity that provides "one stop shopping" for local,
regional and global GEO satellite services. The alliance, which consists of
Loral Skynet, Loral CyberStar, Satmex and Europe*Star, currently has ten
satellites in orbit with a total of 195 C-band and 297 Ku-band 36 MHz
transponder-equivalents and a collective footprint covering almost all of the
world's population. As of December 31, 1999, Loral Global Alliance backlog
(including 100% of Satmex backlog) totaled $1.5 billion, comprised of leases
with customers having an average term of approximately 4.5 years, utilizing
approximately 268 36 MHz transponder-equivalents, with approximately 146
additional 36 MHz transponder-equivalents available for lease, excluding 21 36
MHz transponders not available due to previous sales or other events. Moreover,
in January 2000, Telstar 12 commenced service with 57 36 MHz
transponder-equivalents, of which 51 were available for lease. Discussions set
forth in Part I regarding the number of transponders are in 36 MHz equivalents,
unless otherwise noted.
The Loral Global Alliance provides for cross-selling arrangements among the
alliance members' respective sales forces and for cooperative marketing and
promotional activities. We believe that these arrangements will enable the
members of the alliance to compete more effectively in sales of communications
satellite services worldwide. In addition, the alliance offers in-orbit backup
capabilities for its members in regions where members' fleets have overlapping
coverage.
Loral Skynet
Loral Skynet's core business is providing satellite capacity to support
distribution of U.S. television network programming. The ABC, CBS and Fox
television networks are its major customers. All ABC, CBS and Fox stations have
their antennae pointed at Loral Skynet's satellites, creating a configuration
known as a "neighborhood" that is attractive to other users requiring similar
distribution channels. Other Loral Skynet customers include HBO, Disney, Time
Warner and third-party resellers, such as sports syndicators and distance
learning providers.
Loral Skynet currently has four high power GEO satellites in operation.
Telstar 4 was placed in service in November 1995 and has 24 C-band and 24
Ku-band transponders. Telstar 4 provides coverage over the continental United
States, Hawaii, Puerto Rico and the U.S. Virgin Islands. Telstar 5, with 24
C-band and 24 Ku-band transponders, was built by SS/L and was placed into
service on July 1, 1997. Telstar 5 provides coverage over the continental United
States, Hawaii, Puerto Rico, the Caribbean and into Canada and portions of Latin
America. As of December 31, 1999, Telstar 4 was operating at approximately 85%
utilization and Telstar 5 was operating at approximately 77% utilization.
Telstar 6, built by SS/L, was launched in February 1999 and commenced
commercial operations in March 1999. Telstar 6 is a broadcast video and data
communications satellite with 24 C-band and 24 Ku-band
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transponders. It provides coverage over the continental United States, Hawaii,
Puerto Rico, the Caribbean and into Canada and portions of Latin America and as
of December 31, 1999 was operating at approximately 52% utilization.
Telstar 7, built by SS/L, was launched in September 1999 and commenced
commercial operations in November 1999. Telstar 7 is a broadcast video and data
communications satellite with 24 C-band and 24 Ku-band transponders. It provides
coverage over the continental United States, Hawaii and Puerto Rico as well as
parts of the Caribbean, Canada and Latin America and as of December 31, 1999 was
operating at approximately 37% utilization.
Loral CyberStar
On March 20, 1998, we acquired Orion Network Systems, Inc., a rapidly
growing provider of satellite-based communications services, which recently
changed its name to Loral CyberStar, Inc. We completed our integration plan for
Loral CyberStar and transferred management of Loral CyberStar's satellite
capacity leasing and satellite operations to Loral Skynet, effective January 1,
1999.
Loral CyberStar's leasing business currently provides satellite capacity
for video distribution, satellite news gathering and other satellite services
primarily to broadcasters, news organizations, telecommunications service
providers and ISPs. Loral Cyberstar's customers include PSINet, HBO, Disney,
Cable & Wireless and United Pan Europe Communications.
Telstar 11 (formerly known as Orion 1), a high power satellite with 48
Ku-band transponders, commenced operations in January 1995, and provides
coverage to 34 European countries, much of the United States and parts of
Canada, Mexico and North Africa. As of December 31, 1999, Telstar 11 was
operating at approximately 90% utilization.
Telstar 12 (formerly known as Orion 2), a high power satellite with 57
Ku-band transponders, expands Loral CyberStar's European coverage and extends
coverage to portions of the former Soviet Union, Latin America, the Middle East
and South Africa. Telstar 12 was launched in October 1999 into 15 degrees W.L.
and commenced operations in January 2000. Although Telstar 12 was originally
intended to operate at 12 degrees W.L., Loral Cyberstar reached an agreement
with Eutelsat to operate Telstar 12 at 15 degrees W.L. while Eutelsat continued
to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to
use its 14.8 degrees W.L. orbital slot and to assert its priority rights at such
location on Loral CyberStar's behalf. As part of this coordination effort, Loral
CyberStar agreed to provide to Eutelsat four 54 MHz transponders on Telstar 12
for the life of the satellite. Eutelsat also has the right to acquire, at cost,
four transponders on the next replacement satellite for Telstar 12. As part of
the international coordination process, Loral continues to conduct discussions
with various administrations regarding Telstar 12's operations at 15 degrees
W.L. If these discussions are not successful, Telstar 12's useable capacity may
be reduced.
To replace Orion 3, on September 28, 1999, Loral CyberStar purchased from
APT Satellite Company Limited ("APT") all transponder capacity (except for one
C-band transponder retained by APT) and existing customer leases on the Apstar
IIR satellite for approximately $273 million. Insurance proceeds from the May 4,
1999 launch failure of the Orion 3 satellite were used to fund the initial
payments and for a significant portion of the last installment of approximately
$182 million in March 2000.
Apstar IIR, which was manufactured by SS/L, was launched in October 1997
and has an estimated remaining useful life of approximately 13 years. Loral
CyberStar has full use of 27 C-band and 24 Ku-band transponders aboard Apstar
IIR for the remaining life of the satellite. Located at 76.5 degrees E.L.,
Apstar IIR covers a region that includes Asia, Europe, Africa and Australia,
which represents over 75% of the world's population. Under the purchase
agreement, Loral CyberStar will also have the option to lease replacement
satellites from APT upon the end of life of Apstar IIR. In November 1999, the
satellite was renamed Telstar 10/Apstar IIR. As of December 31, 1999, Telstar
10/Apstar IIR was operating at approximately 44% utilization.
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Satmex
In December 1997, a joint venture in which we hold a 65% economic interest
completed the acquisition from the Mexican government of a 75% interest in
Satmex. Satmex, which owns and operates three GEO communications satellites, is
currently the dominant satellite communications company providing fixed
satellite services in Mexico, and intends to expand its services to become a
leading provider of satellite services throughout Latin America.
Satmex provides satellite transmission capacity to broadcasting customers
for network and cable television programming, DTH service and on-site
transmission of live news reports, sporting events and other video feeds. Satmex
also provides satellite transmission capacity to telecommunications service
providers for public telephone networks in Mexico and elsewhere and to corporate
customers for their private business networks for data, voice and video
applications. Satmex has landing rights to provide broadcasting and
telecommunications transmission capacity in Mexico, the United States, Canada
and 23 nations and territories in the Latin American region. Satmex's
broadcasting customers include Televisa and Television Azteca, and its
telecommunications services customers include Telmex, Bell South and
Interpacket.
Satmex's satellites, Solidaridad 1, Solidaridad 2 and Satmex 5, have
utilization rates as of December 31, 1999 of approximately 47%, 81% and 74%,
respectively. These satellites have a total of 144 transponders operating in C-
and Ku-bands, with an aggregate footprint covering substantially all of the
continental United States and the Caribbean as well as all of Latin America,
other than certain regions in Brazil. We believe that this capacity is one of
the largest blocks of satellite capacity dedicated primarily to the Latin
American region. Satmex holds 20-year concession titles to operate in these
three orbital locations, each of which will expire on October 22, 2017. The
concession titles are renewable thereafter, subject to certain conditions, for
an additional 20-year term without additional payment. In addition, Satmex
operates two satellite control centers.
During 1999, Loral Skynet purchased three Ku-band transponders on the
Satmex 5 satellite from Satmex for $25.5 million.
Europe*Star
In December 1998, we finalized our strategic partnership with Alcatel to
jointly build and operate Europe*Star, a geostationary satellite system to be
marketed as part of the Loral Global Alliance. Alcatel serves as the primary
contractor while SS/L is providing the satellite bus and will test and integrate
the satellites. Europe*Star, in which we own a 47% interest, will provide
broadcast and telecommunications services via two high power all Ku-band
satellites, which are expected to be launched in 2000 and 2002, respectively.
Europe*Star intends to provide satellite services to Europe, Southeast Asia, the
Middle East, South Africa and India.
Total revenues for the fixed satellite services segment, including
intercompany and affiliate sales, were $342 million, $254 million and $83
million for the years ended December 31, 1999, 1998 and 1997, respectively. The
segment's intercompany sales were $11 million in 1999, $5 million in 1998 and $1
million in 1997. Affiliate sales for Satmex were $136 million in 1999 (including
approximately $28 million to Loral companies), $105 million in 1998 and $13
million in 1997. The segment had EBITDA of $193 million, $171 million and $52
million for the years ended December 31, 1999, 1998 and 1997, respectively.
Total assets for the segment were $3.9 billion, $3.4 billion and $1.8 billion as
of December 31, 1999, 1998 and 1997, respectively.
As of December 31, 1999 and 1998, funded backlog for the segment was $1.5
billion and $746 million, respectively, including intercompany backlog of $3
million in 1999 and $6 million in 1998 and affiliate backlog for Satmex of $364
million in 1999 and $133 million in 1998. Approximately $340 million of the
segment's 1999 external funded backlog is expected to be realized in 2000.
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BROADBAND DATA SERVICES
Through the Loral CyberStar Group we distribute multimedia (video, data and
voice) and deliver Internet access and services to businesses and ISPs.
Currently, we:
- deliver U.S.-based Internet content via satellite to more than 130 ISPs
in more than 32 foreign countries, which reach approximately seven
million residential customers around the world;
- distribute high-speed data over private corporate VSAT networks which
currently reach approximately two-and-a-half million corporate desktops
around the world; and
- offer business television services by satellite to corporations for the
delivery of teleconferences, distance learning and training, and special
events.
Satellite-based broadband delivery systems have a number of favorable
technical characteristics, including point-to-multipoint broadcasting
capability, geographic ubiquity, rapid deployment, high capacity and low cost.
We believe that these characteristics will be of increasing importance in the
near future as broadband Internet access becomes an increasingly universal
requirement and Internet content continues to become richer and more complex,
particularly in the most popular sites.
Our broadband strategy will combine our existing resources and current
business base with existing fiber-based terrestrial networks, new technologies
and the resources of strategic partners to address both the expanding market for
today's broadband services and to become a leading medium for delivery of even
richer Internet content in the future. Our existing resources include: a current
customer base of 130 ISPs and 250 enterprise customers; proprietary software for
satellite delivery of large, complex files to multiple locations; satellite
systems expertise; access to our GEO constellation and orbital slots around the
world; access to fiber networks and Internet backbone entry (peering) points;
network operating centers; alliances with high-technology providers; and a
global sales force.
We have identified two attractive opportunities for early market entry:
consumer broadband services and streaming media services.
Consumer Broadband Services
We plan to serve the growing consumer broadband services market, initially
in North America, with an affordable, ubiquitous, two-way, high-speed Internet
access service employing a hybrid satellite/fiber network. When fully deployed,
this network will be capable of serving at least ten million homes and small
businesses.
The network will offer point-to-point downlink data rates of 1.5 megabits
per second and uplink data rates of 128 kilobits per second. In addition, the
system will offer streaming multimedia in multicast mode at speeds of up to 30
megabits per second. The user will have access to stored or live multicasts and
both real-time and non-real-time streaming services. The network will use four
closely-located satellites that customers can access through a single compact
satellite dish: Ku-band satellites for multicasting and Ka-band satellites with
multiple spot beams for delivery of two-way point to point services.
Because this high-capacity system can be rapidly deployed and will be
available anywhere in the satellites' broad coverage area, end-users not served
by digital subscriber lines, or DSL, or cable modems will be an important
market. And because of the system's multimedia multicasting and competitive
pricing, we expect to compete effectively in areas served by these terrestrial
services as well.
We intend to serve as the "wholesaler" of this connectivity service. We
anticipate that our customers (ISPs, cable companies and telephone companies)
will market and sell the service to their customers as a high-value extra
feature in their own portfolio of services, emphasizing its "always-on"
high-speed connectivity and multimedia multicasting capabilities. We believe our
network will be attractive to our reseller customers because it provides an
immediate national presence and preserves their ability to collect consumer
viewing-habit information.
The network will eventually consist of four satellites and fourteen
gateways linked by fiber to the Internet backbone, all controlled by a fully
backed-up network operations center. The consumer premises equipment
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will consist of a set-top box with up to 30 gigabytes of storage connected to a
single small satellite dish capable of seeing our four closely located broadband
satellites. We are currently in discussions with several strategic partners who
would participate in the development of the ground system and customer premises
equipment for the delivery of this service. We will serve as the system
integrator and principal owner and manager of this business, as we do for
Globalstar.
We plan to use Ku-band transponders on two satellites in Loral's current
fleet, Telstar 4 and Telstar 6, along with our existing gateway and Internet
peering site at Mount Jackson, Virginia, for the initiation of this two-way
broadband service in early 2001. Two high-powered Ka-band satellites, each with
48 spot beams, are under construction at SS/L. They are scheduled to be launched
in 2002 and 2003, expanding coverage to the entire Western Hemisphere.
We currently estimate that the required investment for the consumer
broadband services business in North America will be approximately $3 billion,
with the services implemented and the associated investments made in several
phases.
Streaming Media Services
We believe that streaming media -- the continuous distribution of rich
video content -- will be an increasingly important component of total Internet
traffic in the future, fueling end-user demand for faster delivery than the
traditional architecture of the Internet will allow. In the workplace, these
technologies will support more sophisticated work processes and greater
productivity, and will be important components of on-line advertising, content
and e-commerce. We plan to focus our marketing efforts initially on our existing
base of ISP and corporate customers.
We intend to exploit the technical advantages of satellites to deliver
streaming media services more effectively than terrestrial alternatives. Instead
of flooding the Internet with multiple point-to-point transmissions of these
massive files, our system will move content directly from its source via
satellite to multiple servers located at the "edge of the net," near the end
user. This should eliminate bottlenecks, improve quality, lower cost and expand
content choices and applications. We will be able to deliver content either as a
constant stream or to cache servers in ISP or enterprise facilities for
distribution as requested by the end-user.
We intend to enter three streaming media business segments:
- IP Transport Service to the Edge of the Net: Content and applications
service providers with their own encoding capabilities will be able to
use our network to update their servers at the edge of the Net and reach
"new media" viewers with their product offerings more efficiently.
- Content Aggregation Services: For customers who wish to outsource more of
the streaming media distribution process, we will receive and store
customer's content on our own servers at our satellite uplink facilities,
encode the content into digital format, schedule and monitor transmission
and provide customer care. This service will allow customers to
distribute their customized broadband applications and content
(particularly video) throughout the network to lower the cost and improve
the speed and quality of delivery to the end-user.
- Business Portal Service: We plan to offer enterprise customers a library
of selected business-related content and applications (training,
corporate communications, etc.), accessed through a single Internet site.
We expect that this portal will derive revenue not only from hosting the
video content, but also from advertising, e-commerce, subscriptions and
pay-per-view services.
We currently estimate the required investment for the streaming media
services business at approximately $500 million.
We expect to use strategic alliances to enhance the establishment and
prospects of both our planned consumer broadband and streaming media businesses.
We have extensive experience in forming technical and marketing partnerships, as
we did with Globalstar. We have several partnerships with Alcatel, a leading
provider of telecommunications services and technology, including DSL (digital
subscriber lines), and owner of approximately 18% of CyberStar LP. During 1999,
we formed several significant alliances with high-
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technology companies to offer services that increase high-speed, uninterrupted
access to the Internet and improve the efficiency of delivering multimedia
products and services to corporations, broadcasters, content developers, ISPs
and other enterprises. Among the most recently formed alliances are: an
agreement to provide PSINet with a high-speed, satellite-based Internet link
into South America; a trial with RealNetworks to offer satellite-based
audio/video streaming media service to European ISP customers; and a joint
marketing agreement with Akamai to improve delivery of web content to ISPs
worldwide.
On July 31, 1999, CyberStar LP acquired Global Access Services ("Global
Access"), a business television unit of Williams Communications, Inc. for
approximately $11 million in cash. Global Access provides business television,
video conferencing and other communication services to companies in various
parts of the world including Europe, South America, Asia and the Americas,
through networks operated in Singapore, Dallas, London and Johannesburg.
In December 1999, the Brazilian government awarded Loral CyberStar a
license to deliver domestic and international data communications services in
Brazil. Under this license -- one of the first to be awarded to a foreign
company under the country's recent market-opening regulations -- Loral CyberStar
can provide the Brazilian and the international business community with
broadband data services capable of delivering content directly to the user's
desktop, as well as a network infrastructure for advanced telecommunications
services.
Total revenues for the broadband data services segment were $85 million and
$40 million for the years ended December 31, 1999 and 1998, respectively. EBITDA
before development costs for the segment were losses of $8 million and $13
million in 1999 and 1998, respectively. Total development and start-up costs for
Cyberstar LP were $27 million, $33 million and $33 million for 1999, 1998 and
1997, respectively. Total assets for the segment were $114 million, $153 million
and $25 million as of December 31, 1999, 1998 and 1997, respectively.
As of December 31, 1999 and 1998, funded backlog for the segment was $236
million and $147 million, respectively, which was all from external sources.
Approximately $85 million of 1999 external funded backlog is expected to be
realized in 2000.
SATELLITE MANUFACTURING AND TECHNOLOGY
SS/L is a worldwide leader in the design, manufacture and integration of
satellites and space systems. SS/L draws on its 40-year history, during which
satellites manufactured by SS/L have achieved more than 700 years of cumulative
on-orbit experience. SS/L also provides Loral with visibility into emerging and
new satellite-based technologies and applications. SS/L manufactures satellites
that provide telecommunications, weather forecasting and broadcast services.
SS/L is the leading supplier of satellites to Intelsat, an international
consortium of 135 member nations which is currently the world's largest operator
of commercial communications satellites. Other customers include EchoStar, TCI,
Globalstar, Loral Skynet, Sirius Satellite Radio (formerly known as CD Radio)
and Cable & Wireless Optus of Australia.
As one of the premier providers of satellites and other space systems, SS/L
competes principally on the basis of technical excellence, a long record of
reliable performance, competitive pricing and on-orbit delivery packages. We
believe that SS/L's advanced manufacturing and testing facilities and long-term
customer relationships have enabled SS/L to compete effectively in the
commercial space systems marketplace.
SS/L has a history of technical innovation that includes the first
three-axis stabilized satellites, bipropellant propulsion systems for commercial
satellites that permit significant increases in the satellites' payload and
extend the satellites' on-orbit lifetime, rechargeable nickel-hydrogen batteries
with a life span of 10 years or more, the use of advanced composites to
significantly enhance satellite performance at lighter weights and the first
communications satellite with more than ten kilowatts of power. SS/L was also
the first satellite manufacturer to employ heat pipes to control heat transfer
in commercial satellites, thereby providing a more benign temperature
environment and increased reliability. SS/L also created the first multi-mission
geostationary satellite and was one of the first U.S. companies to acquire space
technology from Russia's space industry, obtaining exclusive rights outside the
former Eastern bloc to an electric propulsion subsystem that is five times more
efficient than bipropellant propulsion systems.
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SS/L is actively pursuing research and development projects for both
communications payload equipment and supporting bus elements. SS/L recently
announced that it will be developing new satellites that will be 40% more
powerful than its existing satellites, significantly increasing both
communications capacity and service quality.
SS/L, Alcatel Space Industries and Finmeccanica S.p.A. have generally
agreed to operate as a team on satellite programs worldwide. We believe that
this strategic alliance has enhanced SS/L's technological and manufacturing
capabilities and marketing resources and affords it improved access to
international government and commercial customers.
SS/L's major contracts fall into two categories: firm fixed-price contracts
and cost-plus-award-fee contracts. Under firm fixed-price contracts, work
performed and products shipped are paid for at a fixed price without adjustment
for actual costs incurred in connection with the contract. Risk of loss due to
increased cost, therefore, is borne by SS/L. The majority of SS/L's contracts
are fixed-price contracts. Under such contracts, SS/L may receive progress
payments, or it may receive milestone payments upon the occurrence of certain
program achievements. Under a cost-plus-award-fee contract, the contractor
recovers its actual allowable costs incurred and receives a fee consisting of a
base amount that is fixed at the inception of the contract (the base amount may
be zero) and an award amount that is based on the customer's subjective
evaluation of the contractor's performance based on criteria stated in the
contract.
Many of SS/L's contracts and subcontracts may be terminated at will by the
customer or the prime contractor. In the event of a termination at will, SS/L is
normally entitled to recover the purchase price for delivered items,
reimbursement for allowable costs for work in process and an allowance for
profit or an adjustment for loss, depending on whether completion of performance
would have resulted in a profit or loss. No assurance can be given that these
terminations will not occur in the future.
Total revenues for the satellite manufacturing and technology segment,
including intercompany sales, were $1.4 billion for each of the years ended
December 31, 1999, 1998 and 1997, respectively. The segment's intercompany sales
were $255 million in 1999, $272 million in 1998 and $199 million in 1997. The
segment had EBITDA of $146 million in 1999 before a $44 million charge, and $118
million and $111 million in 1998 and 1997, respectively. The $44 million charge
pertains to an agreement reached with ChinaSat to extend the delivery date of a
satellite and other contract modifications, in return for two 36 MHz and one 54
MHz transponders on Telstar 10/Apstar IIR. After the charge, EBITDA for 1999 was
$102 million. Total assets for the segment were $1.6 billion, $1.7 billion and
$1.5 billion as of December 31, 1999, 1998 and 1997, respectively.
As of December 31, 1999 and 1998, funded backlog for the segment was $1.3
billion and $1.5 billion, respectively, including intercompany backlog of $256
million in 1999 and $111 million in 1998. Approximately $800 million of the 1999
external funded backlog is expected to be realized in 2000. Revenues recorded
under contracts with Globalstar were $360 million, $599 million and $408 million
for the years ended December 31, 1999, 1998 and 1997, respectively. In addition,
sales to two other customers represented in excess of 10% of the Company's
consolidated revenues in 1999 and 1998. For the years ended December 31, 1999,
1998 and 1997, the satellite manufacturing and technology segment expended $35
million, $35 million and $24 million for research and development projects,
respectively.
GLOBAL MOBILE TELEPHONE SERVICE
Globalstar owns and operates a 52-satellite constellation, including four
in-orbit spares, that forms the backbone of a global telecommunications network
designed to serve virtually every populated area of the world. Globalstar's
network, which we refer to as the Globalstar system, uses Qualcomm's patented
CDMA (code division multiple access) technology to provide high-quality mobile
and fixed telephone service to customers who live, work or travel beyond the
reach of adequately developed communications networks. Qualcomm has agreed that
Globalstar will be the only provider of mobile satellite services to which it
will license its patented CDMA technology.
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Globalstar's service provider partners, who are experienced
telecommunications companies, are actively launching, or preparing to launch,
service in key markets worldwide. Globalstar and its service provider partners
have also begun intensive marketing campaigns and are adopting multifaceted,
locally oriented marketing strategies to serve their markets. Under Globalstar's
agreements with its service providers, these partners are the exclusive
providers of Globalstar service within their assigned territory and will retain
their exclusivity as long as they meet minimum performance goals. Under these
agreements, Globalstar acts as a wholesaler of capacity on its space segment to
its service providers. Globalstar has assigned the largest service territories
to its founding strategic partners, including France Telecom, Vodafone AirTouch,
ChinaSat, Elsacom and Dacom.
In the first quarter of 2000, the Globalstar system commenced operations,
and as of February 29, 2000, there were 14 gateways available for service
covering 78 countries. By the end of 2000, we expect a total of 27 or more
gateways to be available for service, covering approximately 131 countries.
As of February 29, 2000, Globalstar service providers were providing
billable service in 20 countries, including Austria, Argentina, Brazil, Canada,
Greece, Italy, South Korea, Switzerland and the United States. By the end of
2000, service providers plan to have billable service available in a total of
approximately 120 countries.
The Globalstar system is designed to offer a cost-effective communications
solution for areas underserved or unserved by existing telecommunications
infrastructures. Globalstar mobile phones are simple to use -- just like
ordinary cellular telephones -- and are among the smallest, lightest and least
expensive satellite phones currently available. These phones are multimode,
functioning as cellular phones where terrestrial cellular service is available
and as satellite phones where cellular service is not available. Globalstar
phones provide this multimode capability without separate modules or plug-ins.
Globalstar pay phones and fixed wireless phones for business and residential use
provide basic telephone service in rural villages and at remote industrial and
residential sites.
Globalstar phones have familiar features such as phone book, voicemail,
short messaging service, and, in some service areas, call forwarding. Globalstar
plans to introduce additional features this year, including data calls, Internet
access through data packet switching, email and fax capability, caller ID and
position location. Globalstar's utilization of Qualcomm's CDMA technology should
enable it to swiftly adopt future improvements as this industry-leading wireless
technology evolves. In addition, because the intelligence of the Globalstar
system is located on the ground, future enhancements are easily implemented.
Globalstar's full constellation has been launched and all satellites are
performing normally. Based on Globalstar's experience to date, these satellites
are now expected to have a useful life of 10 years, rather than the original
expectation of 7 1/2 years. The Globalstar satellites use a simple, traditional
"bent pipe" design, amplifying and reflecting received signals directly back to
earth, with no intersatellite links. Gateways owned and operated by Globalstar
service providers then connect customer calls through the existing public
telephone network. As a result, the Globalstar system will complement and
extend, rather than bypass, the existing telephone network infrastructure.
Globalstar recently completed a period of intensive user trials in which over
one million calls were placed under a variety of conditions, including
simulations of full capacity utilization. Trial users rated call quality equal
to, or better than, digital cellular connections.
According to industry sources, more than 80% of the world's land mass is
not covered by cellular service. Globalstar believes, based on market research,
that its addressable market -- those who live, work or regularly travel to areas
underserved or unserved by existing telecommunications infrastructure and who
desire and have the ability to pay for telephone service such as that offered by
Globalstar -- has approximately 40 million potential customers. Globalstar's
first generation system is expected to have a system capacity of approximately
seven million subscribers, less than one fifth of Globalstar's potential
addressable market. In fact, because of the limited spectrum available for use
by mobile satellite services like Globalstar, the combined capacity of
Globalstar and the other existing and announced mobile satellite service systems
are capable of serving only a portion of this market.
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Globalstar's original consortium of 12 leading international
telecommunications service providers and manufacturers has grown into an
international organization with marketing channels in 131 countries and
agreements with over 220 local service providers. Globalstar-supported
cooperative advertising is creating brand awareness globally and within selected
market segments, while sales channels are focused both on the mass market and
targeted market segments, including:
- government, including police, emergency and military users;
- commercial freight and fishing vessels, cruise ships and recreational
boats;
- truck drivers and business travelers;
- the forestry, mining, oil and gas and other natural resource industries;
- wilderness guides and outdoor enthusiasts;
- agribusiness; and
- utilities.
Globalstar's service providers have an existing customer base of more than
100 million cellular customers from which they intend to identify for direct
marketing efforts those who work in, or frequently travel to, or through, areas
without cellular service.
Globalstar expects to spend $325 million for the enhancement of its system
software, for the eight spare satellites being constructed by SS/L, and for
financing provided to Globalstar's service providers to assist in the purchase
of gateways, fixed access terminals and handsets (of which $231 million is
expected to be received from the service providers as repayment of such
financing). In addition, cash interest, preferred dividends and operating costs
are expected to be approximately $125 million per quarter in 2000. Globalstar
raised $268.5 million through the sale of equity interests on February 1, 2000.
Globalstar believes that its cash on hand ($329 million at February 29, 2000),
available credit under its two bank facilities and vendor financing arrangements
(approximately $425 million at February 29, 2000), service revenues and other
anticipated cash inflows will be sufficient to cover its expected cash outflows
provided that its $250 million credit facility is renegotiated. If Globalstar
cannot renegotiate its $250 million credit facility, it believes it will be able
to obtain additional funds. There can be no assurance, however, that such funds
will be available on favorable terms or on a timely basis, if at all.
The global mobile telephone service segment had development and start-up
costs of $184 million, $145 million and $87 million for the years ended December
31, 1999, 1998 and 1997, respectively. Total assets for the segment were $3.8
billion, $2.7 billion and $2.1 billion as of December 31, 1999, 1998 and 1997,
respectively.
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REGULATION
As an operator of a privately-owned global satellite system, Loral is
subject to: (i) the regulatory authority of the U.S. government; (ii) the
regulatory authority of other countries in which Loral operates; (iii) the
Intelsat consultation process; and (iv) the frequency coordination process of
the International Telecommunications Union ("ITU").
U.S. REGULATION
The ownership and operation of Loral's satellite systems in the U.S. is
regulated by the Federal Communications Commission (the "FCC"). Loral is subject
to the FCC's jurisdiction primarily for: (i) the licensing of satellites and
earth stations; (ii) avoidance of interference with other radio stations; and
(iii) compliance with FCC rules governing U.S.-licensed satellite systems.
Violations of the FCC's rules can result in various sanctions including fines,
loss of authorizations, or the denial of new authorizations or renewal
authorizations. Loral is not regulated as a common carrier and, therefore, is
not subject to rate regulation or the obligation not to discriminate among
customers. Loral must pay FCC filing fees in connection with its space station
and earth station applications; must pay annual regulatory fees that are
intended to defray the FCC's regulatory expenses; must file annual status
reports with the FCC; and, to the extent Loral is deemed to be providing
interstate/international telecommunications, must contribute to funds used to
support universal service.
Authorization to Launch and Operate Satellites. The FCC grants
authorizations to satellite operators that meet its legal, technical and
financial qualification requirements. The FCC often receives applications from
multiple operators to operate a satellite at a given orbital slot. There can be
no assurance that in the process of resolving such mutually exclusive
applications, Loral's application will be granted. Under the FCC's financial
qualification rules, an applicant must demonstrate that it has sufficient funds
to construct, launch, and operate each requested satellite for one year. Most
satellite authorizations also include specific construction and launch
milestones which Loral must meet. Licenses are issued for an initial ten-year
term and the FCC gives licensees an "expectancy" with respect to the replacement
of their authorized satellites. At the end of a ten-year license term, a
satellite that has not been replaced, or that has been relocated to another
orbital location following its replacement, may be allowed to continue
operations for a limited period of time pursuant to a grant of special temporary
authority from the FCC. Such operations, however, are subject to certain
restrictions.
Loral has final FCC authorization for the following satellites which
operate in the C-band, the Ku-band, or both bands: Telstar 4 at 89(LOGO) W.L.,
Telstar 5 at 97(LOGO) W.L., Telstar 6 at 93(LOGO) W.L., Telstar 7 at 129(LOGO)
W.L., Telstar 8 at 77(LOGO) W.L., Telstar 9 at 69(LOGO) W.L., Telstar 11 at
37.5(LOGO) W.L. and Orion A at 47(LOGO) W.L. Certain of these authorizations are
subject to pending petitions for reconsiderations submitted by third parties,
which are still pending. The final FCC authorizations for certain of these
satellites also do not cover certain design changes or milestone extension
requests that are the subject of pending modification applications. Certain of
these applications have been opposed by other satellite operators. There can be
no assurance that such design changes or milestone extensions will be granted by
the FCC. The failure to obtain a milestone extension could result in the loss of
the related FCC authorization. If Loral is unable to obtain FCC approval to
implement its requested technical modifications for any particular
authorization, it will be obligated to operate the related satellite in
accordance with the original authorization. Loral has special temporary
authority to operate an additional satellite, Telstar 12, at 15(LOGO) W.L.,
pending FCC action on its request for final authority.
In addition, Loral has final authorization to operate at the following
orbital slots: Ka-band at 89(LOGO) W.L., 81(LOGO) W.L., 93(LOGO) W.L., 115(LOGO)
W. L., 78(LOGO) E.L. and 105.5(LOGO) E.L. and hybrid Ka/Ku-band at 47(LOGO) W.L.
Loral has requested authority to implement inter-satellite links at all of these
locations and has requested other technical modifications to certain of these
authorizations. Certain applications to make this design modification and
requests for milestones extensions to do so are pending before the FCC, which
has not yet assigned the frequencies which will be used for inter-satellite
links. Certain of these applications have been opposed by other satellite
operators. There can be no assurance that the FCC will grant such modifications
or milestone extensions.
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Loral also has conditional authorizations and applications pending before
the FCC for other orbital locations. Under the FCC's rules, an applicant may
commence satellite construction prior to receiving an authorization to launch
and operate, although it must notify the FCC that it intends to commence
construction. Any construction engaged in is at the applicant's own risk. While
Loral therefore may proceed with the construction of planned satellites without
prior FCC approval, it must accept the risk that the FCC may not grant the
application, may not assign the satellite to its proposed orbital location, or
otherwise may act in a manner that limits or eliminates some or all of the value
of the construction previously done on the satellite.
Scope of Services Authorized. In 1996, the FCC largely eliminated the
regulatory distinction between U.S. domestic satellites and U.S.-licensed
international satellites. As a result, each of Loral's satellites may be used,
to the extent technically feasible, to provide both U.S. domestic and
international services.
Coordination Requirements. The FCC requires applicants to demonstrate that
their proposed satellites would be compatible with the operations of adjacent
satellites. The FCC requires adjacent satellite operators to coordinate with one
another to minimize frequency conflicts. The FCC reserves the right to require
that an FCC licensed satellite be relocated to a different orbital location if
it determines that such a change is in the public interest. The FCC might
exercise this authority in instances where operators are unable to coordinate
with each other.
REGULATION BY NON-U.S. NATIONAL TELECOMMUNICATIONS AUTHORITIES
Foreign laws and regulatory practices governing the provision of satellite
services to licensed entities and directly to end users vary substantially from
country to country. Some countries may require Loral to confirm that it has
successfully completed technical consultation with Intelsat before providing
services on a given satellite. See "-- Intelsat Consultation." In addition,
Loral may be subject to communications and/or broadcasting laws with respect to
its provision of international satellite services, which vary from country to
country.
Many countries have liberalized their regulations to permit entities to
seek licenses to provide voice, data or video services. This trend should
accelerate with the commitments by many World Trade Organization ("WTO")
members, in the context of the WTO Agreement on Basic Telecommunications
Services, to open their satellite markets to competition. Other countries,
however, have maintained strict monopoly regimes. In such markets, the provision
of service from Loral and other U.S.-licensed satellites may be more
complicated.
In addition to the orbital slots licensed by the FCC, Loral has been
assigned orbital slots by certain other countries. For example, Loral has been
authorized to use numerous Ku and Ka orbital slots by the Papua New Guinea
government. In March 1999, the Brazilian telecommunications authority announced
that Loral Skynet do Brasil had won Brazil's auction for its 63(LOGO) W.L.
Ku-band orbital slot. Loral operates capacity on the Telstar 10/Apstar IIR
C/Ku-band satellite licensed by China and located at 76.5(LOGO)E.L. Satmex, of
which Loral owns 49%, is licensed by Mexico to operate the C/Ku-band satellites
Solidaridad 1 at 109.2(LOGO)W.L., Solidaridad 2 at 113.0(LOGO) W.L., and Satmex
5 at 116.8(LOGO) W.L. Europe*Star, of which Loral owns 47%, is licensed by
Germany to operate a Ka-band satellite at 45(LOGO) E.L.
Loral's ability to provide satellite service in a particular country or
region is subject to the technical constraints of its satellites, international
coordination, local regulatory approval and any limitation as to the scope of
the approval so obtained.
Intelsat Consultation. In connection with its international satellite
services, Loral must currently complete a consultation process with Intelsat
under Article XIV of the Intelsat Agreement to ensure technical compatibility of
Loral's facilities and their operation with the spectrum and orbital locations
of existing or planned Intelsat satellites. This process, however, may be
eliminated as a result of the privatization of Intelsat.
The ITU Frequency Coordination Process. All satellite systems are subject
to ITU frequency coordination requirements and must obtain appropriate authority
to provide service in a given territory. The result of the required
international coordination process may limit the extent to which all or some
portion of a particular authorized orbital slot may be used for commercial
operations, with a corresponding impact on the
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useable capacity of a satellite at that location. In addition, the result of the
process by which satellite systems must seek authorization to provide service in
a given territory may limit the extent to which such service may be provided
from a given orbital location.
All of the registrations for Loral's satellites are or will be subject to
the ITU coordination process. Only national governments file required
coordination documents at the ITU. These documents are used by Loral and other
satellite operators as a basis for coordination of satellite systems. There may
be more than one ITU filing submitted for any particular orbital slot, or an
orbital slot adjacent thereto, thus requiring coordination between or among the
affected operators. The results of this coordination process may impose
technical constraints on Loral's ability to operate its satellites at a given
orbital location, if at all. Loral cannot guarantee successful frequency
coordination for its satellites. See "Certain Factors That May Affect Future
Results -- Our business is regulated, causing uncertainty and additional costs."
GLOBALSTAR SYSTEM
The Globalstar system requires regulatory authorization for two pairs of
frequencies: user links (from the user to the satellites and vice versa) and
feeder links (from the gateways to the satellites and vice versa). In January
1995, the FCC granted authority for the construction, launch and operation of
the Globalstar system and assigned spectrum for its user links. A modification
of this authorization in November 1996 assigned feeder link frequencies. This
license is held by L/Q Licensee, a subsidiary of Loral/Qualcomm Partnership,
L.P., which has agreed to use the FCC license exclusively for Globalstar's
benefit. The FCC license grants authority to construct, launch and operate the
Globalstar system with user links in the 1.6 and 2.4 GHz bands, consistent with
the United States band plan for Mobile Satellite Services Above 1 GHz Systems,
and feeder link frequencies in the 5 and 7 GHz bands. These feeder link
frequencies were allocated internationally at the 1995 World Radiocommunication
Conference, and the FCC assigned them for use by Globalstar in the United States
in accordance with this international allocation. However, use of the feeder
link frequencies remains subject to applicable restrictions, which may be
promulgated in an FCC proceeding to adopt the international allocations into the
U.S. Table of Frequency Allocations. The FCC initiated such a proceeding on
August 4, 1998.
The operation of Globalstar in the assigned user links and feeder links
must be coordinated with licensees of other existing radio services operating in
these bands in accordance with FCC and international rules and policies. Such
coordination may adversely affect the usefulness of the frequencies for
Globalstar's operations.
The FCC license only authorizes the construction, launch and operation of
Globalstar's satellite constellation. Separate authorizations must be obtained
from the FCC for operation of gateways and Globalstar phones in the United
States. Globalstar's U.S. service provider has received a license for the U.S.
gateway, and its application for a license for Globalstar phones has been
granted, although a petition for reconsideration remains pending. One of
Globalstar's three manufacturers has obtained equipment authorization from the
FCC for the Globalstar phones.
Even though the Globalstar system is licensed to operate in the United
States by the FCC, in order to provide service in other countries, Globalstar or
its service providers must obtain the required regulatory authorizations in
those countries. There can be no assurance that the required authorizations will
be obtained in every country in which Globalstar proposes to operate or that
they will be obtained in a timely manner, or that, if granted, they will
authorize service on the same terms as the U.S. license.
EXPORT REGULATION
Exports from the United States of commercial communication satellites, and
certain related items, technical data and services, are subject to United States
export control laws and regulations. These export control laws and regulations
affect the export of satellites and certain related items, technical data and
services to foreign launch providers, insurers, customers, potential customers
and business partners, as well as to foreign Loral employees, foreign regulatory
bodies, foreign national telecommunications authorities and to foreign persons
generally. Commercial communications satellites and certain related items,
technical data and services have been added to the United States Munitions List
and export jurisdiction over these satellites and
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certain related items, technical data and services has been transferred to the
U.S. Department of State and made subject to the Arms Export Control Act and the
International Traffic in Arms Regulations. Other items, technical data and
services exported by Loral remain subject to the export jurisdiction of the U.S.
Department of Commerce, pursuant to the Export Administration Act and the Export
Administration Regulations.
U.S. Government licenses or other approvals generally must be applied for
by Loral and obtained before such exports are made. There can be no assurance
that such licenses or approvals will be granted. Also, licenses or approvals may
be granted with limitations, provisos or other requirements imposed by the U.S.
Government as a condition of approval, which may affect the scope of permissible
activity under the license or approval. U.S. Government approval may be required
before such satellites and related items, technical data and services are
re-exported or transferred from one foreign person to another foreign person.
There can be no assurance that such approvals will be granted. Also, such
approvals may be granted subject to limitations, provisos or other requirements
imposed by the U.S. Government as a condition of approval, which may affect the
scope of permissible activity under the license or approval. See "Certain
Factors That May Affect Future Results -- We are subject to export controls,
which may result in delays, unforeseen additional costs and uncertainties in
certain markets."
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PATENTS AND PROPRIETARY RIGHTS
SS/L relies, in part, on patents, trade secrets and know-how to develop and
maintain its competitive position. It holds 163 patents in the United States and
266 patents abroad and has applications for 84 patents pending in the United
States and 269 patents pending abroad. SS/L patents include those relating to
communications, station keeping, power control systems, antennae, filters and
oscillators, phase arrays and thermal control as well as assembly and
inspections technology. The SS/L patents that are currently in force expire
between 2000 and 2018.
In connection with the Globalstar system, Globalstar's design and
development efforts have yielded 26 patents issued and 32 patents pending in the
United States, as well as 22 patents issued and 142 patents pending
internationally for various aspects of communications satellite system design
and implementation of CDMA technology relating to the Globalstar system.
Qualcomm has obtained more than 300 issued patents and has more than 800 patents
pending in the United States applicable to Qualcomm's implementation of CDMA.
The issued patents cover, among other things, Globalstar's process of combining
signals received from multiple satellites to improve the signal received and
minimize call fading.
Loral CyberStar and CyberStar LP have two and one patents in the United
States, respectively. In addition, Loral CyberStar, Loral SpaceCom Corporation
and CyberStar LP have one, three and 17 patents pending in the United States,
respectively, and one, 11 and eight patents pending abroad, respectively.
There can be no assurance that any of the pending patent applications by
the Company or Globalstar will be issued. Moreover, because the U.S. patent
application process is confidential, there can be no assurance that third
parties, including competitors, do not have patents pending that could result in
issued patents which the Company or Globalstar would infringe. In such an event,
the Company or Globalstar could be required to pay royalties to obtain a
license, which could increase costs.
FOREIGN OPERATIONS
Sales to foreign customers, primarily in Europe and Asia, represented 14%,
16% and 30% of the Company's consolidated revenues for the years ended December
31, 1999, 1998 and 1997, respectively. As of December 31, 1999, 1998 and 1997,
the Company had substantially all of its long-lived assets located in the United
States with the exception of the in-orbit satellites. See "Certain Factors that
May Affect Future Results -- We face risks in conducting business
internationally" for a discussion of the risks related to operating
internationally.
EMPLOYEES
As of December 31, 1999, the Company had approximately 4,000 full-time
employees (including approximately 560 employees of Globalstar and Satmex), some
of whom are subject to collective bargaining agreements.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This annual report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
from time to time, we or our representatives have made or may make forward-
looking statements, orally or in writing. They can be identified by the use of
forward-looking words such as "believes", "expects", "plans", "may", "will",
"would", "could", "should", "anticipates", "estimates", "project", "intend", or
"outlook" or their negatives or other variations of these words or other
comparable words, or by discussions of strategy that involve risks and
uncertainties. Such forward-looking statements may be included in, but are not
limited to, various filings made by us with the Securities and Exchange
Commission, press releases or oral statements made by or with the approval of an
authorized executive officer. We warn you that forward-looking statements are
only predictions. Actual events or results may differ materially as a result of
risks that we face, including those presented below. The following are
representative of factors that could affect the outcome of the forward-looking
statements.
WE HAVE SUBSTANTIAL DEBT AND GUARANTEE OBLIGATIONS.
We and our subsidiaries and operating affiliates have a significant amount
of outstanding debt and guarantee obligations. As of December 31, 1999:
- Our consolidated total debt was $2.0 billion, of which $1.0 billion was
recourse to the Loral parent company or our principal operating
subsidiary, Loral SpaceCom Corporation.
- Our unconsolidated affiliate, Globalstar, had $1.45 billion principal
amount of senior notes outstanding, $400 million of term loans
outstanding under its $500 million credit facility and vendor financing
of $394 million, of which $282 million was provided by SS/L. Two of our
subsidiaries have guaranteed Globalstar's obligations under its $500
million credit facility and secured their guarantees by a pledge of their
stock, the Telstar 6 and Telstar 7 satellites and certain other assets.
SS/L has guaranteed $11.7 million under Globalstar's $250 million credit
facility, and Loral has agreed to reimburse Lockheed Martin Corporation
up to $56 million if Lockheed Martin is required to fund its guarantee of
that credit facility, which is currently undrawn.
- Satmex, our 49%-owned Mexico affiliate, had total debt of $588 million.
We have agreed to maintain certain assets in a trust to collateralize an
obligation of Servicios Corporativos Satelitales, S.A. de C.V., the
parent company of Satmex, in which we have a 65% interest. This
obligation has an initial face amount of $125 million which accretes at
6.03% over a seven-year period, expiring in December 2004.
We intend to use our available cash ($240 million at December 31, 1999) and
the net proceeds from our February 2000 offering of preferred stock to help pay
for the growth and operation of our businesses. If any of our subsidiaries or
affiliates finds itself faced with an imminent default, we may be faced with a
choice between providing additional support to that company or accepting the
loss of some or all of our equity investment.
THE ABILITY OF OUR SUBSIDIARIES AND AFFILIATES TO PAY DIVIDENDS TO US OR
OTHERWISE SUPPORT OUR OBLIGATIONS IS LIMITED BY THE TERMS OF THEIR DEBT
INSTRUMENTS.
For example, under the terms of Loral SpaceCom Corporation's credit
facility, it may pay dividends to us only if cumulative dividend payments do not
exceed 50% of its cumulative consolidated net income and the ratio of its funded
debt to EBITDA is less than 3.0 to 1.0. Loral SpaceCom Corporation's ability to
repay cash advances made to it by its parent is also limited to $70 million and
is further subject to there being at least $700 million in shareholders' equity.
OUR CONSUMER BROADBAND AND STREAMING MEDIA STRATEGIES ARE SUBJECT TO
SUBSTANTIAL FINANCING AND EXECUTION RISKS.
We have recently announced our consumer broadband and streaming media
strategies and are only now taking steps toward their implementation. Although
we estimate that these projects will require an investment of approximately $3.5
billion, these projected costs are not based on bids from third parties, but
rather on our own experience and estimates, so the actual cost could be
considerably more. We do not have sufficient funds
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on hand to finance our anticipated share of these costs. We expect third party
strategic partners to bear a significant portion of these costs and to provide
critical resources such as access to technology, content and customers, but we
have no firm commitments from any prospective strategic partners at this time.
We will face significant competition in both these businesses from
terrestrial fiber optic, digital subscriber lines, or DSL, and broadband
wireless ISPs, as well as from competing broadband satellite service providers.
Competing satellite services providers will include Hughes Network Systems, in
which America Online, the nation's largest ISP, has made a $1.5 billion
investment in connection with a strategic alliance. We expect to compete with
Hughes and other satellite-based broadband data services providers not only for
customers but also for relationships with key content and equipment providers
and marketing partners and for access to the capital markets.
The streaming and multicast media services we plan to offer are new, and
our predictions of rising demand for, and our manner of delivering, these
services may be inaccurate. Moreover, our business plan depends on the
development and volume production of low-cost customer premises equipment, and
this might not occur.
THE GLOBALSTAR SYSTEM HAS JUST COMMENCED OPERATIONS AND WE CANNOT PREDICT
CUSTOMER DEMAND FOR THE SERVICE.
Since telephone systems using low-earth orbit satellites are a new
commercial technology, we cannot predict demand for Globalstar's service. The
first company to launch service in this industry, Iridium L.L.C., filed for
bankruptcy in August 1999. More recently, Iridium announced that it was
terminating commercial service on March 17, 2000 and that it was commencing the
process of liquidating its assets. If Globalstar fails to generate sufficient
cash flow from operations through the marketing efforts of its service
providers, it will be unable to fund its operating costs or service its debt.
GLOBALSTAR DEPENDS ON SERVICE PROVIDERS TO MARKET ITS SERVICE AND IMPLEMENT
IMPORTANT PARTS OF ITS SYSTEM AND ON OTHER THIRD PARTIES TO COMPLETE ITS
SYSTEM.
Globalstar depends on independent service providers to supply ground
equipment and user terminals and to market Globalstar service in each country
where it plans to operate, and we cannot be sure that these service providers
will be successful. We expect that these service providers will operate in 125
countries, many of which have developing economies. Globalstar's strategy of
focusing on areas that lack basic telephone service exposes it to the risk that
customers in these countries will not be able to afford the service.
Globalstar currently has no service provider for several important regions
and countries, including India, Malaysia, Indonesia, the Philippines and other
parts of Southeast Asia. If Globalstar cannot enlist suitable service providers
in these territories, it will not be able to offer service in those areas.
Globalstar service providers could fail to obtain local partners; to
acquire, install or adequately maintain and operate the Globalstar gateways; or
to obtain the regulatory licenses needed for service in their countries. If
Globalstar is unable to offer service in any particular region or country, it
will not benefit from the potential demand in that region or country.
IF OUR BUSINESS PLAN DOES NOT SUCCEED, OUR OPERATIONS MIGHT NOT GENERATE
ENOUGH CASH TO PAY OUR OBLIGATIONS.
For the year ended December 31, 1999, we had a deficiency of earnings to
cover fixed charges of $192 million. In addition to our debt service
requirements, our core businesses are capital intensive and need substantial
investment before returns on investment can be realized. For example,
construction of satellites to expand our fixed satellite services business and
to implement our broadband data services business will require us to make
significant expenditures. Loral CyberStar also anticipates that it will have
additional funding requirements in excess of cash from operations to fund the
purchase of VSATs, other capital expenditures, senior note interest payments and
other operating needs, which it will need to secure from us or externally. We
are subject to substantial financial risks from possible delays or reductions in
revenue, unforeseen capital needs or unforeseen expenses. Our ability to meet
our obligations and execute our business plan could depend upon
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our ability, and that of our operating subsidiaries and affiliates, to raise
cash in the capital markets. We cannot be certain that this source of cash will
be available in the future on favorable terms, if at all.
LAUNCH FAILURES HAVE DELAYED SOME OF OUR OPERATIONS IN THE PAST AND MAY DO
SO AGAIN IN THE FUTURE.
We depend on third parties, in the United States and abroad, to launch our
satellites. Satellite launches are risky, and launch attempts have ended in
failure. We ordinarily insure against launch failures, but at considerable cost.
The cost and the availability of insurance vary depending on market conditions
and the launch vehicle used. Our insurance typically does not cover business
interruption, and so launch failures result in uninsured economic losses.
Replacement of a lost satellite typically requires up to 18 months from the time
a contract is executed until the launch date of the replacement satellite.
On May 4, 1999, the Orion 3 broadcast communications satellite was placed
into a lower-than-expected orbit after its launch on a Boeing Delta III rocket.
According to Boeing, the Delta III rocket apparently failed to complete its
second stage burn, and, as a result, the satellite, manufactured by Hughes Space
and Communications Corporation, achieved an orbit well below the planned final
altitude. As a result, the satellite cannot be used for its intended purpose.
This loss resulted in Loral CyberStar having to refund approximately $34 million
to DACOM Corporation, representing the amount of the prepayments made by DACOM
towards its purchase of eight transponders on Orion 3.
In September 1998, a malfunction of a Zenit 2 rocket resulted in the loss
of 12 Globalstar satellites shortly after lift-off from Kazakhstan and resulted
in a significant delay in Globalstar's program schedule.
AFTER LAUNCH, OUR SATELLITES REMAIN VULNERABLE TO IN-ORBIT FAILURE, WHICH
MAY RESULT IN UNINSURED LOSSES.
Random failure of satellite components may result in damage to or loss of a
satellite before the end of its expected life. Satellites are carefully built
and tested and have certain redundant systems in case of failure. However,
in-orbit failure may result from various causes including:
- component failure;
- loss of power or fuel;
- inability to control positioning of the satellite;
- solar and other astronomical events; and
- space debris.
Repair of satellites in space is not feasible. Many factors affect the useful
lives of our satellites. These factors include:
- fuel consumption;
- the quality of construction;
- gradual degradation of solar panels; and
- the durability of components.
Although some failures may be covered in part by insurance, they may result
in uninsured losses as well. For example, when Loral Skynet experienced the
total loss of two satellites in 1994 and 1997 while under AT&T's ownership, it
suffered a substantial drop in its profits due to the loss of these revenue
producing assets. Moreover, because Globalstar has a large constellation and
will have a number of spare satellites, Globalstar currently does not intend to
insure its satellites against in-orbit failures.
Some of the satellites we currently have in-orbit have experienced
operational problems:
- In November 1995, a component on Telstar 11 malfunctioned, resulting in a
two-hour service interruption. Full service was restored using a back-up
component. If the back-up component fails, Telstar 11 would lose a
significant amount of usable capacity.
- On April 28, 1999, Satmex's Solidaridad 1 satellite experienced a loss of
its primary satellite control processor. Service was restored after 14
hours, using the backup satellite control processor. Failure of
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the backup satellite control processor would result in the loss of Solidaridad
1, which would be fully covered by insurance.
A loss of transponders on a satellite can also adversely affect us. Prior
to its acquisition by us, Loral Skynet sold several transponders outright to
customers. Under the terms of the sales contracts, Loral Skynet continues to
operate the satellites on which the transponders are located and provides a
warranty for a period of 10 to 14 years. Depending on the contract, Loral Skynet
may be required to replace any transponders failing to meet operating
specifications. All customers are entitled to a refund equal to the
reimbursement value in the event there is no replacement. The reimbursement
value is determined based on the original purchase price plus an interest factor
from the time the payment was received to acceptance of the transponder by the
customer, reduced on a straight-line basis over the warranty period.
WE DEPEND HEAVILY ON SPACE SYSTEMS/LORAL FOR A LARGE PORTION OF REVENUE AND
OPERATING INCOME.
SS/L generates a significant part of our revenue and operating income.
SS/L, in turn, has historically derived a large part of its revenue and
operating income from a few customers. For example, in the year ended December
31, 1999, three of SS/L's customers accounted for approximately 25%, 18% and 13%
of Loral's consolidated revenues. As a result, our revenue and operating results
would be hurt if completed or canceled contracts are not promptly replaced with
new orders. Some of SS/L's customers are start-up companies, and there can be no
assurance that these companies will have the ability to fulfill their payment
obligations under their contracts with SS/L.
SS/L's accounting for long-term contracts sometimes requires adjustments to
profit and loss based on revised estimates during the performance of the
contract. These adjustments may have a material effect on our results of
operations in the period in which they are made. The estimates giving rise to
these risks, which are inherent in long-term, fixed-price contracts, include the
forecasting of costs and schedules, contract revenues related to contract
performance, including revenues from orbital incentives, and the potential for
component obsolescence due to procurements long ahead of assembly.
SS/L MAY FORFEIT PAYMENTS FROM CUSTOMERS DUE TO SATELLITE FAILURES OR LOSSES
AFTER LAUNCH OR BE LIABLE FOR PENALTY PAYMENTS UNDER CERTAIN CIRCUMSTANCES,
AND THESE LOSSES MAY BE UNINSURED.
Some of SS/L's satellite manufacturing contracts provide that some of the
total price is payable as "incentive" payments earned over the life of the
satellite. While insurance against loss of these payments has been available in
the past, the cost and availability of such insurance are subject to wide
fluctuations. In addition, SS/L is sometimes prohibited from insuring these
incentive payments. Some of SS/L's contracts call for in-orbit delivery,
transferring the launch risk to SS/L. SS/L generally insures against that
exposure.
SS/L records as revenue the present value of incentive payments as the
costs associated with these incentive payments are incurred. SS/L generally
receives the present value of these incentive payments if there is a launch
failure or a failure is caused by customer error. SS/L forfeits these payments,
however, if the loss is caused by satellite failure or as a result of its own
error.
In addition, some of SS/L's contracts provide that SS/L may be liable to a
customer for penalty payments under certain circumstances, including upon late
delivery of a satellite. These payments are not insured by SS/L.
SS/L IS CURRENTLY IN ARBITRATION PROCEEDINGS WITH PANAMSAT CORPORATION OVER
A SATELLITE REFLECTOR DISPUTE.
In late 1998, following the launch of an SS/L-built satellite sold to
PanAmSat, a manufacturing error was discovered that affected the geographical
coverage of the Ku-band transponders on the satellite. On January 6, 2000,
PanAmSat filed an arbitration proceeding in connection with this error claiming
damages of $225 million for lost profits and increased sales and marketing
costs. SS/L believes it has meritorious defenses to the claim and that its
liability is limited to a loss of a portion of the applicable orbital
incentives, the estimated impact of which is included in Loral's consolidated
financial statements. PanAmSat has received a recovery from its insurance
carrier that should reduce any damage claim. While this proceeding is in its
very early stages, management believes that this matter will not have a material
adverse effect on the financial condition or results of operations of Loral.
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WE FACE RISKS IN CONDUCTING BUSINESS INTERNATIONALLY.
Some of our business is conducted outside the United States. We could be
harmed financially and operationally by changes in foreign regulations and
telecommunications standards, tariffs or taxes and other trade barriers.
Customers in developing countries could have difficulty in obtaining the U.S.
dollars they owe us, including as a result of exchange controls. Additionally,
exchange rate fluctuations may adversely affect the ability of our customers to
pay us in U.S. dollars. Moreover, if we ever need to pursue legal remedies
against our foreign business partners or customers, we may have to sue them
abroad, where it could be hard for us to enforce our rights.
WE ARE SUBJECT TO EXPORT CONTROLS, WHICH MAY RESULT IN DELAYS, UNFORESEEN
ADDITIONAL COSTS AND UNCERTAINTIES IN CERTAIN MARKETS.
Like other exporters of space-related products and services, SS/L needs
licenses from the U.S. government whenever it sells a satellite to a foreign
customer or launches a satellite abroad. Foreign launches have been politically
sensitive because of the relationship between launch technology and missile
technology. U.S. government policy has limited, and is likely in the future to
limit, launches from the former Soviet Union and China. For example, the U.S.
government delayed a Globalstar launch from Kazakhstan by several months when it
stopped granting case-by-case approval of launches from that location pending an
intergovernmental agreement covering technology security matters. Changes in
governmental policies, political leadership or legislation in the United States,
Russia, Kazakhstan or China could adversely affect our ability to launch from
these countries or materially increase the costs of doing so.
On December 23, 1998, the Office of Defense Trade Controls, or ODTC, of the
U.S. Department of State temporarily suspended the previously approved technical
assistance agreement under which SS/L had been preparing for the launch of the
ChinaSat-8 satellite. According to ODTC, the purpose of the temporary suspension
is to permit that agency to review the agreement for conformity with
newly-enacted legislation (Section 74 of the Arms Export Control Act) with
respect to the export of missile equipment or technology. SS/L has complied with
ODTC's instructions and believes that a review of the agreement will show that
its terms comply with the new law. The ODTC, however, has not yet completed its
review, and the scheduled launch date for ChinaSat-8 is being delayed. In
December 1999, we concluded an agreement with ChinaSat to extend the date for
delivery of the ChinaSat-8 satellite to July 31, 2000. In return for this
extension and other modifications to the contract, we have agreed to provide the
customer two 36 MHz and one 54 MHz transponders on Telstar 10/Apstar IIR for the
life of those transponders. As a result, a net charge to earnings of $35 million
was recorded by us. If the suspension is not lifted by July 31, 2000, ChinaSat
could decide to terminate the contract. If such a termination were to occur,
SS/L would have to refund advances received from ChinaSat ($134 million as of
December 31, 1999), and may incur penalties of up to $13 million and believes it
would incur costs of approximately $38 million to refurbish and retrofit the
satellite so that it could be sold to another customer. There can be no
assurance, however, that SS/L will be able to find a replacement customer for
the satellite or its Chinese launch vehicle. SS/L will incur a loss of
approximately $35 million if it is unable to find a replacement customer for
this launch vehicle.
In February 1999, the U.S. government informed Hughes Space &
Communications, Inc. that it intended to deny an export license for a
telecommunications satellite it was building for Asia Pacific Mobile
Telecommunications. We do not know what this denial may mean for future
applications of export licenses to Chinese customers or the resolution of the
ChinaSat-8 suspension. If the U.S. government continues to deny export licenses
for satellites sold to the Chinese or other markets, SS/L's business could be
hurt.
In March 1999, jurisdiction for satellite licensing was transferred from
the Commerce Department to the State Department and the State Department has
issued regulations relating to the export of and disclosure of technical
information related to, satellites and related equipment. SS/L anticipates that
obtaining licenses and technical assistance agreements under these new
regulations will take more time and will be considerably more burdensome than in
the past. Delays in obtaining the necessary licenses and technical assistance
agreements may delay SS/L's performance on existing contracts, and, as a result,
SS/L may incur penalties or lose incentive payments under these contracts. In
addition, such delays may have an adverse effect on SS/L's ability to compete
against foreign satellite manufacturers for new satellite contracts.
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SS/L IS THE TARGET OF A GRAND JURY INVESTIGATION WHICH MAY ADVERSELY AFFECT
SS/L'S ABILITY TO EXPORT ITS PRODUCTS.
SS/L could be accused of criminal violations of the export control laws
arising out of the participation of its employees in a committee formed to
review the findings of the Chinese regarding the 1996 crash of a Long March
rocket in China. Under the applicable regulations, SS/L could be debarred from
export privileges without being convicted of any crime if it is indicted for
these alleged violations, and loss of export privileges would harm SS/L's
business. Whether or not SS/L is indicted or convicted, SS/L will remain subject
to the State Department's general statutory authority to prohibit exports of
satellites and related services if it finds that SS/L has violated the Arms
Export Control Act. Further, the State Department can suspend export privileges
whenever it determines that grounds for debarment exist and that suspension "is
reasonably necessary to protect world peace or the security or foreign policy of
the United States." If SS/L were to be indicted and convicted of a criminal
violation of the Arms Export Control Act, it:
- would be subject to a fine of $1 million per violation;
- could be debarred from certain export privileges; and
- could be debarred from participation in government contracts.
Since some of SS/L's satellites are built for foreign customers and/or are
launched on foreign rockets, a debarment would have a material adverse effect on
SS/L's business, which in turn would affect us.
WE SHARE CONTROL OF OUR AFFILIATES WITH THIRD PARTIES.
Third parties have significant ownership, voting and other rights in many
of our subsidiaries and affiliates. As a result, we do not always have full
control over management of these entities and the rights of these third parties
and fiduciary duties under applicable law could result in these entities taking
actions not in our best interests or in refraining from taking actions that we
deem advisable. To the extent that these entities are or become customers of
SS/L, these conflicts could become acute. For example:
- Although we are the managing general partner and largest equity owner of
Globalstar, our control is limited by the supermajority rights of
Globalstar's limited partners.
- Primary operational control of Satmex is vested in Mexican nationals, as
required by Mexican law, subject to certain supermajority rights which we
retain.
- The Europe*Star joint venture, initiated by Alcatel, is under its
control, subject to our supermajority rights.
- Future joint ventures between Alcatel and us within the Loral Global
Alliance will be controlled by the initiating party, subject to
supermajority rights in favor of the non-initiating party.
- Alcatel is an investor in CyberStar LP and has supermajority rights in
it.
THERE ARE POTENTIAL CONFLICTING COMMERCIAL INTERESTS AMONG OUR SUBSIDIARIES
AND AFFILIATES.
Loral Skynet, Satmex, Loral CyberStar and Europe*Star have adopted a
marketing policy that provides for collaboration and cross-selling of capacity
among the Loral Global Alliance members. If, however, the members of the Loral
Global Alliance do not collaborate but rather compete in areas of overlapping
capacity, conflicting commercial interests among our subsidiaries and affiliates
may arise. Both Loral Skynet and Loral CyberStar own or are building satellites
whose coverage areas overlap with those of Satmex and Europe*Star. If Loral
Skynet and Loral CyberStar do not collaborate with Satmex and Europe*Star, or
vice versa, under the Loral Global Alliance, Loral Skynet and Loral CyberStar
might compete directly with Europe*Star and Satmex for customers.
Partners and affiliates of Globalstar, including companies affiliated with
us, will be among Globalstar's service providers and may, therefore, have
conflicts with Globalstar and/or us over service provider agreements.
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OUR BUSINESS IS REGULATED, CAUSING UNCERTAINTY AND ADDITIONAL COSTS.
Our business is regulated by authorities in more than 100 jurisdictions,
including the Federal Communications Commission, the International
Telecommunications Union, or ITU, and the European Union. As a result, some of
the activities which are important to our strategy are beyond our control. The
following are some strategically important activities which are regulated by
various government authorities:
- the expansion of Loral Skynet's operations beyond the domestic U.S.
market;
- the international service offered by the Loral CyberStar Group;
- the manufacture, export and launch of satellites;
- the expansion of Satmex's Latin American business; and
- the implementation of Europe*Star's business plan.
Regulatory authorities in the various jurisdictions in which we operate can
modify, withdraw or impose charges or conditions upon the licenses which we
need, and so increase our cost of doing business. The regulatory process also
requires potentially costly negotiations with third parties operating or
intending to operate satellites at or near orbital locations where we place our
satellites so that the frequencies of the satellites do not interfere. For
example, as part of our coordination effort on Telstar 12, we agreed to provide
four 54 MHz transponders on Telstar 12 to Eutelsat for the life of the
satellite. We also granted Eutelsat the right to acquire, at cost, four
transponders on the next replacement satellite for Telstar 12. Moreover, as part
of this international coordination process, we continue to conduct discussions
with various administrations regarding Telstar 12's operations at 15 degrees
W.L. If these discussions are not successful, Telstar 12's useable capacity may
be reduced. We cannot guarantee successful frequency coordination for our
satellites.
Our coordination efforts are subject to the regulatory regime of the ITU,
which has rules and regulations governing the relative rights that companies
have to orbital slots. For example, if Europe*Star does not have a satellite in
its 45(LOGO) E.L. orbital location by July 2000, it would, under ITU
regulations, lose its priority rights in that slot.
Failure to successfully coordinate our satellites' frequencies or to
resolve other required regulatory approvals could have a material adverse effect
on our financial condition and on our results of operations.
SS/L COMPETES WITH LARGE MANUFACTURERS THAT HAVE SIGNIFICANT RESOURCES.
In the manufacture of our satellites, we compete with very large
well-capitalized companies, including several of the world's largest
corporations, such as Hughes Space & Communications, Inc., a subsidiary of
General Motors Corporation, and Lockheed Martin. Hughes recently agreed to sell
its satellite manufacturing operations to The Boeing Company, another large
company. These companies have considerable financial resources which they may
use to gain advantages in marketing and in technological innovation. SS/L's
success will depend on its ability to innovate on a cost-effective and timely
basis.
WE COMPETE WITH OTHERS FOR MARKET SHARE AND CUSTOMERS; TECHNOLOGICAL
DEVELOPMENTS FROM COMPETITORS OR OTHERS MAY REDUCE DEMAND FOR OUR SERVICES.
We face competition in the provision of fixed satellite services from
companies such as PanAmSat Corporation, GE Americom, SES Astra and
quasi-governmental organizations such as Intelsat and Eutelsat. Competition in
this market may cause downward price pressures, which may adversely affect our
profits.
The Loral CyberStar Group also faces competition in the provision of
high-speed data communications, such as Internet applications, from providers of
land-based data communications services, such as cable operators, digital
subscriber line, or DSL, providers, wireless local loop providers and
traditional telephone service providers. In addition, the Loral CyberStar Group
may face competition in the future from proposed satellite systems, including
Teledesic Corporation's proposed system and Hughes' Spaceway system. We cannot
assure you that the Loral CyberStar Group will attract enough customers either
to compete effectively or to implement fully its business plan.
Globalstar faces intense competition for customers from various companies,
including providers of land-based mobile phone services and fixed satellite
systems. We cannot assure you that Globalstar will attract
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enough subscribers either to compete effectively or to implement fully its
current business plan. Moreover, if ICO Global emerges from its bankruptcy
proceedings with a debt-free or reduced debt capital structure and a viable
business plan, it would be in a position to compete more effectively with
Globalstar.
As land-based telecommunications services expand, demand for some
satellite-based services may be reduced. New technology could render
satellite-based services less competitive by satisfying consumer demand in other
ways or through the use of incompatible standards.
We also compete for local regulatory approval in places in which both we
and a competitor may want to operate. We also compete for scarce frequency
assignments and fixed orbital positions.
WE RELY ON KEY PERSONNEL.
We need highly qualified personnel. Except for Mr. Bernard L. Schwartz, our
Chairman and Chief Executive Officer, none of our officers has an employment
contract nor do we maintain "key man" life insurance. The departure of any of
our key executives could have an adverse effect on our business.
THE RIGHTS OF SHAREHOLDERS UNDER BERMUDA LAW ARE DIFFERENT FROM RIGHTS OF
SHAREHOLDERS UNDER U.S. LAW.
Since we are a Bermuda company, the principles of law that govern
shareholder rights, the validity of corporate procedures and other matters are
different from those that would apply if we were a U.S. company. For example, it
is not certain whether a Bermuda court would enforce liabilities against us or
our officers and directors based upon United States securities laws either in an
original action in Bermuda or under a United States judgment. Bermuda law giving
shareholders rights to sue directors is less developed than in the United States
and may provide fewer rights.
THE YEAR 2000 PROBLEM COULD CAUSE COMPLICATIONS.
As of the date of this Report on Form 10-K, our computer systems and
software programs are functioning properly. However, there is still a
possibility that some computer systems and software programs may not function
properly later in the Year 2000 and beyond because of a once common programming
standard which used two digits instead of four digits to signify a year. This
problem is often referred to as the "Year 2000" problem.
If we are unable to fix a serious Year 2000 problem, there could be an
interruption or failure in our operations. Likewise, if our suppliers or
customers are unable to fix a material Year 2000 problem, a resulting
interruption or failure of their business could hurt our company.
ITEM 2. PROPERTIES
The Company leases approximately 47,000 square feet for its corporate
offices in New York. The Company's subsidiaries also maintain office space,
manufacturing and telemetry, tracking and control facilities primarily in the
United States. Management believes that the facilities are sufficient for its
current operations.
Fixed Satellite Services
Loral Skynet owns two telemetry, tracking and control stations covering
approximately 39,000 square feet on 220 acres in Hawley, Pennsylvania and Three
Peaks, California and leases approximately 51,000 square feet of office space in
Bedminster, New Jersey and Richmond, California.
Broadband Data Services
Loral CyberStar owns seven acres of land in Mt. Jackson, Virginia and
leases approximately 78,000 square feet for office space worldwide and its
operations center in Mt. Jackson, Virginia.
CyberStar LP leases approximately 14,000 square feet for office space and
its network operations center in Mountain View, California and approximately
37,000 square feet of office space in London, England, Plano, Texas and St.
Paul, Minnesota.
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Satellite Manufacturing and Technology
SS/L's research, production and testing facilities are carried on in
SS/L-owned facilities covering approximately 562,000 square feet on 84 acres in
Palo Alto, California. In addition, SS/L leases approximately 780,000 square
feet of space from various third parties in Palo Alto, California, Menlo Park,
California and Mountain View, California.
ITEM 3. LEGAL PROCEEDINGS
Export Control Matters. Various agencies and departments of the U.S.
government regulate Loral's ability to pursue business outside the United
States. Exports of space-related products, services and technical information
require U.S. government licenses. There can be no assurance that Loral or SS/L
will be able to obtain necessary licenses or approvals, and the inability to do
so, or the failure to comply with the terms thereof when granted, could have a
material adverse effect on their respective businesses.
On February 15, 1996, a Chinese Long March rocket carrying an Intelsat
satellite built by SS/L crashed seconds after launch. Thereafter, at the request
of insurance companies concerned about underwriting future Long March launches,
the manufacturer of the Long March, China Great Wall Industries Corporation
("CGWIC"), asked SS/L employees and personnel from other interested companies to
serve on a committee formed to consider whether studies of the crash made by the
Chinese had correctly identified the cause of the failure. In meetings with
CGWIC, the committee reviewed CGWIC's launch failure analysis, which consisted
of a preliminary explanation for the crash (a failed solder joint) and CGWIC's
plan for further studies it planned to make.
In May 1996, an SS/L employee transmitted a copy of the committee's
preliminary report to the members of the committee and, contrary to the
intentions of SS/L's management, to CGWIC before consulting with the U.S. State
Department. Upon becoming apprised of the facts, SS/L immediately informed the
State Department, and thereafter submitted a detailed voluntary written
disclosure to the State Department that included copies of the written materials
provided to CGWIC and descriptions of the committee's meetings with the Chinese
and of the events surrounding disclosure of the preliminary report. For the next
18 months, the Company had no notice of any adverse action being taken or
contemplated in connection with the matter.
SS/L is a target of a grand jury investigation being conducted by the U.S.
Attorney for the District of Columbia as to whether an unlawful transfer of
technology occurred in connection with the committee's work. The Company and
several of its employees have received subpoenas from that grand jury. SS/L is
not in a position to predict the outcome of this investigation. If SS/L were to
be indicted and convicted of a criminal violation of the Arms Export Control
Act, it would be subject to a fine of $1 million for each violation, and could
be debarred from certain export privileges and, possibly, from participation in
government contracts. Since many of SS/L's satellites are built for foreign
customers and/or launched on foreign rockets, such a debarment would have a
material adverse effect on SS/L's business, which would in turn affect the
Company. Indictment for such violations would subject SS/L to discretionary
debarment from further export licenses. Under the applicable regulations, SS/L
could be debarred from export privileges without being convicted of any crime if
it is indicted for these alleged violations, and loss of export privileges would
harm SS/L's business. Whether or not SS/L is indicted or convicted, SS/L will
remain subject to the State Department's general statutory authority to prohibit
exports of satellites and related services if it finds a violation of the Arms
Export Control Act that puts SS/L's reliability in question, and it can suspend
export privileges whenever it determines that grounds for debarment exist and
that such suspension "is reasonably necessary to protect world peace or the
security or foreign policy of the United States."
As far as SS/L can determine, no sensitive information or technology was
conveyed to the Chinese, and no secret or classified information was discussed
with or reported to them. SS/L believes that its employees acted openly and in
good faith and that none engaged in intentional misconduct. Accordingly, the
Company does not believe that SS/L has committed a criminal violation of the
export control laws. The Company does not expect the grand jury investigation or
its outcome to result in a material adverse effect upon its business. However,
there can be no assurance as to those conclusions.
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In May 1997, SS/L applied for an export license for the launch of another
SS/L satellite in China, which was granted following the required Presidential
waiver in February 1998. The Company believes that the authorizations were
properly granted, and does not believe that it or any of its officers acted
improperly in obtaining them. The policy of the Bush administration, which has
been continued under President Clinton, has been to grant such waivers routinely
as being in the national interest; indeed, the Company is unaware of any
requested waiver for a Chinese satellite launch ever having been denied.
According to press reports, President Bush signed three waivers covering nine
Long March launches, and President Clinton has signed eight waivers covering 11
Long March launches. This policy has, until recently, also enjoyed bipartisan
Congressional support. On December 23, 1998, the Office of Defense Trade
Controls ("ODTC") of the U.S. Department of State temporarily suspended the
previously approved technical assistance agreement under which SS/L had been
preparing for the launch of the ChinaSat-8 program. According to ODTC, the
purpose of the temporary suspension is to permit that agency to review the
agreement for conformity with newly-enacted legislation (Section 74 of the Arms
Export Control Act) with respect to the export of missile equipment or
technology. SS/L has complied with ODTC's instructions, and believes that a
review of the agreement will conclude that its terms comply with the new law.
The ODTC, however, has not completed its review, and the scheduled launch date
for ChinaSat-8 is being delayed. In December 1999, we concluded an agreement
with ChinaSat to extend the date for delivery of the ChinaSat-8 satellite to
July 31, 2000. In return for this extension and other modifications to the
contract, Loral has agreed to provide to the customer two 36 MHz and one 54 MHz
transponders on Telstar 10/Apstar IIR for the customer's use for the life of
those transponders. As a result, the Company recorded a net charge to earnings
of $35 million. If the suspension is not lifted by July 31, 2000, ChinaSat could
decide to terminate the contract. If such a termination were to occur, SS/L
would have to refund advances received from ChinaSat ($134 million as of
December 31, 1999) and may incur penalties of up to $13 million and believes it
would incur costs of approximately $38 million to refurbish and retrofit the
satellite so that it could be sold to another customer. There can be no
assurance, however, that SS/L will be able to find a replacement customer for
the satellite or its Chinese launch vehicle. SS/L will incur a loss of
approximately $35 million if it is unable to find a replacement customer for
this launch vehicle.
PanAmSat Arbitration. In late 1998, following the launch of an SS/L-built
satellite sold to PanAmSat, a manufacturing error was discovered that affected
the geographical coverage of the Ku-band transponders on the satellite. On
January 6, 2000, PanAmSat filed an arbitration proceeding in connection with
this error claiming damages of $225 million for lost profits, and increased
sales and marketing costs. SS/L believes it has meritorious defenses to the
claim and that its liability is limited to a loss of a portion of the applicable
orbital incentives, the estimated impact of which is included in Loral's
consolidated financial statements. PanAmSat has received a recovery from its
insurance carrier that should reduce any damage claim. While this proceeding is
in its very early stages, management believes that this matter will not have a
material adverse effect on the financial condition or results of operations of
Loral.
CCD Lawsuits. On September 12, 1991, Loral Fairchild Corp. ("Loral
Fairchild"), a subsidiary of Loral Corporation, filed suit against a number of
companies including Sony Corporation ("Sony"), Matsushita Electronics
Corporation ("Matsushita") and NEC Corp. claiming that such companies had
infringed Loral Fairchild's patents for a "charged coupled device" ("CCD"),
commonly used as an optical sensor in video cameras and fax machines. Although
the CCD patents have expired, Loral Fairchild is seeking reasonable royalties
through the expiration date from a number of defendants. On February 22, 1996, a
jury in the United States District Court for the Eastern District of New York
found unanimously that Sony had infringed the CCD patents. The trial judge,
however, in an order dated July 12, 1996, reversed the jury verdict. Loral
Fairchild appealed and sought certiorari unsuccessfully. Although Loral
Fairchild has settled its claim against one of the other defendants for
approximately $450,000 its claims against other defendants remain pending. In
view of the court's decision, however, a substantial portion, but not all, of
the damage claims against the other defendants are adversely affected.
Matsushita has been granted a declaratory judgment that it has a valid and
enforceable license under the CCD patents. In addition, a trial on Matsushita's
claim against Loral Fairchild for tortious interference was conducted during
July 1996, and a verdict was rendered in favor of Loral Fairchild in September
1997.
Environmental Regulation. Operations at SS/L, Loral Skynet, Loral
CyberStar, CyberStar LP and Globalstar are subject to regulation by various
federal, state and local agencies concerned with environmental
25
27
control. The Company believes that these facilities are in substantial
compliance with all existing federal, state and local environmental regulations.
With regard to certain sites, environmental remediation is being performed by
prior owners who retained liability for such remediation arising from
occurrences during their period of ownership. To date, these prior owners have
been fulfilling such obligations and the size and current financial condition of
the prior owners make it probable that they will be able to complete their
remediation obligations without cost to the Company or Globalstar.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
(a) MARKET PRICE AND DIVIDEND INFORMATION
The Company's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol LOR. The following table presents, the reported high
and low sales prices of the Company's common stock as reported on the NYSE:
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1999
Quarter ended March 31, 1999................................ $22 7/16 $14 7/16
Quarter ended June 30, 1999................................. 20 3/4 14 3/8
Quarter ended September 30, 1999............................ 22 7/8 16 1/4
Quarter ended December 31, 1999............................. 24 3/4 13 1/2
YEAR ENDED DECEMBER 31, 1998
Quarter ended March 31, 1998................................ $30 1/2 $19
Quarter ended June 30, 1998................................. 33 15/16 24 1/2
Quarter ended September 30, 1998............................ 31 7/8 12 1/8
Quarter ended December 31, 1998............................. 20 1/2 10 3/4
The Company does not currently anticipate paying any dividends or
distributions on its common stock or the Series A Convertible Preferred Stock.
As required, Loral is currently paying dividends on its 6% Series C Convertible
Redeemable Preferred Stock and will be paying dividends on its 6% Series D
Convertible Redeemable Preferred Stock. Loral's indenture relating to its 9.5%
senior notes also imposes limitations on Loral's ability to pay dividends to its
shareholders. The credit facility maintained by the Company's wholly owned
subsidiary, Loral SpaceCom Corporation ("Loral SpaceCom"), restricts the ability
of Loral SpaceCom to transfer cash or pay dividends to its parent (see Note 8 to
Loral's consolidated financial statements). The guarantee by certain Loral
subsidiaries of Globalstar's $500 million credit facility restricts these
subsidiaries from making dividend payments to Loral, if cash on hand at the
subsidiaries is not at least $50 million and the subsidiaries do not hold an
intercompany note from Loral for at least $100 million. Loral CyberStar's
indentures relating to its senior notes and its senior discount notes also
contain restrictions on Loral CyberStar's ability to make dividend payments to
its parent.
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At February 29, 2000, there were 6,866 holders of record of the Company's
common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from, and should be
read in conjunction with, the related financial statements.
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LORAL SPACE & COMMUNICATIONS LTD.
(in thousands, except per share and ratio data)
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED YEAR ENDED
------------------------------------ DECEMBER 31, MARCH 31,
1999 1998(1) 1997(1) 1996(1) 1996(1)
---------- ---------- ---------- ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues............................. $1,457,720 $1,301,702 $1,312,591
Management fee from affiliate........ -- $ 5,088 $ 5,608
Operating income (loss)(2)........... (62,263) (33,780) 13,552 (12,201) 2,587
Equity in net loss of
affiliates(1)(3)................... (177,819) (120,417) (49,037) (4,709) (8,628)
Net income (loss)(2)................. (201,916) (138,798) 40,004 8,877 (13,785)
Preferred dividends and
accretion(4)....................... (44,728) (46,425) (26,315)
Net income (loss) applicable to
common stockholders(2)............. (246,644) (185,223) 13,689 8,877 (13,785)
Earnings (loss) per share -- basic
and diluted........................ (.85) (.68) .06 .04 (.08)
OTHER DATA:
Ratio of earnings to fixed charges... 1.9x 3.7x
Deficiency of earnings to cover fixed
charges............................ $ 191,932 $ 140,438
CASH FLOW DATA:
(Used in) provided by operating
activities......................... $ (26,405) $ 86,795 $ (173,609) $ (3,003) $ (1,319)
Used in investing activities......... 659,533 555,613 1,079,411 1,962 115,031
Provided by (used in) equity
transactions....................... (24,633) 589,187 (18,097) 602,413 116,362
Provided by financing transactions... 403,664 199,856 316,912 583,292
Dividends paid per common share...... N/A
DECEMBER 31,
------------------------------------------------- MARCH 31,
1999 1998(1) 1997(1) 1996(1) 1996(1)
---------- ---------- ---------- ---------- ------------
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 239,865 $ 546,772 $ 226,547 $1,180,752 $ 12
Total assets......................... 5,610,421 5,229,215 3,010,447 1,699,326 354,396
Convertible preferreds(4)............ 583,292
Debt, including current portion...... 1,999,322 1,555,775 435,398
Non-current liabilities.............. 252,052 231,384 230,411 26,834
Shareholders' equity/Invested
equity............................. 2,750,664 2,935,721 1,980,520 1,070,069 354,396
- ---------------
(1) On March 20, 1998, Loral acquired all of the outstanding stock of Loral
CyberStar in exchange for common stock of Loral. The 1998 financial
information includes Loral Cyberstar commencing from April 1, 1998. In 1997,
Loral increased its ownership in SS/L to 100%, prior to 1997, SS/L was
accounted for under the equity method of accounting. On March 14, 1997,
Loral acquired Loral Skynet from AT&T; Loral's financial information
includes the results of Loral Skynet from that date. Financial information
as of and for the year ended March 31, 1996, represents the space and
communications operations of Loral Corporation ("Old Loral"). The results of
operations for the year ended March 31, 1996 include allocations and
estimates of certain expenses of Loral based upon estimates of actual
services performed by Old Loral on behalf of Loral. Interest expense was
allocated to Loral based on Old Loral's historical weighted average interest
rate applied to the average investment in affiliates.
(2) The results of operations for the year ended December 31, 1999 includes a
pre-tax charge of $35 million ($21 million after taxes) relating to an
agreement reached with a customer to extend the delivery date of a satellite
and other modifications to the contract in return for providing transponders
on another Loral satellite for their remaining lives.
(3) The Company's principal affiliates are Globalstar, Satmex since November 17,
1997 and Europe*Star since December 1998. Loral also has investments in
SkyBridge and other ventures, which are accounted for under the equity
method. Loral sold its interest in K&F Industries, Inc. in 1997.
(4) Convertible preferred equivalent obligations were exchanged for 6% Series C
Preferred Stock and were reclassified to shareholders' equity in 1997 upon
approval by the Company's shareholders.
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SPACE SYSTEMS/LORAL, INC.
(In thousands)
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
1996 1996
------------ ----------
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $1,017,653 $1,121,619
Gross profit................................................ 64,157 34,406
Net income.................................................. 31,025 12,367
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 19,181 $ 126,863
Total assets................................................ 1,059,064 908,677
Long-term debt.............................................. 127,586 65,052
Shareholders' equity........................................ 478,893 447,868
GLOBALSTAR, L.P.
(in thousands, except per partnership interest data)
CUMULATIVE
MARCH 23, 1994
(COMMENCEMENT
OF OPERATIONS) TO YEARS ENDED DECEMBER 31,
DECEMBER 31, ----------------------------------------------------
1999 1999(2) 1998(2) 1997 1996 1995
----------------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ -- $ -- $ -- $ -- $ -- $ --
Operating loss......................................... 590,538 186,505 146,684 88,071 61,025 80,226
Net loss applicable to ordinary partnership
interests............................................ 639,562 232,584 151,740 88,788 71,969 68,237
Net loss per weighted average ordinary partnership
interest outstanding -- basic and diluted............ 3.99 2.69 1.74 1.53 1.50
Cash distributions per ordinary partnership interest...
OTHER DATA:
Deficiency of earnings to cover fixed charges(1)....... 466,369 330,475 184,683 81,869 N/A
CASH FLOW DATA:
Used in operating activities........................... 265,657 56,576 24,958 68,615 51,756 38,368
Used in investing activities........................... 2,734,313 721,733 682,884 622,004 379,130 280,345
Provided by partners' capital transactions............. 1,361,649 463,329 14,825 132,990 284,714 318,630
Provided by (used in) other financing activities....... 1,765,996 386,432 287,552 998,137 95,750 (1,875)
DECEMBER 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents(3)................................ $ 173,921 $ 56,739 $ 464,154 $ 21,180 $ 71,602
Globalstar System under construction........................ 3,181,189 2,302,333 1,626,913 891,033 400,257
Total assets................................................ 3,781,459 2,670,025 2,149,053 942,913 505,391
Vendor financing liability, including current portion....... 393,795 371,170 197,723 130,694 42,219
Debt........................................................ 1,799,111 1,396,175 1,099,531 96,000
Redeemable preferred partnership interests.................. 303,089 302,037
Partners' capital........................................... 1,028,329 602,401 380,828 315,186 386,838
- ---------------
(1) The ratio of earnings to fixed charges is not meaningful as Globalstar was
in the development stage until the first quarter of 2000 and, accordingly,
has incurred operating losses.
(2) The results of operations for 1999 and 1998, include launch related costs of
$30 million and $17 million, respectively.
(3) Includes restricted cash of $46 million and $0.5 million for 1999 and 1998,
respectively, received from service providers for the purchase of gateways.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Financial
Condition and Results of Operations of Loral Space & Communications Ltd. and its
subsidiaries ("Loral" or the "Company") are not historical facts, but are
"forward-looking statements," as that term is defined in the Private Securities
Litigation Reform Act of 1995. In addition, the Company or its representatives
have made and may continue to make forward-looking statements, orally or in
writing, in other contexts, such as in reports filed with the Securities and
Exchange Commission (the "SEC"), press releases or statements made with the
approval of an authorized executive officer of the Company. These
forward-looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "plans," "may," "will," "would,"
"could," "should," "anticipates," "estimates," "project," "intend," or "outlook"
or the negative of these words or other variations of these words or other
comparable words, or by discussion of strategy that involve risks and
uncertainties. These forward-looking statements are only predictions, and actual
events or results may differ materially as a result of a wide variety of factors
and conditions, many of which are beyond the Company's control. Some of these
factors and conditions include: (i) the Company and its subsidiaries and
affiliates owe significant amounts of money; (ii) the Company's consumer
broadband and streaming media strategies are subject to substantial financing
and execution risks; (iii) Globalstar was a development-stage company through
December 31, 1999, that may continue to lose money, have negative cash flow,
require additional money and suffer delays in meeting its targets; (iv) launch
failures may delay operations; (v) satellites may fail prematurely; (vi)
dependence on operating subsidiaries, especially Space Systems/Loral, Inc.
("SS/L"), for operating income; (vii) severe competition in the Company's
industries; and (viii) governmental or regulatory changes. For a detailed
discussion of these factors and conditions, please refer to the periodic reports
filed with the SEC by Loral, Globalstar, L.P. ("Globalstar"), Globalstar
Telecommunications Limited ("GTL"), Loral CyberStar, Inc. ("Loral CyberStar"),
formerly known as Loral Orion, Inc., and Satelites Mexicanos, S.A. de C.V.
("Satmex"). In addition, the Company operates in an industry sector where
securities values may be volatile and may be influenced by economic and other
factors beyond the Company's control.
Loral is one of the world's leading satellite communications companies,
with substantial activities in satellite manufacturing and satellite-based
communications services. Loral has assembled the building blocks necessary to
provide a seamless, global networking capability for the information age.
Loral's four operating segments are:
Fixed Satellite Services ("FSS"). Through the Loral Global Alliance,
which currently consists of Loral Skynet, Loral CyberStar, its 49% owned
affiliate Satmex, and its 47% owned affiliate Europe*Star Limited
("Europe*Star"), Loral has become one of the world's leading providers of
satellite services using geostationary communications satellites. The
Company leases transponder capacity on its satellites to its customers who
use the capacity for various applications, including broadcasting, news
gathering, Internet access and transmission, private voice and data
networks, business television, distance learning and direct-to-home
television. The Loral Global Alliance currently has ten high-powered
geosynchronous satellites in orbit: the seven satellite Telstar fleet and
three Satmex satellites, with footprints covering almost all of the world's
population.
Broadband Data Services. Through Loral CyberStar and its 82% owned
subsidiary CyberStar, L.P. ("CyberStar LP"), Loral currently (i) delivers
U.S.-based Internet content via satellite to more than 130 Internet Service
Providers ("ISPs") in more than 32 foreign countries, which reach
approximately seven million residential customers around the world, (ii)
distributes high-speed data over private corporate very small aperture
terminal ("VSAT") networks, which reach approximately 2.5 million corporate
desktops around the world, and (iii) offers business television ("BTV")
services by satellite to corporations. Loral's broadband strategy will
build on these existing resources and will initially focus on two
attractive opportunities for early market entry: consumer broadband
services and streaming media services.
Satellite Manufacturing and Technology. SS/L is one of the world's
leading manufacturers of satellites and space systems, providing its
customers with a full suite of services, including: developing
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32
custom designs to meet their requirements, manufacturing and testing, and
arranging for launch services and insurance.
Global Mobile Telephone Service. Globalstar owns and operates a
52-satellite constellation, including four in-orbit spares, that forms the
backbone of a global telecommunications network designed to serve virtually
every populated area of the world. The Globalstar system commenced
operations in the first quarter of 2000, and as of February 29, 2000, there
were 14 gateways available for service covering 78 countries. Billable
service has commenced in 20 countries, including Austria, Argentina,
Brazil, Canada, Greece, Italy, South Korea, Switzerland and the United
States. Loral is the managing general partner and owned 41%, 43% and 40% of
Globalstar as of December 31, 1999, 1998 and 1997, respectively. In
February 2000, Loral's ownership in Globalstar was reduced to 40% as a
result of Globalstar issuing equity interests in connection with GTL's
public offering of 8.1 million shares of common stock.
CONSOLIDATED OPERATING RESULTS
In evaluating financial performance, management uses revenues and earnings
before interest, taxes, depreciation and amortization ("EBITDA") as a measure of
a segment's profit or loss. The following discussion of revenues and EBITDA
reflects the results of Loral's operating segments for the years ended December
31, 1999, 1998 and 1997. See Note 16 to Loral's consolidated financial
statements for additional information on segment results. The remainder of the
discussion relates to the consolidated results of Loral, unless otherwise noted.
Operating Revenues:
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
Fixed satellite services(1)................................. $ 341.8 $ 254.2 $ 83.0
Broadband data services(2).................................. 84.6 39.8
Satellite manufacturing and technology(3)................... 1,433.3 1,390.2 1,442.6
-------- -------- --------
Operating segment revenues.................................. 1,859.7 1,684.2 1,525.6
Affiliate eliminations(4)................................... (135.5) (104.8) (12.9)
Intercompany eliminations(5)................................ (266.5) (277.7) (200.1)
-------- -------- --------
Operating revenues as reported.............................. $1,457.7 $1,301.7 $1,312.6
======== ======== ========
EBITDA(6):
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN MILLIONS)
Fixed satellite services(1)................................. $ 193.1 $ 171.2 $ 51.8
Broadband data services(2).................................. (8.4) (13.3)
Satellite manufacturing and technology(3)(7)................ 102.3 117.9 110.9
Corporate expenses(8)....................................... (39.3) (42.8) (26.9)
------- ------- -------
Segment EBITDA before development and start-up costs and
eliminations(7)........................................... 247.7 233.0 135.8
Development and start-up costs(9):
Broadband data services(2)................................ (27.2) (33.3) (32.6)
Global mobile telephone service(10)....................... (184.2) (145.0) (87.1)
------- ------- -------
Total development and start-up costs........................ (211.4) (178.3) (119.7)
------- ------- -------
Segment EBITDA before eliminations(7)....................... 36.3 54.7 16.1
Affiliate eliminations(4)................................... 106.7 70.2 77.2
Intercompany eliminations(5)................................ (30.4) (23.7) (17.0)
------- ------- -------
EBITDA as reported(7)....................................... $ 112.6 $ 101.2 $ 76.3
======= ======= =======
- ---------------
(1) Fixed Satellite Services consists of 100% of the following companies since
their respective dates of acquisition: Loral Skynet acquired on March 14,
1997; Loral CyberStar's transponder leasing business acquired on March 20,
1998; Satmex, a 49% equity investee,
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acquired on November 17, 1997; and Europe*Star, a 47% equity investee,
since December 1998. For the year ended December 31, 1999, Satmex's results
include $25.5 million in revenues and $11.2 million of EBITDA from the sale
of transponders to Loral Skynet.
(2) Broadband Data Services consists of 100% of CyberStar LP (in which Loral
owns an 82% equity interest) and 100% of Loral CyberStar's broadband data
services business since its acquisition on March 20, 1998.
(3) Satellite Manufacturing and Technology consists of 100% of SS/L's results.
In February 1997, Loral agreed to acquire the remaining 49% of SS/L.
(4) Represents amounts related to unconsolidated affiliates (Satmex,
Europe*Star and Globalstar). These amounts are eliminated in order to
arrive at Loral's consolidated results. Loral's proportionate share of
these affiliates is included in equity in net loss from affiliates in
Loral's consolidated statements of operations.
(5) Represents the elimination of intercompany sales and EBITDA primarily for
satellites under construction by SS/L for wholly owned subsidiaries, as
well as eliminating sales for the lease of transponder capacity by
Broadband Data Services from Fixed Satellite Services.
(6) EBITDA (which is equivalent to operating income [loss] before depreciation
and amortization, including amortization of unearned compensation) is
provided because it is a measure commonly used in the communications
industry to analyze companies on the basis of operating performance,
leverage and liquidity and is presented to enhance the understanding of
Loral's operating results. EBITDA is not an alternative to net income as an
indicator of a company's operating performance, or cash flow from
operations as a measure of a company's liquidity. EBITDA may be calculated
differently and, therefore, may not be comparable to similarly titled
measures reported by other companies.
(7) Segment EBITDA before development and start-up costs and eliminations
includes a charge of $44 million for Satellite Manufacturing and Technology
relating to an agreement with ChinaSat to extend the delivery date of a
satellite and other modifications to the contract in return for providing
transponders on another Loral satellite for their remaining lives. The net
charge to Loral after intercompany eliminations was $35 million.
(8) Represents corporate expenses incurred in support of the Company's
operations.
(9) Represents EBITDA for CyberStar LP and Globalstar.
(10) Includes 100% of Globalstar. EBITDA for 1999 and 1998 includes launch
related costs of $30 million and $17 million, respectively. Loral owned
41%, 43% and 40% of Globalstar as of December 31, 1999, 1998 and 1997,
respectively.
1999 COMPARED WITH 1998
Operating segment revenues for Loral were $1.9 billion for 1999 versus $1.7
billion in 1998, before intercompany and affiliate eliminations of $402 million
in 1999 and $383 million in 1998. The increase in revenues was due primarily to
growth in fixed satellite services as a result of the service start-up of Satmex
5 in January 1999, Loral Skynet's Telstar 6 satellite in March 1999 and the
acquisition of Telstar 10/Apstar IIR in September 1999, increased growth in
broadband data services, partially due to the acquisition of Global Access
Services in July 1999, and increases in satellite manufacturing and technology.
Also contributing to increased revenues was the inclusion of Loral CyberStar's
leasing and data businesses for the full year in 1999 versus nine months in 1998
and other increased revenues at Satmex, primarily from the sale of three
transponders to Loral Skynet. The increase in affiliate eliminations in 1999
reflects higher revenues for Satmex.
EBITDA for operating segments before development and start-up costs and
affiliate and intercompany eliminations, increased in 1999 to $248 million from
$233 million in 1998. This increase arose primarily from growth in fixed
satellite services due to the initiation of service on satellites added to our
FSS fleet in 1999, increased margins in broadband data services, and increases
at Satmex, primarily from the sale of three transponders to Loral Skynet. In
addition, satellite manufacturing and technology's EBITDA grew $28 million to
$146 million in 1999, before a $44 million charge relating to an agreement
reached with ChinaSat to extend the delivery date of a satellite and other
modifications to the contract in return for satellite capacity on another
Company-owned satellite. After considering the charge, satellite manufacturing
and technology's EBITDA was $102 million in 1999 versus $118 million in 1998.
The net charge to Loral was $35 million, after considering the cost of the owned
transponders and, as a result, intercompany eliminations were reduced by $9
million. Total investment in development and start-up costs increased in 1999 to
$211 million, from 1998 costs of $178 million. While the investment required for
CyberStar LP decreased to $27 million in 1999 from $33 million in 1998, costs
related to the further development of Globalstar rose to $184 million in 1999
from $145 million in 1998, resulting from increased costs for the development of
user terminals and in-house engineering, marketing, general and administrative
costs in anticipation of the start of service and launch related costs.
Affiliate eliminations increased in 1999, primarily as a result of Globalstar's
increased development and start-up costs. As a result of the above, EBITDA as
reported increased to $113 million in 1999 from $101 million in 1998.
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Depreciation and amortization rose to $175 million in 1999 from $135
million in 1998, and excludes depreciation and amortization of unconsolidated
affiliates of $65 million and $50 million for 1999 and 1998, respectively,
primarily for Satmex. The increase primarily results from the depreciation of
satellites placed in service in 1999, including Telstar 6, Telstar 7, Telstar
12, and Telstar 10/Apstar IIR and the inclusion of Loral CyberStar's
depreciation and the amortization of cost in excess of Loral CyberStar's net
assets acquired for the full year in 1999.
Interest and investment income increased to $89 million in 1999 from $54
million in 1998, principally due to $16 million of non-cash income related to
warrants received in connection with Globalstar's 1999 credit agreement (see
Acquisitions and Investments in Affiliates) and $11 million of dividend income
from Loral's investment in GTL preferred stock in January 1999.
Interest expense was $89 million in 1999, net of capitalized interest of
$84 million, versus $51 million in 1998, net of capitalized interest of $60
million. The increase in interest expense in 1999 was primarily due to including
interest expense for Loral CyberStar for a full year in 1999, interest expense
on the Company's 9.5% senior notes issued in January 1999 and increased interest
expense on Loral SpaceCom Corporation's credit facility, due to higher rates and
amounts outstanding in 1999, partially offset by increased capitalized interest
in 1999. Capitalized interest is expected to be lower in 2000, due to the start
of Globalstar telephone service in the first quarter of 2000 and the successful
launches in 1999 of Telstar 6, Telstar 7 and Telstar 12.
In 1998, the Company realized a $35 million gain on the sale of GTL common
stock, which was mostly offset by the write-off of non-strategic investments in
Asia Broadcasting and Communications Network, Ltd. and Continental Satellite
Corporation of $30 million, which were determined to have no future value to
Loral. These items resulted in a net gain on investments of $5 million in 1998.
For 1999, the income tax benefit of $33 million included a non-recurring
tax benefit of $34 million relating to a tax law change affecting the future
utilization of Loral CyberStar's pre-acquisition loss carryforwards. Excluding
this non-recurring benefit, the Company recorded an income tax provision of $1
million on a loss before income taxes of $62 million. For 1998, the Company
recorded an income tax benefit of $4 million on a loss of $26 million before
income taxes. In comparing 1999 to 1998, the change is primarily attributable to
a decrease in net income from non-taxable jurisdictions in 1999.
The minority interest benefit primarily reflects the reduction of CyberStar
LP's loss attributed to CyberStar LP's other investor, who owned 17.6% as of
December 31, 1999.
The equity in net loss of affiliates was $178 million in 1999 compared to
$120 million in 1998. Loral's share of Globalstar's losses, net of the related
tax benefits, was $99 million in 1999 compared to $67 million in 1998. This
increase is primarily due to Globalstar's increased development costs and
marketing, general and administrative costs in 1999 and launch related costs of
$30 million in 1999 related to excess launch capacity. As a result of its
successful launch campaign during 1999, Globalstar does not anticipate using all
the excess launch vehicle capacity it had contracted for and, accordingly,
recorded a charge of $30 million. Globalstar has a remaining deposit balance of
$45 million relating to backup launch capacity for three additional launches. In
1998, Globalstar incurred a $17 million charge related to the loss of satellites
on launch failure. Loral's share of Satmex's loss was $33 million for 1999,
after eliminating the profit on its sale of three transponders to Loral Skynet,
and $16 million for 1998. Also included as equity in net loss of affiliates is
Loral's share of Europe*Star's losses, SkyBridge Limited Partnership's losses,
and losses from other affiliates, including $15 million, net of related tax
benefits, principally related to Loral's proportionate share of the reduction in
the carrying value of the transponders of the Mabuhay Space Holdings Limited
joint venture (see Note 7 to Loral's consolidated financial statements).
Preferred distributions of $45 million for 1999 and $46 million for 1998
relate to Loral's 6% Series C convertible redeemable preferred stock (the
"Series C Preferred Stock").
As a result of the above, the net loss applicable to common stockholders
for 1999 was $247 million or $0.85 per basic and diluted share, compared to a
net loss applicable to common stockholders of $185 million or $0.68 per basic
and diluted share for 1998. Basic and diluted weighted average shares were 290.2
million for 1999 and 273.4 million for 1998 (see Note 15 to Loral's consolidated
financial statements). This increase is
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primarily due to the 23 million shares issued to the public in June 1998 and the
18 million shares issued to acquire Loral CyberStar in March 1998.
1998 COMPARED WITH 1997
Total revenues for Loral's operating segments were $1.7 billion for 1998
versus $1.5 billion in 1997, before intercompany and affiliate eliminations of
$383 million in 1998 and $213 million in 1997. The increase in revenues was due
primarily to growth in fixed satellite services as a result of including Satmex
for the full year, Loral CyberStar's leasing business for nine months, Loral
Skynet's results for a full year in 1998 versus nine and a half months in 1997
and increased utilization of Loral Skynet's Telstar satellites. The growth in
fixed satellite services was partially offset by a modest decline in satellite
manufacturing revenues which primarily resulted from the debooking of three
satellites for Asian customers at the end of 1997. The increase in affiliate
eliminations in 1998 reflects the elimination of a full year of Satmex sales.
The increase in intercompany eliminations in 1998 primarily reflects increased
investment in satellite construction by SS/L for Loral's FSS segment.
EBITDA for operating segments before development and start-up costs, and
intercompany and affiliate eliminations, increased in 1998 to $233 million from
$136 million in 1997, a year-over-year increase of 72%. This increase arose
primarily from the growth in fixed satellite services due to increased
utilization of Loral Skynet's Telstar satellites, the inclusion of Loral
Skynet's results for a full year in 1998 versus nine and a half months in 1997,
including the results of Loral CyberStar's leasing business subsequent to its
acquisition, and including Satmex's results for a full year in 1998 and growth
in satellite manufacturing and technology from increased margins. These
increases were partially offset by including the results of Loral CyberStar's
broadband data services business in 1998 and increased corporate expenses, which
resulted primarily from costs incurred for the additional resources required to
manage the substantial growth in Loral's businesses, along with increased legal
and other costs in support of the Company's operations. Total development and
start-up costs rose substantially in 1998 to $178 million, a 49% increase over
1997 spending of $120 million. While the investment required for CyberStar LP
remained constant year-over-year at approximately $33 million, costs related to
the further development of Globalstar rose to $145 million in 1998 from $87
million in 1997, due to increased activities in anticipation of the commencement
of commercial service. Affiliate eliminations decreased in 1998 primarily as a
result of eliminating a full year of Satmex's results for 1998 versus one and a
half months in 1997, partially offset by the elimination of increased Globalstar
costs and Europe*Star costs in 1998. Intercompany eliminations increased in 1998
primarily from increased investment in satellite construction by SS/L for
Loral's FSS segment. As a result of the above, EBITDA as reported increased 33%
to $101 million in 1998 from $76 million in 1997.
Depreciation and amortization rose to $135 million in 1998 from $63 million
in 1997, and excludes depreciation and amortization of unconsolidated affiliates
of $50 million and $7 million for 1998 and 1997, respectively, primarily for
Satmex. The increase primarily results from the inclusion of Loral CyberStar's
depreciation and the amortization of cost in excess of its net assets acquired
and from the inclusion of Loral Skynet's depreciation and amortization for a
full year in 1998, which includes the depreciation of Loral Skynet's Telstar 5
satellite which was placed in service on July 1, 1997.
Interest and investment income increased to $54 million in 1998 from $49
million in 1997. This increase is principally due to including Loral CyberStar's
interest income in 1998, partially offset by lower cash balances available for
investment in 1998.
Interest expense of $51 million in 1998, net of capitalized interest of $60
million, reflects interest on borrowings under Loral SpaceCom Corporation's
credit facility, other Loral debt and interest on Loral CyberStar's debt
subsequent to its acquisition. Interest expense of $15 million in 1997, net of
capitalized interest of $23 million, reflects interest on SS/L's debt assumed
and interest on Loral's outstanding Convertible Preferred Equivalent Obligations
("CPEOs"). On June 5, 1997, the CPEOs were exchanged for the 6% Series C
Preferred Stock.
Loral realized a $35 million gain on the sale of GTL common stock, which
was mostly offset by the write-off of non-strategic investments in Asia
Broadcasting and Communications Network, Ltd. and in Continental
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Satellite Corporation of $30 million, which were determined to have no future
value to Loral. These items resulted in a net gain on investments of $5 million
in 1998. In 1997, the Company realized a gain on investment of $80 million
resulting from the sale of the stock of K&F Industries, Inc. ("K&F"), net of
expenses.
For 1998, the Company recorded an income tax benefit of 15.1% on its loss
before income taxes, while for 1997, the Company recorded an income tax
provision of 27.5% on income before income taxes. The benefit rate for 1998 is
lower than the provision rate for 1997 primarily because of the Loral CyberStar
non-deductible amortization of costs in excess of net assets acquired in the
current year.
The minority interest benefit in 1998 primarily reflects the reduction of
CyberStar LP's loss attributed to CyberStar LP's other investor, who owned 17.6%
as of December 31, 1998. The minority interest expense in 1997 also reflects the
reduction of SS/L's income attributed to other partners' partial ownership in
SS/L until Loral acquired the remaining 49% in February 1997, as compared to
Loral's full ownership of SS/L in 1998 for the entire year.
The equity in net loss of affiliates was $120 million in 1998 compared to
$49 million in 1997. Loral's share of Globalstar's losses was $67 million in
1998 compared to $41 million in 1997. This increase was primarily due to
Globalstar's increased development and start-up costs and Loral's increased
ownership percentage in Globalstar in 1998 (42.6% as of December 31, 1998 versus
40.1% as of December 31, 1997) and Loral's proportionate share of a charge taken
by Globalstar in 1998 as a result of a Zenit launch failure. Loral's share of
Satmex's loss was $16 million and $6 million for the year ended December 31,
1998 and the period November 17, 1997 through December 31, 1997, respectively.
Also included as equity in net loss of affiliates for 1998 is Loral's share of
Europe*Star's losses, SkyBridge Limited Partnership's loss, net of the related
tax benefit, and losses from other affiliates (see Note 7 to Loral's
consolidated financial statements).
Preferred distributions of $46 million and $26 million for the years ended
December 31, 1998 and 1997, relate to the Series C Preferred Stock. The increase
in 1998 reflects a full year of preferred distributions versus a partial year in
1997. The Series C Preferred Stock was issued in June 1997.
As a result of the above, net loss applicable to common stockholders for
1998 was $185 million or $0.68 per basic and diluted share, compared to net
income of $14 million or $0.06 per basic and diluted share, for 1997. Diluted
weighted average shares were 273.4 million for 1998 and 243.6 million for 1997.
This increase was primarily due to the 23 million shares issued to the public
and the 18 million shares issued to acquire Loral CyberStar in 1998.
RESULTS BY OPERATING SEGMENT
Fixed Satellite Services
FSS revenue (consisting of Loral Skynet, 100% of Satmex, and Loral
CyberStar's revenues from leasing) increased to $342 million in 1999, from $254
million and $83 million in 1998 and 1997, respectively. EBITDA on the same basis
increased to $193 million in 1999, from $171 million in 1998 and $52 million in
1997, respectively. In 1999, our FSS fleet increased to 10 operational
satellites in-orbit, from five at the end of 1998. EBITDA margins are expected
to increase in 2000, as utilization grows on the new satellites added to our
fleet, without a proportionate growth in costs. Funded backlog for the fixed
satellite services segment totaled $1.5 billion at the end of 1999, almost
double the $746 million in backlog at year-end 1998, including intercompany
backlog of $3 million and $6 million in 1999 and 1998, respectively, and
affiliate backlog of $364 million and $133 million for Satmex in 1999 and 1998,
respectively. The average contract length of funded backlog has grown from
approximately 3.5 years at December 31, 1998, to approximately 4.5 years at
December 31, 1999. Approximately $340 million of the 1999 funded backlog is
expected to be realized in 2000. Capital expenditures for 1999 were
approximately $575 million, which included $6 million and $150 million for
Satmex and Europe*Star, respectively. In 2000, capital expenditures are expected
to decrease, due to lower satellite spending.
During the fourth quarter of 1998, Loral completed its integration plan for
Loral CyberStar and transferred management of Loral CyberStar's satellite
capacity leasing and satellite operations to Loral
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Skynet, effective January 1, 1999. In addition to increasing the operational
efficiency, capacity, flexibility and marketing reach of Loral's FSS services,
the realignment permits Loral CyberStar to focus on and leverage its experience
in the global broadband data services market.
Broadband Data Services
In order to align all of Loral's resources and activities in the developing
broadband data services area, CyberStar LP's broadband business and Loral
CyberStar's Internet and corporate data networking businesses have been
reorganized and in 1999 began reporting to a group vice president. This
alignment allows the business units to take advantage of the synergies they
share. The reported results for the broadband data services segment include
Loral CyberStar's operations relating to the provisioning of broadband data
services, exclusive of transponder leasing, along with the results of CyberStar
LP.
Revenues for the broadband data services segment increased to $85 million
in 1999 from $40 million in 1998, primarily from Loral CyberStar's corporate
data networking and Internet and intranet services businesses and from its
acquisition of Global Access Services ("Global Access") in July 1999. EBITDA
before development and start-up costs in 1999 was a loss of approximately $8
million versus a loss of $13 million in 1998. Total development and start-up
costs for CyberStar LP were $27 million (including $11 million of asset
disposals resulting from changes in technology supporting its business
strategy), $33 million and $33 million for 1999, 1998 and 1997, respectively. As
of December 31, 1999 and 1998, funded backlog for the segment was $236 million
and $147 million, respectively, which was all from external sources.
Approximately $85 million of 1999 external funded backlog is expected to be
realized in 2000. Capital expenditures in 1999 were approximately $19 million
and are estimated to increase in 2000 (see Liquidity and Capital Resources).
Satellite Manufacturing and Technology
Revenues at SS/L, the Company's satellite manufacturing and technology
subsidiary, before intercompany eliminations, were approximately $1.4 billion in
1999, 1998 and 1997, respectively. EBITDA in 1999, before intercompany
eliminations and a $44 million charge, grew to $146 million from $118 million in
1998. The $44 million charge pertains to an agreement reached with ChinaSat to
extend the delivery date of a satellite and other modifications to the contract
in return for two 36 MHz and one 54 MHz transponders on Telstar 10/Apstar IIR
(see Liquidity and Capital Resources). After the charge, EBITDA for 1999 was
$102 million. EBITDA in 1998 rose to $118 million from $111 million in 1997.
Funded backlog for SS/L as of December 31, 1999 and 1998 was $1.3 billion and
$1.5 billion, respectively, including intercompany backlog of $256 million in
1999 and $111 million in 1998. Approximately $800 million of the 1999 funded
backlog is expected to be realized in 2000. Revenues recorded under contracts
with Globalstar for the years ended December 31, 1999, 1998 and 1997 were $360
million, $599 million and $408 million, respectively. Capital expenditures for
1999 were approximately $30 million and are estimated to increase moderately in
2000.
Global Mobile Telephone Service
Loral manages and is the largest equity owner of Globalstar, Loral's global
mobile telephone service segment. Through December 31, 1999, Globalstar was a
development stage partnership. Globalstar's development and start-up costs were
$184 million in 1999 as compared to $145 million in 1998 and $87 million in
1997. The rise in costs in 1999 is due to increased development costs,
marketing, general and administrative costs and launch related costs. Globalstar
has expended significant funds for the construction, testing and deployment of
the Globalstar system and expects deployment and system enhancement costs to
continue throughout 2000. As a result of commencing commercial operations in the
first quarter of 2000, Globalstar will start recognizing depreciation expense on
the Globalstar system and will stop capitalizing interest on the Globalstar
system under construction.
ACQUISITIONS AND INVESTMENTS IN AFFILIATES
The Company commenced operations in 1996 with equity holdings in SS/L,
Globalstar and K&F. From 1997 through 1999, Loral accelerated its transformation
from a company with extensive equity investments, to
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a major satellite manufacturer and provider of satellite services by making a
number of acquisitions and investments that significantly affected its results
of operations and financial condition.
Fixed Satellite Services
Loral Skynet
On March 14, 1997, Loral acquired Loral Skynet for $462.1 million in cash.
The acquisition was accounted for as a purchase and the results of Loral Skynet
have been consolidated by Loral from March 14, 1997.
Loral CyberStar
On March 20, 1998, Loral acquired all of the outstanding stock of Orion
Network Systems, Inc. in exchange for Loral common stock. Loral issued 18
million shares of its common stock and assumed existing exercisable Orion
options and warrants to purchase an aggregate of 1.4 million shares of Loral
common stock. The resulting purchase price was $472.5 million. In November 1999,
Orion changed its name to Loral CyberStar, Inc. Loral accounted for the
acquisition as a purchase and its consolidated financial statements reflect the
results of operations of Loral CyberStar from April 1, 1998.
Satmex
In connection with the privatization by the Mexican Government of its fixed
satellite services business, Loral and Principia, S.A. de C.V. ("Principia"),
formerly known as Telefonica Autrey, S.A. de C.V., formed a joint venture,
Firmamento Mexicano, S.A. de R.L. de C.V. ("Holdings"). On November 17, 1997,
Holdings acquired 75% of the outstanding capital stock of Satmex for $646.8
million. The purchase price was financed by a Loral equity contribution of $94.6
million, a Principia equity contribution of $50.9 million and debt originally
issued by Servicios Corporativos Satelitales, S.A. de C.V. ("Servicios"), a
wholly owned subsidiary of Holdings. As part of the acquisition Servicios also
agreed to issue a seven-year Government Obligation ("Government Obligation") to
the Mexican Government in consideration for the assumption by Satmex of the debt
incurred by Servicios in connection with the acquisition. The Government
Obligation had an initial face amount of $125 million, which accretes at 6.03%
and expires in December 2004. The debt of Satmex and Holdings is non-recourse to
Loral and Principia. However, Loral and Principia have agreed to maintain assets
in a collateral trust in an amount equal to the value of the Government
Obligation through December 30, 2000 and, thereafter, in an amount equal to 1.2
times the value of the Government Obligation until maturity. As of December 31,
1999, Loral and Principia have pledged their respective shares in Holdings in
such trust. Loral has a 65% economic interest in Holdings and a 49% indirect
economic interest in Satmex. Loral has accounted for Satmex using the equity
method since November 17, 1997.
On March 30, 1999, Loral acquired 577,554 shares of preferred stock of
Satmex at a purchase price of $30.3 million. The preferred stock has limited
voting rights, pays a dividend in limited voting common stock of Satmex and is
exchangeable, at Satmex's option, into limited voting common stock of Satmex
based upon a predetermined exchange ratio.
Europe*Star
In December 1998, Loral finalized its strategic partnership with a
subsidiary of Alcatel to jointly build and operate Europe*Star, a geostationary
satellite system designed to provide broadcast and telecommunications services
to Europe, the Middle East, Southeast Asia, India, and South Africa. Alcatel
serves as the primary contractor of the Europe*Star turnkey system, while SS/L
is providing the satellite bus and will test and integrate the satellites.
Europe*Star is a member of the Loral Global Alliance of FSS providers, which is
led by Loral Skynet. Through December 31, 1999, Loral has invested $66 million
in Europe*Star.
Broadband Data Services
Loral CyberStar -- see Loral CyberStar above.
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On July 31, 1999, CyberStar LP acquired Global Access, a business
television unit of Williams Communications, Inc., for approximately $11 million
in cash. Loral has accounted for the acquisition as a purchase and its
consolidated financial statements include the results of Global Access from
August 1, 1999. Global Access provides business television, video conferencing
and other communication services to companies in various parts of the world,
including Europe, South Africa, Australia, Asia and the Americas, through
networks operated in Singapore, Dallas, London and Johannesburg.
Satellite Manufacturing and Technology
SS/L
In February 1997, Loral agreed to increase its ownership in SS/L to 100% by
acquiring the remaining 49% of the common stock of SS/L held by four
international aerospace and communications companies for $374 million in cash
and Loral securities. The acquisition of the remaining equity interest in SS/L
was accounted for as a purchase. Loral's consolidated financial statements for
the year ended December 31, 1997 reflect the results of operations of SS/L from
January 1, 1997 and the elimination of the minority interest of the SS/L equity
not owned by Loral during the period. Prior to January 1, 1997, SS/L was
accounted for using the equity method of accounting.
Global Mobile Telephone Service
Globalstar and GTL
In each of 1998 and 1997, GTL effected a two-for-one stock split to
shareholders in the form of a 100% stock dividend. As a result, all GTL share
amounts are represented by equivalent partnership interests on an approximate
four-for-one basis.
Loral's original investment in Globalstar was made in 1994 in connection
with its formation. Loral has continued to make investments in Globalstar since
its inception, including the following transactions during the three years ended
December 31, 1999:
- In 1996, Loral purchased $102.5 million principal amount of GTL's 6 1/2%
Convertible Preferred Equivalent Obligations for $99.4 million. On April
30, 1998, these securities were converted into 6,832,030 shares of GTL
common stock, including shares issued in satisfaction of a required
interest make-whole payment.
- In March 1997, Loral exercised warrants to purchase 4,550,088 shares of
GTL common stock at $6.63 per share, which were received in connection
with Loral's partial guarantee of a $250 million Globalstar Credit
Agreement. In April 1997, Loral exercised rights to purchase an
additional 700,696 shares of GTL common stock at $6.63 per share
distributed to the existing shareholders of GTL. The aggregate purchase
price paid was $34.8 million.
- During 1997, Loral acquired 2,748,372 Globalstar ordinary partnership
interests from other Globalstar partners for $122.3 million in cash and
1,255,684 shares of Loral common stock.
- In July 1998, Loral purchased 4.2 million Globalstar ordinary partnership
interests from certain founding service providers for $420 million in
cash. Concurrently, Loral sold 8.4 million shares of GTL common stock to
persons or entities advised by or associated with Soros Fund Management
LLC for $245 million in cash. As a result of this sale, Loral recognized
a gain of approximately $35 million, which is included in gain on
investments, net in the consolidated statement of operations.
- In November 1998, Loral acquired 276,000 Globalstar ordinary partnership
interests from other Globalstar partners in exchange for 717,600 shares
of GTL common stock.
- In January 1999, Loral purchased $150 million principal amount of GTL's
8% Series A convertible preferred stock, which is convertible into
6,449,865 shares of GTL's common stock.
- In November 1999, Loral purchased 103,187 shares of GTL common stock for
$2.7 million.
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TAXATION
Loral, as a Bermuda company, may be subject to U.S. federal, state and
local income taxation at regular corporate rates on any income that is
effectively connected with the conduct of a U.S. trade or business. When such
income is deemed removed from the U.S. business, it is subject to an additional
30% "branch profits" tax. Loral expects that a significant portion of its
worldwide income will be from non-U.S. sources and will not be effectively
connected with a U.S. trade or business. The United States Treasury Department
is, however, engaged in a project to draft and propose regulations that may
recharacterize a substantial portion of Loral's income as derived from U.S.
sources and as effectively connected with a U.S. trade or business so as to
subject that income to regular U.S. Federal income tax and a 30% branch profits
tax. The Company cannot predict the outcome of that regulatory project.
Any portion of the Company's income from sources outside the United States,
realized through Globalstar or otherwise, may be subject to taxation by foreign
countries and the extent to which these countries may require the Company to pay
tax or to make payments in lieu of tax cannot be determined in advance. However,
based upon the Company's review of current tax laws, including applicable
international tax treaties of certain countries that the Company believes to be
among our key potential markets, the Company expects that a significant portion
of the Company's worldwide income will not be subject to tax by Bermuda or by
the other foreign countries from which the Company derives income.
The Company's U.S. subsidiaries are subject to U.S. taxes on their
worldwide income. In addition, a 30% U.S. withholding tax will be imposed on
dividends and interest paid by such subsidiaries to Loral Space & Communications
Ltd.
LIQUIDITY AND CAPITAL RESOURCES
Loral intends to capitalize on its innovative capabilities, market position
and advanced technologies to offer value-added satellite-based services as part
of the evolving worldwide communications networks and, where appropriate, to
form strategic alliances with major telecommunications service providers and
equipment manufacturers to enhance and expand its satellite-based communications
service opportunities. In order to pursue such opportunities, Loral may seek
funds from strategic partners and other investors, and through incurrence of
debt or the issuance of additional equity.
Debt
In January 1999, Loral completed a private offering of senior notes,
raising approximately $350 million from selling 9.5% senior notes due 2006, of
which a portion was used to invest in $150 million face amount of GTL's $350
million offering of GTL Series A Preferred Stock, thereby maintaining Loral's
prior proportionate ownership position in Globalstar.
The Amended and Restated Credit Agreement, dated as of November 10, 1999,
among Loral SpaceCom Corporation ("Loral SpaceCom"), SS/L and the banks party
thereto (the "Credit Agreement"), provides for a $275 million term loan
facility, a $500 million revolving credit facility, of which up to $175 million
can be used for letters of credit and a separate $75 million letter of credit
facility. The facility is secured by the stock of Loral SpaceCom Corporation and
SS/L, and contains various covenants, including an interest coverage ratio, debt
to capitalization ratios and restrictions on cash transfers to its parent. As of
December 31, 1999, there was $670 million of borrowings outstanding under this
credit facility.
The Company had outstanding letters of credit of approximately $118 million
and $99 million as of December 31, 1999 and 1998, respectively. The Company also
had a $12.5 million Canadian Dollar letter of credit outstanding at December 31,
1999.
Loral CyberStar's outstanding debt as of December 31, 1999, of $965
million, is non-recourse to Loral, and includes certain restrictions on Loral
CyberStar's ability to pay dividends or make loans to Loral. The accreted
principal value of Loral CyberStar's senior notes and senior discount notes was
$821 million at December 31, 1999.
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Equity
On February 18, 2000, Loral sold $400 million of 6% convertible redeemable
preferred stock due 2007 in an offering exempt from registration. The preferred
stock is convertible into approximately 20.2 million shares of common stock at a
conversion price of $19.83 per share. Loral intends to apply the proceeds from
the sale of the preferred stock for general corporate purposes, including
investment in its broadband strategy and expansion of the Loral Global Alliance
by acquisition of additional satellites and orbital slots.
In February 2000, Loral and Lockheed Martin Corporation ("Lockheed Martin")
filed certain notices under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 in connection with Lockheed Martin's plan to convert its 45,896,977 shares
of Loral's Series A preferred stock into an equal number of shares of Loral
common stock. The waiting period expired on March 5, 2000 and, accordingly,
Lockheed Martin is now free to convert the Series A preferred stock at any time.
In February 2000, Loral and Lockheed Martin also entered into an agreement
pursuant to which Lockheed Martin agreed that it will not sell any of the Series
A preferred stock or the Loral common stock into which it is convertible before
May 19, 2000. Loral has agreed to use its best efforts to cause a registration
statement relating to the common stock issuable upon conversion of the Series A
preferred stock to be effective on or before May 19, 2000 and to maintain its
effectiveness for at least 12 months thereafter. Loral has also agreed that it
will refrain from selling equity securities in the public markets for its own
account until the six month anniversary of the effective date of such
registration statement.
Cash
As of December 31, 1999, Loral had $240 million of cash and cash
equivalents. Loral intends to utilize its existing capital base and access to
the capital markets to construct and operate additional satellites, make
additional investments in Globalstar and Globalstar service provider
opportunities, invest in its other core businesses, expand the Loral Global
Alliance and pursue its broadband strategy.
Restricted and Segregated Cash
As of December 31, 1999, Loral CyberStar had approximately $50 million of
restricted cash for interest payments on its senior notes and $137 million of
segregated cash to be applied towards a portion of the final payment on the
purchase of Telstar 10/Apstar IIR. Segregated cash increased as of December 31,
1999, as a result of receiving the insurance proceeds from the Orion 3 launch
failure.
Fixed Satellite Services
Loral Skynet
Loral Skynet currently has four high-power satellites in orbit, including
Telstar 7, which was launched in September 1999 aboard an Ariane launch vehicle
and started revenue generating service in November 1999. Loral intends to expand
Loral Skynet's business to become a worldwide satellite service provider through
the construction of additional satellites.
Loral CyberStar
Loral CyberStar currently has three satellites in orbit (Telstar 11,
Telstar 12 and Telstar 10/Apstar IIR). Telstar 12, originally intended to
operate at 12 degrees W.L., was launched aboard an Ariane launch vehicle in
October 1999 into the orbital slot located at 15 degrees W.L., and commenced
operations in January 2000. Under an agreement reached with Eutelsat, Loral
CyberStar agreed to operate Telstar 12 at 15 degrees W.L. while Eutelsat
continues to develop its services at 12.5 degrees W.L. Eutelsat has in turn
agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority
rights at such location on Loral CyberStar's behalf. As part of this
coordination effort, Loral CyberStar agreed to provide to Eutelsat four 54 MHz
transponders on Telstar 12 for the life of the satellite. Eutelsat also has the
right to acquire, at cost, four transponders on the next replacement satellite
for Telstar 12. As part of the international coordination process, Loral
continues to conduct discussions with various administrations regarding Telstar
12's operations at 15 degrees W.L. If these discussions are not successful,
Telstar 12's useable capacity may be reduced.
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On May 4, 1999, the Orion 3 satellite was placed into a lower-than-expected
orbit after its launch on a Delta III rocket. According to Boeing, the Delta III
rocket apparently failed to complete its second stage burn, and, as a result,
the satellite, manufactured by Hughes Space and Communications Corporation,
achieved an orbit well below the planned final altitude. As a result, the
satellite cannot be used for its intended purpose.
The satellite and launch were fully insured for approximately $266 million,
which was received in the third quarter of 1999. DACOM Corporation, a Korean
communications company which had purchased eight transponders on Orion 3 for a
total of $89 million, had made prepayments of approximately $34 million to the
Company. Under the agreement with DACOM, the amount prepaid was refunded in July
1999.
To replace Orion 3, on September 28, 1999, Loral CyberStar purchased from
APT Satellite Company Limited ("APT") the rights to all transponder capacity and
existing customer leases on the Apstar IIR satellite (except for one C-band
transponder retained by APT), and renamed the satellite the Telstar 10/Apstar
IIR satellite, for approximately $273 million. Telstar 10/Apstar IIR, which was
manufactured by SS/L, was launched in October 1997 and as of September 28, 1999,
had an expected remaining useful life of 13 years. Loral CyberStar has full use
of the transponders for the remaining life of Telstar 10/Apstar IIR. Located at
76.5 degrees E.L., Telstar 10/Apstar IIR covers a region that includes Asia,
Europe, Africa and Australia, which represents over 75% of the world's
population. Under the purchase agreement, Loral CyberStar will also have the
option to lease from APT replacement satellites upon the end of life of Telstar
10/Apstar IIR.
As of December 31, 1999, Loral CyberStar had made payments of approximately
$91 million to APT and paid approximately $182 million in March 2000. Insurance
proceeds from the Orion 3 failure were used to fund the initial payments made
and a significant portion of the final payment.
Based upon its current expectations for growth, Loral CyberStar anticipates
it will have additional funding requirements over the next three years to fund
the purchase of VSATs, senior note interest payments, other capital expenditures
and other operating needs. Interest charges on the senior notes are fully
provided for by restricted cash through July 2000. Loral CyberStar does not have
a revolving credit facility. Accordingly, Loral CyberStar will need to secure
funding from Loral, or raise additional financing. Sources of additional capital
may include public or private debt, equity financings or strategic investments.
To the extent that Loral CyberStar seeks to raise additional debt financing, its
indentures limit the amount of such additional debt and prohibit Loral CyberStar
from using Telstar 11, Telstar 12 and Telstar 10/Apstar IIR as collateral for
indebtedness for money borrowed. If Loral CyberStar requires additional
financing and is unable to obtain such financing from Loral or from outside
sources in the amounts and at the times needed, there would be a material
adverse effect on Loral CyberStar.
Satmex
Satmex currently has three satellites in orbit (Satmex 5, Solidaridad 1 and
Solidaridad 2) and one satellite in inclined orbit (Morelos 2). On April 28,
1999, Solidaridad 1 experienced a loss of its primary satellite control
processor. Service was restored after 14 hours, using the backup satellite
control processor. Failure of the backup satellite control processor would
result in the loss of Solidaridad 1, which would be fully covered by insurance.
On March 31, 1999, Satmex redeemed $35 million of its secured floating rate
notes using proceeds from the sale of preferred stock. On September 30, 1999,
Satmex redeemed an additional $50 million of its secured floating rate notes.
The related covenants of such debt restrict the ability of Satmex to pay
dividends to Loral.
On February 16, 2000, Satmex obtained amendments to certain of its debt
agreements which adjust certain financial covenants. As a result, Satmex
believes that its future operating cash flow and the availability of its
revolving credit facility will be sufficient to service its interest and debt
repayment requirements and ensure compliance with its debt agreements.
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Broadband Data Services
Loral's broadband strategy will build on its existing resources to address
both the expanding market for today's broadband services and to become a leading
medium for delivery of even richer Internet content in the future. The Company's
initial focus will be on two attractive opportunities for early market entry:
consumer broadband services and streaming media services.
Consumer Broadband Services. The Company plans to serve the growing
consumer broadband services market, initially in North America, with an
affordable, ubiquitous, two-way, high-speed Internet access service employing a
hybrid satellite/fiber network. When fully deployed, this network will be
capable of serving at least ten million homes and small businesses at downstream
connection speeds of up to 1.5 megabits per second. In addition, the system will
offer streaming multimedia in multicast mode at speeds of up to 30 megabits per
second and at upstream connection speeds of at least 128 kilobits per second.
The Company intends to serve as the "wholesaler" of this connectivity service to
ISPs, cable companies, and telephone companies who will market and sell the
service to their customers as a high-value extra feature in their own portfolio
of services. The Company currently estimates that the required investment for
the consumer broadband services business in North America will be approximately
$3 billion, with the services implemented and the associated investments made in
several phases.
Streaming Media Services. The Company intends to exploit the technical
advantages of satellites to deliver streaming media services more effectively
than terrestrial alternatives. Instead of flooding the Internet with multiple
point-to-point transmissions of these massive files, the Company's system will
move content directly from its source via satellite to multiple servers located
at the "edge of the net," near the end user. This should eliminate bottlenecks,
improve quality, lower cost and expand content choices and applications. The
Company plans to focus its marketing efforts initially on its existing base of
ISP and corporate customers. The Company intends to enter three streaming media
business segments: transport services to the "edge of the net" for content and
applications service providers; content aggregation services for customers
wishing to outsource their streaming media distribution process; and development
of a portal tailored for businesses. The Company currently estimates the
required investment for the streaming media services business at approximately
$500 million.
The Company is seeking strategic partners to enhance the establishment and
prospects of both the planned consumer broadband and streaming media businesses.
The Company expects that such third party strategic partners will bear a
significant portion of the costs of these projects.
Satellite Manufacturing and Technology
SS/L
Due to the long lead times required to produce purchased parts and launch
vehicles, the Company has entered into various purchase commitments with
suppliers. These commitments aggregated approximately $685 million as of
December 31, 1999.
Global Mobile Telephone Service
Globalstar
In January 1999, Globalstar sold to GTL seven million units (face amount of
$50 per unit) of 8% convertible redeemable preferred partnership interests ("8%
RPPIs"), in connection with GTL's offering of seven million shares (face amount
of $50 per share) of GTL 8% Series A convertible redeemable preferred stock (the
"GTL Series A Preferred Stock"). The GTL Series A Preferred Stock is convertible
into shares of GTL common stock at a conversion price of $23.2563 per share.
Loral purchased three million shares or $150 million face amount of the GTL
Series A Preferred Stock offered. Dividends on the 8% RPPIs and the GTL Series A
Preferred Stock accrue at 8% per annum and are payable quarterly.
In July 1999, Globalstar and GTL filed a shelf registration statement (the
"Shelf Registration Statement") with the SEC covering up to $500 million of
securities. Under the Shelf Registration Statement, Globalstar may, from time to
time, offer debt securities, which may be either senior or subordinated or
secured
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or unsecured and GTL may, from time to time, offer shares of common stock,
preferred stock or warrants, all at prices and on terms to be determined at the
time of the offering.
On August 5, 1999, Globalstar entered into a $500 million credit agreement
with a group of banks for the build-out of the Globalstar system, of which $400
million was outstanding at December 31, 1999. The credit facility is guaranteed
by Loral SatCom Ltd. and Loral Satellite, Inc., wholly owned subsidiaries of
Loral. The guarantee is secured by the pledge of certain assets of Loral and its
subsidiaries, including the stock of the guarantors and the Telstar 6 and
Telstar 7 satellites. Based on third party valuations, management believes that
the fair value of Telstar 6 and Telstar 7 is in excess of this $500 million
credit agreement. As of December 31, 1999, the net book value of Telstar 6 and
Telstar 7 was $392 million. The guarantee agreement contains customary financial
covenants of the guarantors, including maintenance of a minimum collateral
coverage ratio and maintenance of a combined minimum net worth and combined
EBITDA. In addition, the guarantee agreement contains customary limitations on
indebtedness, liens, fundamental changes, asset sales, dividends (except that
the guarantors may pay dividends to their parents provided that combined
aggregate cash on hand at the guarantors is at least equal to $50 million and
the guarantors hold an intercompany note due from Loral for at least $100
million), investments, capital expenditures, creating liens other than those
created pursuant to the guarantee and transactions with affiliates.
In consideration for the guarantee, Loral received warrants to purchase
3,450,000 Globalstar partnership interests at an exercise price of $91 per
interest, which were valued at $141 million (based on the guarantee provided).
The exercise price was determined by reference to the fair market value of GTL's
common stock on the closing date of the credit agreement, based on an
approximate one partnership interest for four shares of GTL common stock
exchange ratio. 50% of the warrants vested in February 2000. Assuming the
guarantee remains in effect, an additional 25% will vest in August 2000 with the
remaining 25% vesting in August 2001. The warrants expire in 2006. Globalstar
may call the warrants after August 5, 2001 if GTL's common stock price exceeds
$45.50 for a defined period.
In December 1999, GTL completed a private offering of $150 million of 9%
Series B convertible redeemable preferred stock (the "GTL Series B Preferred
Stock"). GTL used the net proceeds from this offering to purchase 9% Series B
convertible redeemable preferred partnership interests ("9% RPPIs") of
Globalstar, the terms of which are generally similar to the terms of the GTL
Series B Preferred Stock. Globalstar in turn is using such proceeds for the cost
of the continued deployment of the Globalstar system and for general corporate
purposes.
In February 2000, GTL sold 8,050,000 shares of its common stock to the
public under the Shelf Registration Statement. GTL used the net proceeds from
the offering of approximately $268.5 million to purchase 1,987,654 ordinary
partnership interests in Globalstar. Globalstar intends to use the offering
proceeds for general corporate purposes, including: the acceleration of
Globalstar's roll-out through increased support for service provider marketing
activities and the funding of promotional discounts; development of new service
features; and possible repayment of debt.
SS/L has provided $330 million of billings deferred under its construction
contracts with Globalstar; comprised of: $105 million of orbital incentives, of
which $44 million was repaid in 1999 and $61 million is expected to be repaid in
2000; $90 million of vendor financing which bears interest at LIBOR plus 3% and
is repayable over five years commencing in 2001; and $134 million of
non-interest bearing vendor financing, due over five years in equal monthly
installments, commencing in 2000. SS/L's terms with its subcontractors include
$116 million of financing assumed by them, which is to be repaid on
substantially similar terms (of which a portion is non-recourse to SS/L in the
event of non-payment by Globalstar).
In the first quarter of 2000, Globalstar commenced commercial service.
Pursuant to the Globalstar partnership agreement, Loral is entitled to receive a
managing partner's allocation of 2% of Globalstar's annual revenues under $500
million and 2.8% of annual revenues in excess of $500 million. Such allocation
is reduced by 50% to the extent Globalstar has a net loss in any given year.
Globalstar expects to spend $325 million for the enhancement of its system
software, for the eight spare satellites being constructed by SS/L, and for
financing provided to Globalstar's service providers to assist in the purchase
of gateways, fixed access terminals and handsets (of which $231 million is
expected to be received from the service providers as repayment of
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such financing). In addition, cash interest, preferred dividends and operating
costs are expected to be approximately $125 million per quarter in 2000.
Globalstar believes that its cash on hand ($329 million at February 29, 2000),
available credit under its two credit facilities and vendor financing
arrangements (approximately $425 million at February 29, 2000), service revenues
and other anticipated cash inflows will be sufficient to cover its expected cash
outflows provided that its $250 million credit facility is renegotiated. If
Globalstar cannot renegotiate its $250 million credit facility, it believes it
will be able to obtain additional funds. There can be no assurance, however,
that such funds will be available on favorable terms or on a timely basis, if at
all.
Qualcomm Incorporated ("Qualcomm") has agreed to provide Globalstar $500
million of vendor financing (for which the terms of $400 million are still being
finalized). In connection with the agreement, Qualcomm is expected to receive
warrants to purchase Globalstar partnership interests comparable to those
received by Loral pursuant to Loral's guarantee of Globalstar's $500 million
credit facility (see above).
COMMITMENTS AND CONTINGENCIES
In connection with the merger between Loral Corporation and Lockheed
Martin, Lockheed Martin assumed approximately $206 million of the guarantee
under Globalstar's $250 million credit agreement. The balance of $44 million of
the guarantee was assumed by various Globalstar partners, including $11.7
million by SS/L. Loral has agreed to indemnify Lockheed Martin for its
liability, if any, in excess of $150 million under its guarantee of the $250
million Globalstar credit agreement.
Loral had a $115 million secured standby bank credit facility, which was
undrawn as of December 31, 1999, supporting a guarantee of a $115 million term
loan of an unaffiliated third party. The term loan was repaid by the
unaffiliated third party on February 29, 2000, resulting in the expiration of
the standby credit facility.
Prior to its acquisition by Loral, Loral Skynet sold several transponders
under which title to specific transponders was transferred to the customer.
Under the terms of the sales contracts, Loral Skynet continues to operate the
satellites on which the transponders are located and provides a warranty for a
period of 10 to 14 years. Depending on the contract, Loral Skynet is required to
replace any transponders failing to meet operating specifications. All customers
are entitled to a refund equal to the reimbursement value, as defined, in the
event there is no replacement. The reimbursement value is determined based on
the original purchase price plus an interest factor from the time the payment
was received to acceptance of the transponder by the customer, reduced on a
straight-line basis over the warranty period. In case of satellite failure, the
reimbursement value may be paid from proceeds received from insurance policies.
In 1997, two satellites built by SS/L experienced solar array circuit
failures. SS/L settled one of the customer's claims in 1999 and the other
customer's claims in 1997. In late 1998, following the launch of an SS/L-built
satellite sold to PanAmSat, a manufacturing error was discovered that affected
the geographical coverage of the Ku-band transponders on the satellite. On
January 6, 2000, PanAmSat filed an arbitration proceeding in connection with
this error claiming damages of $225 million for lost profits, and increased
sales and marketing costs. SS/L believes it has meritorious defenses to the
claim and that its liability is limited to a loss of a portion of the applicable
orbital incentives, the estimated impact of which is included in Loral's
consolidated financial statements. PanAmSat has received a recovery from its
insurance carrier that should reduce any damage claim. While this proceeding is
in its very early stages, management believes that this matter will not have a
material adverse effect on the financial condition or results of operations of
Loral.
SS/L is a target of a grand jury investigation being conducted by the
office of the U.S. Attorney for the District of Columbia with respect to
possible violations of export control laws that may have occurred in connection
with the participation of SS/L employees on a committee formed in the wake of
the 1996 crash of a Long March rocket in China and whose purpose was to consider
whether studies of the crash made by the Chinese had correctly identified the
cause of the failure. The Company is not in a position to predict the direction
or outcome of the investigation. If SS/L were to be indicted and convicted of a
criminal violation of the Arms Export Control Act, it would be subject to a fine
of $1 million per violation and could be debarred from certain export privileges
and, possibly, from participation in government contracts. Since many of SS/L's
satellites are built for foreign customers and/or launched on foreign rockets,
such a debarment would have a
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material adverse effect on SS/L's business, and therefore the Company.
Indictment for such violations would subject SS/L to discretionary debarment
from further export licenses. Under the applicable regulations, SS/L could be
debarred from export privileges without being convicted of any crime if it is
indicted for these alleged violations, and loss of export privileges would harm
SS/L's business. Whether or not SS/L is indicted or convicted, SS/L remains
subject to the State Department's general statutory authority to prohibit
exports of satellites and related services if it finds a violation of the Arms
Export Control Act that puts SS/L's reliability in question, and it can suspend
export privileges whenever it determines that grounds for debarment exist and
that such suspension "is reasonably necessary to protect world peace or the
security or foreign policy of the United States."
As far as SS/L can determine, no sensitive information or technology was
conveyed to the Chinese, and no secret or classified information was discussed
with or reported to them. SS/L believes that its employees acted openly and in
good faith and that none engaged in intentional misconduct. Accordingly, the
Company does not believe that SS/L has committed a criminal violation of the
export control laws. The Company does not expect the grand jury investigation or
its outcome to result in a material adverse effect upon its business. However,
there can be no assurance as to these conclusions.
On December 23, 1998, the Office of Defense Trade Controls ("ODTC") of the
U.S. Department of State temporarily suspended the previously approved technical
assistance agreement under which SS/L had been preparing for the launch of the
ChinaSat-8 satellite. According to ODTC, the purpose of the temporary suspension
is to permit that agency to review the agreement for conformity with newly
enacted legislation (Section 74 of the Arms Export Control Act) with respect to
the export of missile equipment or technology. SS/L has complied with ODTC's
instructions, and believes that a review of the agreement will show that its
terms comply with the new law. The ODTC, however, has not yet completed its
review, and the scheduled launch date for ChinaSat-8 is being delayed. In
December 1999, Loral reached an agreement with ChinaSat to extend the date for
delivery of the ChinaSat-8 satellite to July 31, 2000. In return for this
extension and other modifications to the contract, Loral has agreed to provide
to the customer two 36 MHz and one 54 MHz transponders on Telstar 10/Apstar IIR
for the life of those transponders. As a result, the Company recorded a net
charge to earnings of $35 million. If the suspension is not lifted by July 31,
2000, ChinaSat could decide to terminate the contract. If such a termination
were to occur, SS/L would have to refund advances received from ChinaSat ($134
million as of December 31, 1999) and may incur penalties of up to $13 million
and believes it would incur costs of approximately $38 million to refurbish and
retrofit the satellite so that it could be sold to another customer. There can
be no assurance, however, that SS/L will be able to find such a replacement
customer for the satellite or its Chinese launch vehicle. SS/L will record a
charge to earnings of approximately $35 million if it is unable to find a
replacement customer for this launch vehicle.
In March 1999, jurisdiction for satellite licensing was transferred from
the Commerce Department to the State Department and the State Department has
issued regulations relating to the export of, and disclosure of technical
information related to, satellites and related equipment. SS/L anticipates that
obtaining licenses and technical assistance agreements under these new
regulations will take more time and will be considerably more burdensome than in
the past. Delays in obtaining the necessary licenses and technical assistance
agreements may delay SS/L's performance on existing contracts, and, as a result,
SS/L may incur penalties or lose incentive payments under these contracts. In
addition, such delays may have an adverse effect on SS/L's ability to compete
against foreign satellite manufacturers for new satellite contracts.
NET CASH PROVIDED BY/USED IN OPERATING ACTIVITIES
Net cash used in operating activities for the year ended December 31, 1999
was $26 million, primarily due to increases in contracts-in-process of $85
million, deposits of $54 million and other assets of $64 million and a decrease
in customer advances of $91 million. This was offset in part by the net loss as
adjusted for non-cash operating items of $165 million, a decrease in inventories
of $67 million and an increase in long-term liabilities of $61 million.
Net cash provided by operating activities for the year ended December 31,
1998 was $87 million, primarily due to the net loss as adjusted for non-cash
operating items of $108 million and increases in
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customer advances of $54 million, long-term liabilities of $52 million and
accrued expenses and other current liabilities of $19 million, offset by
increases in inventories of $91 million and contracts-in-process of $72 million.
NET CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities for 1999 was $660 million, primarily
as a result of $470 million of capital expenditures mainly for the construction
of satellites, the $148 million cost of acquiring GTL Series A Preferred Stock,
$44 million of capitalized interest on investments, $36 million of advances to
affiliates and $107 million of other investments in affiliates, offset by a
reduction in restricted and segregated cash of $156 million, used for the
construction of Loral CyberStar satellites and interest payments on its senior
notes.
Net cash used in investing activities for 1998 was $556 million, primarily
as a result of $489 million of capital expenditures mainly for the construction
of satellites, the $175 million net cost of acquiring additional Globalstar
partnership interests, $82 million of advances to affiliates, $25 million of
capitalized interest on investments and $95 million of other investments in
affiliates, offset by a reduction in restricted and segregated cash of $264
million, primarily used for the construction of Loral CyberStar satellites and
interest payments on its senior notes and cash acquired in connection with the
Loral CyberStar acquisition of $54 million.
NET CASH PROVIDED BY FINANCING ACTIVITIES
Net cash provided by financing activities was $379 million in 1999, due
primarily to the net proceeds of $344 million from the Company's issuance of
9.5% senior notes, net borrowings under the Company's revolving credit facility
of $70 million and proceeds from equity transactions of $20 million, offset in
part by debt repayments of $23 million and preferred dividends of $45 million.
During 1998, net cash provided by financing activities was $789 million,
due primarily to net proceeds from equity transactions of $634 million, net
borrowings under the Company's credit facilities of $178 million and
contributions from minority partners of $21 million, partially offset by
preferred dividends of $45 million.
OTHER MATTERS
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Loral has not yet determined the impact that the adoption
of SFAS 133 will have on its earnings or financial position. Loral is required
to adopt SFAS 133 on January 1, 2001.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency
The Company has limited involvement with derivative financial instruments
and does not use such instruments for trading purposes. The derivative financial
instruments are used to manage foreign currency exchange risk.
As of December 31, 1999, the Company had foreign currency exchange
contracts (forwards and swaps) with several banks to purchase and sell foreign
currencies, primarily Japanese yen, aggregating $106.3 million. Such contracts
were designated as hedges of certain foreign contracts and subcontracts to be
performed by SS/L through May 2006. The fair value of these contracts, based on
quoted market prices as of December 31, 1999, was $104.6 million. As of December
31, 1999, deferred gains on forward contracts to sell foreign currencies,
primarily yen, were $2.0 million and deferred losses on forward contracts to
purchase foreign currencies, primarily yen, were $0.3 million.
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The Company is exposed to credit-related losses in the event of
nonperformance by counter parties to these financial instruments, but does not
expect any counter party to fail to meet its obligation.
The maturity of foreign currency exchange contracts held as of December 31,
1999 is consistent with the contractual or expected timing of the transactions
being hedged, principally receipt of customer payments under long-term contracts
and payments to vendors under subcontracts. These foreign exchange contracts
mature as follows (in thousands):
TO PURCHASE TO SELL
AS OF DECEMBER 31, 1999 -------------------- -------------------
AT AT AT AT
YEARS TO CONTRACT MARKET CONTRACT MARKET
MATURITY RATE RATE RATE RATE
-------- -------- -------- -------- -------
1................................. $ 62,077 $ 63,044 $16,166 $15,755
2 to 5............................ 7,276 6,575 12,101 11,819
6 to 10........................... 8,699 7,370
-------- -------- ------- -------
$ 69,353 $ 69,619 $36,966 $34,944
======== ======== ======= =======
AS OF DECEMBER 31, 1998 $108,900 $112,837 $88,631 $76,911
======== ======== ======= =======
The decrease in the value of foreign currency contracts reflects progress
towards completion of the underlying construction contracts.
Interest
As of December 31, 1999 and 1998, the fair value of the Company's long-term
debt was estimated to be $1.55 billion and $1.4 billion, respectively, using
quoted market prices. The long-term debt carrying value exceeded fair value by
$443 million and $173 million as of December 31, 1999 and 1998, respectively.
Market risk on debt is estimated as the potential increase in annual interest
expense resulting from a hypothetical one percent increase in interest rates and
amounts to $18 million and $15 million for 1999 and 1998, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information required for this item is presented in the Company's 2000
definitive proxy statement which is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers of Loral as of March 1, 2000.
NAME AGE POSITION
---- --- --------
Bernard L. Schwartz.......... 74 Chairman of the Board of Directors and Chief Executive
Officer since January 1996. Prior to that, Chairman and
Chief Executive Officer of Old Loral since 1972.
Eric J. Zahler............... 49 President and Chief Operating Officer since February
2000. Prior to that Executive Vice President since
November 1999. Prior to that Senior Vice President,
General Counsel and Secretary since February 1998. Prior
to that, Vice President, General Counsel and Secretary
since March 1996. Prior to that, Vice President and
General Counsel of Old Loral since April 1992.
Michael P. DeBlasio.......... 63 First Senior Vice President since September 1998. Prior
to that, First Senior Vice President and Chief Financial
Officer since February 1998. Prior to that, Senior Vice
President and Chief Financial Officer since March 1996.
Prior to that, Senior Vice President -- Finance of Old
Loral since 1979.
Robert E. Berry.............. 71 Senior Vice President since November 1996 and Chairman of
Space Systems/Loral since September 1999. Prior to that,
President of Space Systems/Loral since 1990.
Nicholas C. Moren............ 53 Senior Vice President and Treasurer since February 1998.
Prior to that, Vice President and Treasurer since March
1996. Prior to that, Vice President and Treasurer of Old
Loral since April 1991.
Richard J. Townsend.......... 49 Senior Vice President and Chief Financial Officer since
October 1998. Prior to that, Corporate Controller and
Director of Strategy for ITT Industries since 1997. Prior
to that, Vice President of Finance Worldwide Industries
for IBM and various other financial management positions
with IBM since 1979.
Laurence D. Atlas............ 42 Vice President, Government
Relations -- Telecommunications since May 1997. Prior to
that, Associate Chief of the Common Carrier Bureau of the
FCC since January 1995. Prior to that, Associate Chief of
the FCC's Wireless Telecommunications Bureau since
November 1994. Prior to that, associate in the law firm
of Willkie Farr & Gallagher since 1982.
W. Neil Bauer................ 53 Vice President since March 1998. Prior to that, Chief
Executive Officer and President of Orion Network Systems,
Inc. since September 1993.
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NAME AGE POSITION
---- --- --------
Jeanette H. Clonan........... 51 Vice President -- Communications and Investor Relations
since November 1996. Prior to that, Director -- Corporate
Communications from June 1996. Prior to that, Vice
President -- Corporate Relations of Jamaica Water
Securities since September 1992.
Terry J. Hart................ 53 Vice President since February 1998 and President of Loral
Skynet since March 1997. Prior to that, Division Manager
of AT&T Skynet Satellite Services since 1991.
Stephen L. Jackson........... 58 Vice President -- Administration since March 1997. Prior
to that, Vice President -- Administration of Old Loral
since 1978.
Avi Katz..................... 41 Vice President, General Counsel and Secretary since
November 1999. Prior to that Vice President, Deputy
General Counsel and Assistant Secretary since February
1998. Prior to that, Deputy General Counsel and Assistant
Secretary since August 1997. Prior to that, Associate
General Counsel and Assistant Secretary since July 1996.
Prior to that, associate in the law firm of Willkie Farr
& Gallagher since 1987.
John Klineberg............... 61 Vice President of Loral and President of Space
Systems/Loral since September 1999. Prior to that,
Executive Vice President of Satellite Constellation
Establishment of Globalstar since January 1998. Prior to
that, Executive Vice President, Globalstar Program at
Space Systems/Loral from 1995 to January 1998. Prior to
that, a variety of technical and management positions
with NASA, including Director of the Goddard Space Flight
Center and NASA's Lewis Research Center.
Russell R. Mack.............. 45 Vice President -- Business Ventures since February 1998.
Prior to that, Director of Business Planning and
Development since April 1996. Prior to that, Manager of
Project Finance of Old Loral since July 1991.
Anthony J. Navarra........... 52 Vice President of Loral and President of Globalstar since
September 1999 and President of GTL since February 2000.
Prior to that, acting Chief Operating Officer of
Globalstar since March 1999 and Executive Vice President
of GTL since 1999. Prior to that, Vice President of GTL
since 1995 and Executive Vice President, Strategic
Development of Globalstar since March 1994.
Harvey B. Rein............... 46 Vice President and Controller since April 1996. Prior to
that, Assistant Controller of Old Loral since 1985.
Thomas B. Ross............... 70 Vice President -- Government Relations since November
1996. Prior to that, Vice President -- Corporate
Communications from April 1996. Prior to that, Vice
President -- Communications of Globalstar from May 1995
to April 1996. Prior to that, Special Assistant to the
President and Senior Director for Public Affairs of the
National Security Council from April 1994 to May 1995 and
Senior Vice President of Hill & Knowlton.
Janet T. Yeung............... 35 Vice President, Deputy General Counsel and Assistant
Secretary since February 2000. Prior to that, Associate
General Counsel and Assistant Secretary since November
1999. Prior to that, Associate General Counsel since
February 1998. Prior to that, associate in the law firm
of Willkie Farr & Gallagher since September 1991.
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ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under Items 11, 12 and 13, is presented in the
Company's 2000 definitive proxy statement which is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
PAGE
----
Index to Financial Statements............................... F-1
Loral Space & Communications Ltd.
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997....................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997....................... F-6
Notes to Consolidated Financial Statements................ F-7
Globalstar, L.P.
Independent Auditors' Report.............................. *
Consolidated Balance Sheets as of December 31, 1999 and
1998................................................... *
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 and cumulative........ *
Consolidated Statements of Partners' Capital and
Subscriptions Receivable for the period March 23, 1994
(commencement of operations) to December 31, 1999...... *
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 and cumulative........ *
Notes to Consolidated Financial Statements................ *
- ---------------
* Incorporated herein by reference from the Annual Report on Form
10-K of Globalstar Telecommunications Limited and Globalstar,
L.P. for the year ended December 31, 1999, pages F-1 through
F-42.
(a) 2. Financial Statement Schedules
Independent Auditors' Report.................. S-1
Schedule I -- Condensed Financial Information
of Registrant............................................. S-2
Financial statement schedules not listed are
either not required or the information
required is reflected in the consolidated
financial statements.
(a) 3. Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Restructuring, Financing and Distribution Agreement, dated
as of January 7, 1996, among Loral Corporation, Loral
Aerospace Holdings, Inc., Loral Aerospace Corp., Loral
General Partner, Inc., Loral Globalstar L.P., Loral
Globalstar Limited, the Registrant and Lockheed Martin
Corporation(1)
50
52
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.2 Amendment to Restructuring, Financing and Distribution
Agreement, dated as April 15, 1996(1)
2.3 Agreement for the Purchase and Sale of Assets dated as of
September 25, 1996 by and between AT&T Corp., as Seller, and
Loral Space & Communications Ltd., as Buyer(2)
2.4 First Amendment to Agreement for the Purchase and Sale of
Assets dated as of March 14, 1997 by and between AT&T Corp.,
as Seller, and Loral Space & Communications Ltd., as
Buyer(3)
2.5 Agreement and Plan of Merger dated as of October 7, 1997 by
and among Orion Network Systems, Inc., Loral Space &
Communications Ltd. and Loral Satellite Corporation(4)
2.6 First Amendment to Agreement and Plan of Merger dated as of
February 11, 1998 by and among Orion Network Systems, Inc.,
Loral Space & Communications Ltd. and Loral Satellite
Corporation(5)
2.7 Second Amendment to Agreement and Plan of Merger dated as of
March 20, 1998 by and among Orion Network Systems, Inc.,
Loral Space & Communications Ltd. and Loral Satellite
Corporation(12)
3.1 Memorandum of Association(1)
3.2 Memorandum of Increase of Share Capital(1)
3.3 Third Amended and Restated Bye-laws+
3.4 Schedule IV to the Third Amended and Restated Bye-laws+
4.1 Rights Agreement dated March 27, 1996 between the Registrant
and The Bank of New York, Rights Agent(1)
4.2 Indenture dated as of January 15, 1999 relating to
Registrant's 9 1/2% Senior Notes due 2006(14)
10.1 Shareholders Agreement dated as of April 23, 1996 between
Loral Corporation and the Registrant(1)
10.1.1 Amended Shareholders Agreement dated as of March 29, 2000
between the Registrant and Lockheed Martin Corporation+
10.2 Tax Sharing Agreement dated as of April 22, 1996 between
Loral Corporation, the Registrant, Lockheed Martin
Corporation and LAC Acquisition Corporation(1)
10.3 Exchange Agreement dated as of April 22, 1996 between the
Registrant and Lockheed Martin Corporation(1)
10.4 Amended and Restated Agreement of Limited Partnership of
Globalstar, L.P., dated as of January 26, 1999 among
Loral/Qualcomm Satellite Services, L.P., Globalstar
Telecommunications Limited, AirTouch Satellite Services,
Inc., Dacom Corporation, Dacom International, Inc., Hyundai
Corporation, Hyundai Electronics Industries Co., Ltd.,
Loral/DASA Globalstar, L.P., Loral Space & Communications
Ltd., San Giorgio S.p.A., TeleSat Limited, TE.S.AM and
Vodafone Satellite Services Limited(14)
10.4.1 Amendment dated as of December 8, 1999 to the Amended and
Restated Agreement of Limited Partnership of Globalstar,
L.P.(15)
10.4.2 Amendment dated as of February 1, 2000 to the Amended and
Restated Agreement of Limited Partnership of Globalstar,
L.P.+
10.5 Service Provider Agreements by and between Globalstar, L.P.
and each of Loral General Partner, Inc. and Loral/DASA
Globalstar, L.P.(8)
10.6 Contract between Globalstar, L.P. and Space Systems/Loral,
Inc.(8)
10.7 1996 Stock Option Plan(1)++
10.7.1 Amendment to 1996 Stock Option Plan(14)++
10.8 Common Stock Purchase Plan for Non-Employee Directors(1)++
10.9 Employment Agreement between the Registrant and Bernard L.
Schwartz(1)++
51
53
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.9.1 Amendment dated as of March 1, 1997 to Employment Agreement
between the Registrant and Bernard L. Schwartz(12)++
10.10 Registration Rights Agreement dated as of August 9, 1996
among Loral Space & Communications Ltd., Lehman Brothers
Capital Partners II, L.P., Lehman Brothers Merchant Banking
Portfolio Partnership L.P., Lehman Brothers Offshore
Investment Partnership L.P. and Lehman Brothers Offshore
Investment Partnership-Japan L.P.(9)
10.11 Registration Rights Agreement dated November 6, 1996
relating to the Registrant's 6% Convertible Preferred
Equivalent Obligations due 2006(6)
10.12 Registration Rights Agreement (Series C Preferred Stock)
dated as of March 31, 1997 between Loral Space &
Communications Ltd. and Finmeccanica S.p.A. and dated as
June 23, 1997 among Loral Space & Communications Ltd.,
Aerospatiale SNI and Alcatel Espace(10)
10.13 Registration Rights Agreement (Common Stock) dated as of
June 23, 1997 among Loral Space & Communications Ltd.,
Aerospatiale SNI and Alcatel Espace(10)
10.14 Alliance Agreement dated as of June 23, 1997 among Loral
Space & Communications Ltd., Aerospatiale SNI, Alcatel
Espace and Finmeccanica S.p.A.(10)
10.15 Principal Stockholder Agreement dated as of October 7, 1997
among Loral Space & Communications Ltd., Loral Satellite
Corporation, Orion Network Systems, Inc. and certain Orion
stockholders signatory thereto(4)
10.16 Amended and Restated Credit and Participation Agreement,
dated as of November 14, 1997, among Loral SpaceCom
Corporation, Space Systems/Loral, Inc., the Banks parties
thereto, Bank of America National Trust and Savings
Association, as Administrative Agent, and Istituto Bancario
San Paolo di Torino S.p.A, individually and as Italian
Export Financing and Arranger and as Selling Bank(11)
10.16.1 First Amendment dated as of May 7, 1998 to and of the
Amended and Restated Credit and Participation Agreement,
dated as of November 14, 1997, among Loral SpaceCom
Corporation, Space Systems/Loral, Inc. and, the banks
parties thereto(14)
10.16.2 Second Amendment dated as of September 4, 1998 to and of the
Amended and Restated Credit Agreement dated as of November
14, 1997, among Loral SpaceCom Corporation, Space
Systems/Loral, Inc. and the banks parties thereto.+
10.16.3 Third Amendment dated as of July 12, 1999 to and of the
Amended and Restated Credit Agreement dated as of November
14, 1997, among Loral SpaceCom Corporation, Space
Systems/Loral, Inc. and the banks parties thereto.+
10.16.4 Fourth Amendment dated as of November 10, 1999 to and of the
Amended and Restated Credit Agreement dated as of November
14, 1997, among Loral SpaceCom Corporation, Space Systems/
Loral, Inc. and the banks parties thereto.+
10.17 Agreement of Limited Partnership of CyberStar, L.P. dated as
of June 30, 1997(12)
10.18 Purchase and Sale Agreement dated November 17, 1997 between
the Federal Government of the United Mexican States and
Corporativo Satelites Mexicanos, S.A. de C.V. for the
purchase and sale of the capital stock of Satelites
Mexicanos, S.A. de C.V. (English translation of Spanish
original)(12)
10.19 Amended and Restated Membership Agreement dated and
effective as of August 21, 1998 among Loral Satmex Ltd. and
Ediciones Enigma, S.A. de C.V. and Firmamento Mexicano, S.
de R.L. de C.V.(14)
52
54
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.20 Letter Agreement dated December 29, 1997 between Loral Space
& Communications Ltd., Telefonica Autrey S.A. de C.V.,
Donaldson, Lufkin & Jenrette Securities Corporation, Lehman
Brothers Inc. and Lehman Commercial Paper Inc. and related
Agreement between the Federal Government of United Mexican
States, Telefonica Autrey, S.A. de C.V., Ediciones Enigma,
S.A. de C.V., Loral Space & Communications Ltd., Loral
Satmex Ltd. and Servicios Corporativos Satelitales, S.A. de
C.V.(12)
10.21 Shareholders Agreement dated December 7, 1998 by and among
Alcatel SpaceCom, Loral Space & Communications Ltd., Dr.
Jurgen Schulte-Hillen and EuropeStar Limited(14)
10.22 Registration Rights Agreement dated as of January 21, 1999
relating to Registrant's 9 1/2% Senior Notes due 2006(14)
10.23 Guarantee and Collateral Agreement dated as of August 5,
1999, made by Loral Satcom Ltd. and Loral Satellite, Inc. in
favor of Bank of America, National Association as Collateral
Agent(16)
10.24 Lease Agreement dated as of August 18, 1999 by and between
Loral Asia Pacific Satellite (HK) Limited and APT Satellite
Company Limited(17)
10.25 Guarantee of Loral Space & Communications Ltd. dated August
18, 1999(17)
10.26 Registration Rights Agreement dated as of February 18, 2000
relating to Registrant's 6% Series D Convertible Redeemable
Preferred Stock due 2007+
12 Statement Re: Computation of Ratios+
21 List of Subsidiaries of the Registrant+
23 Consent of Deloitte & Touche LLP+
27 Financial Data Schedule (EDGAR only)+
99.1 Consolidated Financial Statements of Globalstar, L.P. and
Independent Auditors' Report(13)
- ---------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form 10 (No. 1-14180).
(2) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on September 27, 1996.
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K
on March 28, 1997.
(4) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on October 10, 1997.
(5) Incorporated by reference from the Registrant's Registration Statement on
Form S-4 filed on February 17, 1998 (File No. 333-46407).
(6) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the nine month period ended December 31, 1996.
(7) Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 filed by Globalstar Telecommunications
Limited (File No. 0-25456).
(8) Incorporated by reference from the Registration Statement on Form S-1 of
Globalstar Telecommunications Limited (File No. 33-86808).
(9) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on August 13, 1996.
(10) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on July 8, 1997.
(11) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on December 9, 1997.
(12) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
(13) Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 filed by Globalstar Telecommunications
Limited and Globalstar, L.P. (File No. 0-25456).
(14) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
53
55
(15) Incorporated by reference from the Current Report on Form 8-K filed on
December 21, 1999 by Globalstar Telecommunications Limited and Globalstar,
L.P.
(16) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on August 6, 1999.
(17) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on August 23, 1999.
+ Filed herewith.
++ Management compensation plan.
(b) Reports on Form 8-K.
DATE OF REPORT DESCRIPTION
-------------- -----------
September 28, 1999 Item 5 -- Other Events Lease Agreement relating to Apstar II-R
54
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LORAL SPACE & COMMUNICATIONS LTD.
By: /s/ BERNARD L. SCHWARTZ
------------------------------------
Bernard L. Schwartz
(Chairman of the Board and
Chief Executive Officer)
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ BERNARD L. SCHWARTZ Chairman of the Board, Chief March 29, 2000
- --------------------------------------------------- Executive Officer and Director
Bernard L. Schwartz (Principal Executive Officer)
/s/ HOWARD GITTIS Director March 29, 2000
- ---------------------------------------------------
Howard Gittis
/s/ ROBERT B. HODES Director March 29, 2000
- ---------------------------------------------------
Robert B. Hodes
/s/ GERSHON KEKST Director March 29, 2000
- ---------------------------------------------------
Gershon Kekst
/s/ CHARLES LAZARUS Director March 29, 2000
- ---------------------------------------------------
Charles Lazarus
/s/ MALVIN A. RUDERMAN Director March 29, 2000
- ---------------------------------------------------
Malvin A. Ruderman
/s/ E. DONALD SHAPIRO Director March 29, 2000
- ---------------------------------------------------
E. Donald Shapiro
/s/ ARTHUR L. SIMON Director March 29, 2000
- ---------------------------------------------------
Arthur L. Simon
/s/ DANIEL YANKELOVICH Director March 29, 2000
- ---------------------------------------------------
Daniel Yankelovich
/s/ RICHARD J. TOWNSEND Chief Financial Officer and March 29, 2000
- --------------------------------------------------- Senior Vice President
Richard J. Townsend (Principal Financial Officer)
/s/ HARVEY B. REIN Vice President and Controller March 29, 2000
- --------------------------------------------------- (Principal Accounting Officer)
Harvey B. Rein
55
57
INDEX TO FINANCIAL STATEMENTS
Loral Space & Communications Ltd. and Subsidiaries
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997....................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997........... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997....................... F-6
Notes to Consolidated Financial Statements................ F-7
F-1
58
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF LORAL SPACE & COMMUNICATIONS LTD.
We have audited the accompanying consolidated balance sheets of Loral Space
& Communications Ltd. (a Bermuda company) and its subsidiaries (collectively,
the "Company") as of December 31, 1999 and 1998 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
February 22, 2000 (March 5, 2000 as to the second paragraph of Note 18)
F-2
59
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31,
------------------------
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents................................. $ 239,865 $ 546,772
Restricted and segregated cash............................ 187,315 50,180
Accounts receivable, net.................................. 47,899 23,637
Contracts-in-process...................................... 439,921 355,196
Inventories............................................... 111,060 191,245
Other current assets...................................... 47,261 30,063
---------- ----------
Total current assets.............................. 1,073,321 1,197,093
Property, plant and equipment, net.......................... 1,884,975 1,667,508
Cost in excess of net assets acquired, net.................. 946,781 966,260
Long-term receivables....................................... 167,464 161,977
Restricted and segregated cash.............................. 22,675
Investments in and advances to affiliates................... 1,098,003 938,551
Deposits.................................................... 195,875 140,970
Other assets................................................ 244,002 134,181
---------- ----------
$5,610,421 $5,229,215
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 85,496 $ 22,736
Accounts payable.......................................... 207,362 213,507
Satellite purchase price payable.......................... 181,928
Accrued employment costs.................................. 44,797 44,256
Customer advances......................................... 67,725 158,192
Accrued interest and preferred dividends.................. 49,093 37,860
Other current liabilities................................. 37,770 34,890
Income taxes payable...................................... 19,708 17,630
---------- ----------
Total current liabilities......................... 693,879 529,071
Deferred income taxes....................................... 38,370
Pension and other postretirement liabilities................ 51,601 50,470
Long-term liabilities....................................... 177,300 113,840
Long-term debt.............................................. 1,913,826 1,533,039
Minority interest........................................... 23,151 28,704
Commitments and contingencies (Notes 7, 8, 11 and 13)
Shareholders' equity:
Series A convertible preferred stock, $.01 par value;
150,000,000 shares authorized, 45,896,977 shares
issued................................................. 459 459
Series B preferred stock, $.01 par value; 750,000 shares
authorized and unissued................................
6% Series C convertible redeemable preferred stock
($745,472 redemption value), $.01 par value; 20,000,000
shares authorized, 14,909,437 shares issued............ 735,437 735,437
Common stock, $.01 par value; 750,000,000 shares
authorized, 245,204,432 and 243,861,719 shares
issued................................................. 2,452 2,439
Paid-in capital........................................... 2,347,323 2,330,755
Treasury stock, at cost; 174,195 shares................... (3,360) (3,360)
Unearned compensation..................................... (1,253) (8,231)
Retained deficit.......................................... (409,301) (162,657)
Accumulated other comprehensive income.................... 78,907 40,879
---------- ----------
Total shareholders' equity........................ 2,750,664 2,935,721
---------- ----------
$5,610,421 $5,229,215
========== ==========
See notes to consolidated financial statements.
F-3
60
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenues from satellite sales......................... $1,178,193 $1,117,721 $1,243,255
Revenues from satellite services...................... 279,527 183,981 69,336
---------- ---------- ----------
Total revenues...................................... 1,457,720 1,301,702 1,312,591
Costs of satellite sales.............................. 1,071,063 995,401 1,127,863
Costs of satellite services........................... 225,874 134,473 44,077
Selling, general and administrative expenses.......... 223,046 205,608 127,099
---------- ---------- ----------
Operating income (loss)............................... (62,263) (33,780) 13,552
Interest and investment income........................ 89,422 53,867 49,069
Interest expense...................................... (89,297) (51,209) (15,230)
Gain on investments, net.............................. 5,494 79,591
---------- ---------- ----------
Income (loss) before income taxes, equity in net loss
of affiliates and minority interest................. (62,138) (25,628) 126,982
Income tax expense (benefit).......................... (32,516) (3,871) 34,871
---------- ---------- ----------
Income (loss) before equity in net loss of affiliates
and minority interest............................... (29,622) (21,757) 92,111
Equity in net loss of affiliates...................... (177,819) (120,417) (49,037)
Minority interest..................................... 5,525 3,376 (3,070)
---------- ---------- ----------
Net income (loss)..................................... (201,916) (138,798) 40,004
Preferred dividends and accretion..................... (44,728) (46,425) (26,315)
---------- ---------- ----------
Net income (loss) applicable to common stockholders... $ (246,644) $ (185,223) $ 13,689
========== ========== ==========
Earnings (loss) per share -- basic and diluted........ $ (0.85) $ (0.68) $ 0.06
========== ========== ==========
Weighted average shares outstanding:
Basic............................................... 290,232 273,402 242,070
========== ========== ==========
Diluted............................................. 290,232 273,402 243,591
========== ========== ==========
See notes to consolidated financial statements.
F-4
61
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(in thousands, except per share amounts)
6% SERIES C
SERIES A CONVERTIBLE
CONVERTIBLE REDEEMABLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- ----------------- ----------------
SHARES SHARES SHARES PAID-IN TREASURY UNEARNED
ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT CAPITAL STOCK COMPENSATION
------ ------ ------ -------- ------- ------ ---------- -------- ------------
Balance January 1, 1997........... 45,897 $459 191,092 $1,911 $1,058,822
Shares issued:
Exercise of stock options and
related tax benefits, net of
shares tendered................ 208 2 2,015 $(1,680)
Employee savings plan............ 352 4 6,997
Acquisition of equity interest in
SS/L........................... 2,909 $149,600 8,043 80 130,820
Acquisition of Globalstar
partnership interests.......... 1,256 13 17,474
Mandatory exchange of Convertible
Preferred Equivalent
Obligations, net of unamortized
issue costs.................... 12,000 583,282
Unearned compensation............. 249 $ (249)
Preferred dividends $3.00 per
share............................
Accretion to redemption value..... 880
Net income........................
Other comprehensive income........
Comprehensive income..............
------ ---- ------ -------- ------- ------ ---------- ------- -------
Balance December 31, 1997......... 45,897 459 14,909 733,762 200,951 2,010 1,216,377 (1,680) (249)
Shares issued:
Common stock and vested options
issued to acquire Loral
CyberStar...................... 17,969 179 468,846
Unvested options issued to
acquire Loral CyberStar........ 4,512 (4,512)
Loral CyberStar note conversion
and fractional shares.......... 32 (5)
Common stock sold to public,
net............................ 23,000 230 601,586
Exercise of stock options and
related tax benefits, net of
shares tendered................ 739 8 8,112 (1,680)
Employee savings plan............ 1,171 12 25,669
Unearned compensation............. 5,658 (5,658)
Amortization of unearned
compensation..................... 2,188
Preferred dividends $3.00 per
share............................
Accretion to redemption value..... 1,675
Net loss..........................
Other comprehensive income........
Comprehensive loss................
------ ---- ------ -------- ------- ------ ---------- ------- -------
Balance December 31, 1998......... 45,897 459 14,909 735,437 243,862 2,439 2,330,755 (3,360) (8,231)
Shares issued:
Exercise of stock options and
related tax benefits........... 288 3 3,442
Employee savings plan............ 944 9 16,640
Forfeited unearned compensation... (3,755) 3,755
Unearned compensation............. 240 (240)
Amortization of unearned
compensation..................... 3,463
Preferred dividends $3.00 per
share............................
Exercise of warrants for common
stock............................ 110 1 1
Net loss..........................
Other comprehensive income........
Comprehensive loss................
------ ---- ------ -------- ------- ------ ---------- ------- -------
Balance December 31, 1999......... 45,897 $459 14,909 $735,437 245,204 $2,452 $2,347,323 $(3,360) $(1,253)
====== ==== ====== ======== ======= ====== ========== ======= =======
ACCUMULATED
RETAINED OTHER TOTAL
EARNINGS COMPREHENSIVE SHAREHOLDERS'
(DEFICIT) INCOME EQUITY
--------- ------------- -------------
Balance January 1, 1997........... $ 8,877 $1,070,069
Shares issued:
Exercise of stock options and
related tax benefits, net of
shares tendered................ 337
Employee savings plan............ 7,001
Acquisition of equity interest in
SS/L........................... 280,500
Acquisition of Globalstar
partnership interests.......... 17,487
Mandatory exchange of Convertible
Preferred Equivalent
Obligations, net of unamortized
issue costs.................... 583,282
Unearned compensation.............
Preferred dividends $3.00 per
share............................ (25,435) (25,435)
Accretion to redemption value..... (880)
Net income........................ 40,004
Other comprehensive income........ $ 7,275
Comprehensive income.............. 47,279
--------- ------- ----------
Balance December 31, 1997......... 22,566 7,275 1,980,520
Shares issued:
Common stock and vested options
issued to acquire Loral
CyberStar...................... 469,025
Unvested options issued to
acquire Loral CyberStar........
Loral CyberStar note conversion
and fractional shares.......... (5)
Common stock sold to public,
net............................ 601,816
Exercise of stock options and
related tax benefits, net of
shares tendered................ 6.440
Employee savings plan............ 25,681
Unearned compensation.............
Amortization of unearned
compensation..................... 2,188
Preferred dividends $3.00 per
share............................ (44,750) (44,750)
Accretion to redemption value..... (1,675)
Net loss.......................... (138,798)
Other comprehensive income........ 33,604
Comprehensive loss................ (105,194)
--------- ------- ----------
Balance December 31, 1998......... (162,657) 40,879 2,935,721
Shares issued:
Exercise of stock options and
related tax benefits........... 3,445
Employee savings plan............ 16,649
Forfeited unearned compensation...
Unearned compensation.............
Amortization of unearned
compensation..................... 3,463
Preferred dividends $3.00 per
share............................ (44,728) (44,728)
Exercise of warrants for common
stock............................ 2
Net loss.......................... (201,916)
Other comprehensive income........ 38,028
Comprehensive loss................ (163,888)
--------- ------- ----------
Balance December 31, 1999......... $(409,301) $78,907 $2,750,664
========= ======= ==========
See notes to consolidated financial statements.
F-5
62
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Operating activities:
Net income (loss).......................................... $(201,916) $ (138,798) $ 40,004
Non-cash items:
Gain on investments, net................................. (5,494) (79,591)
Equity in net loss of affiliates......................... 177,819 120,417 49,037
Minority interest........................................ (5,525) (3,376) 3,070
Deferred taxes........................................... (39,864) (5,940) 419
Non-cash interest and investment income.................. (22,877) (14,249) (1,739)
Non-cash interest expense................................ 33,758 20,474
Depreciation and amortization............................ 174,906 135,029 62,764
Loss on ChinaSat agreement (Note 13)..................... 35,492
Loss on disposal of property, plant and equipment........ 12,696
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable, net................................... (19,360) (4,086) (5,351)
Contracts-in-process....................................... (84,725) (72,413) (15,690)
Inventories................................................ 67,117 (90,897) (23,753)
Other current assets....................................... (13,098) 14,450 (8,958)
Deposits................................................... (54,350) 14,000 (107,670)
Long-term receivables...................................... (5,486) 6,662 (78,634)
Other assets............................................... (63,739) (16,056) 9,616
Accounts payable........................................... (7,517) 9,048 27,845
Accrued expenses and other current liabilities............. 8,128 19,432 (36,602)
Income taxes payable....................................... 6,914 (8,322) 24,873
Customer advances.......................................... (90,547) 54,090 (57,778)
Long-term liabilities...................................... 61,000 51,844 24,529
Other...................................................... 4,769 980
--------- ---------- -----------
Cash (used in) provided by operating activities............. (26,405) 86,795 (173,609)
--------- ---------- -----------
Investing activities:
Cash acquired in connection with Loral CyberStar
acquisition.............................................. 53,801
Acquisition of businesses, net of cash acquired............ (10,790) (6,877) (545,642)
Proceeds from the sale of investment in affiliates, net.... 246,867 79,591
Investments in and advances to affiliates.................. (335,377) (624,079) (312,305)
Other assets............................................... (45,715)
Use and transfer of restricted and segregated cash......... 156,381 264,123
Capital expenditures....................................... (469,747) (489,448) (255,340)
--------- ---------- -----------
Cash used in investing activities........................... (659,533) (555,613) (1,079,411)
--------- ---------- -----------
Financing activities:
Proceeds from the issuance of 9.5% senior notes, net....... 343,875
Proceeds from sale of common stock, net.................... 601,816
Proceeds from other stock issuances........................ 20,095 32,121 7,338
Borrowings (repayments) under revolving credit facility,
net...................................................... 70,000 150,000 (4,000)
Borrowings under note purchase facility.................... 12,581 38,423 38,958
Proceeds from issuance of term loan........................ 275,000
Repayments under term loan................................. (18,750)
Repayments under Export-Import facility.................... (2,146) (2,146) (2,146)
Repayments of other long-term obligations.................. (1,896) (7,819)
Contributions from minority partners....................... 21,398 9,100
Preferred dividends........................................ (44,728) (44,750) (25,435)
--------- ---------- -----------
Cash provided by financing activities....................... 379,031 789,043 298,815
--------- ---------- -----------
Decrease (increase) in cash and cash equivalents............ (306,907) 320,225 (954,205)
Cash and cash equivalents -- beginning of period............ 546,772 226,547 1,180,752
--------- ---------- -----------
Cash and cash equivalents -- end of period.................. $ 239,865 $ 546,772 $ 226,547
========= ========== ===========
Non-cash activities:
Common stock issued to acquire Loral CyberStar............. $ 469,025
==========
Unrealized gain on available-for-sale securities........... $ 38,909 $ 32,988 $ 7,275
========= ========== ===========
Mandatory exchange of Convertible Preferred Equivalent
Obligations.............................................. $ 583,282
===========
Issuance of Series C Preferred Stock to acquire equity
interest in SS/L......................................... $ 149,600
===========
Issuance of Loral common stock to acquire equity interest
in SS/L and Globalstar partnership interests............. $ 148,387
===========
Deferred purchase price to acquire Globalstar partnership
interests................................................ $ 24,787
===========
Supplemental information:
Interest paid.............................................. $ 113,990 $ 68,485 $ 40,866
========= ========== ===========
Taxes paid................................................. $ 1,480 $ 9,789 $ 8,901
========= ========== ===========
See notes to consolidated financial statements.
F-6
63
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL BUSINESS
Loral Space & Communications Ltd. together with its subsidiaries ("Loral"
or the "Company") is one of the world's leading satellite communications
companies with substantial activities in satellite manufacturing and
satellite-based communications services. Loral has assembled the building blocks
necessary to provide a seamless, global networking capability for the
information age. Loral is organized into four distinct operating segments (see
Note 16):
Fixed Satellite Services ("FSS"): Leasing transponder capacity to
customers for various applications, including broadcasting, news gathering,
Internet access and transmission, private voice and data networks, business
television, distance learning and direct-to-home television ("DTH"),
through the activities of Loral Skynet, Loral CyberStar, Inc. ("Loral
CyberStar"), formerly Loral Orion, Inc., Satelites Mexicanos, S.A. de C.V.
("Satmex") and Europe*Star Limited ("Europe*Star"),
Broadband Data Services: Business in development, providing managed
communications networks and Internet and intranet services through Loral
CyberStar and delivering high-speed broadband data communications and
business television services through CyberStar, L.P. ("CyberStar LP"),
Satellite Manufacturing and Technology: Designing and manufacturing
satellites and space systems and developing satellite technology for a
broad variety of customers and applications through Space Systems/Loral,
Inc. ("SS/L"), and
Global Mobile Telephone Service: Operating a 52-satellite constellation,
including four in-orbit spares, that forms the backbone of a global
telecommunications network designed to serve virtually every populated area
of the world (the "Globalstar System") owned by Globalstar, L.P.
("Globalstar").
Loral was formed to effectuate the distribution on April 23, 1996 of Loral
Corporation's ("Old Loral") space and communications businesses (the
"Distribution") to shareholders of Old Loral and holders of options to purchase
Old Loral common stock pursuant to a merger agreement between Old Loral and
Lockheed Martin Corporation ("Lockheed Martin").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Loral, a Bermuda company, has a December 31 year-end. The consolidated
financial statements for the years ended December 31, 1999, 1998 and 1997,
include Loral and the consolidated results of SS/L, Loral Skynet from March 14,
1997 and Loral CyberStar from April 1, 1998 (see Note 4) and have been prepared
in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").
All intercompany transactions have been eliminated.
Investments in Satmex, Europe*Star and Globalstar as well as other
affiliates are accounted for using the equity method. Income and losses of
affiliates are recorded based on Loral's beneficial interest. Intercompany
profit arising from transactions between affiliates is eliminated to the extent
of the Company's beneficial interest. The excess carrying value of these
investments over Loral's interest in the underlying net assets is being
amortized in accordance with Loral's policy for costs in excess of net assets
acquired and, if applicable, begins upon the commencement of commercial service
of the affiliate. Advances to affiliates consist of amounts due under extended
payment terms (prior year amounts have been reclassified to present information
on a comparable basis). Equity in losses of affiliates is not recognized after
the carrying value of the investment has been reduced to zero, unless guarantees
or other obligations exist. In connection with Loral's investment in Globalstar
and Europe*Star, Loral capitalizes interest cost on its investment, until such
entities commence commercial operations. Certain of the Company's affiliates are
in the development stage or will start commercial operations in the near future
and are subject to the risks associated with new businesses.
F-7
64
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the amounts of expenses
reported for the period. Actual results could differ from estimates.
A significant portion of Loral's satellite manufacturing and technology
revenue is associated with long-term contracts which require significant
estimates. These estimates include forecasts of costs and schedules, estimating
contract revenue related to contract performance (including orbital incentives)
and the potential for component obsolescence in connection with long-term
procurements. Significant estimates also include the estimated useful lives of
the Company's satellites and the amortization period of cost in excess of net
assets acquired.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and highly liquid
investments with original maturities of three months or less.
Restricted and Segregated Cash
In connection with the acquisition of Loral CyberStar, Loral acquired cash
and cash equivalents which are restricted in use to the payment of interest on
Loral CyberStar's senior notes and payments for satellite construction. At
December 31, 1999 and 1998, Loral CyberStar held $50.0 million and $72.9
million, respectively, of restricted cash for interest payments on its senior
notes and $137.3 million of segregated cash at December 31, 1999 to be used
towards the final payment on the purchase of Telstar 10/Apstar IIR (see Note 6).
Concentration of Credit Risk
Financial instruments which potentially subject Loral to concentrations of
credit risk consist principally of cash and cash equivalents, foreign exchange
contracts and contracts-in-process and long-term receivables. Loral's cash and
cash equivalents are maintained with high-credit-quality financial institutions.
Historically, Loral's customers have been primarily large multinational
corporations and U.S. and foreign governments for which the creditworthiness was
generally substantial. In recent years, the Company has added commercial
customers which include companies in emerging markets or the development stage,
some of which are highly leveraged or partially funded. Management believes that
its credit evaluation, approval and monitoring processes combined with
negotiated billing arrangements mitigate potential credit risks with regard to
the Company's current customer base.
Accounts Receivable
As of December 31, 1999 and 1998, accounts receivable was reduced by an
allowance for doubtful accounts of $4.6 million and $2.5 million, respectively.
Inventories
Inventories consist principally of parts and subassemblies used in the
manufacture of satellites which have not been specifically identified to
contracts-in-process, and are valued at the lower of cost or market. Cost is
determined using the first-in-first-out (FIFO) or average cost method.
F-8
65
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
on the straight-line method for satellites, and related equipment, over the
estimated useful lives of the related assets. Depreciation is provided primarily
on an accelerated method for other owned assets over the estimated useful life
of the related assets. Leasehold improvements are amortized over the shorter of
the lease term or the estimated useful life of the improvements.
Costs incurred in connection with the construction and successful
deployment of the Company's satellites and related equipment are capitalized.
Such costs include direct contract costs, allocated indirect costs, launch
costs, launch insurance and construction period interest. Capitalized interest
related to the construction of satellites for the years ended December 31, 1999,
1998 and 1997 was $40.8 million, $34.7 million and $9.4 million, respectively.
All capitalized satellite costs are amortized over the estimated useful life of
the related satellite. The estimated useful life of the satellites, ranging from
12 to 18 years, was determined by engineering analyses performed at the
in-service date. Satellite lives are reevaluated periodically. Losses from
unsuccessful launches and in-orbit failures of the Company's satellites, net of
insurance proceeds, are recorded in the period a loss occurs.
Cost in Excess of Net Assets Acquired
The excess of the cost of purchased businesses over the fair value of net
assets acquired is primarily being amortized over 40 years using the
straight-line method. Accumulated amortization was $58.9 million and $32.2
million as of December 31, 1999 and 1998, respectively.
Valuation of Long-Lived Assets and Cost in Excess of Net Assets Acquired
The carrying value of Loral's long-lived assets, and cost in excess of net
assets acquired is reviewed for impairment whenever events or changes in
circumstances indicate that an asset may not be recoverable. The Company looks
to current and future profitability, as well as current and future undiscounted
cash flows, excluding financing costs, as primary indicators of recoverability.
If an impairment is determined to exist, any related impairment loss is
calculated based on fair value.
Deposits
Deposits primarily represent prepaid amounts on satellite launch vehicles
which are expected to be utilized for the launch of customer or Company-owned
satellites.
Investments in Available-For-Sale Securities and Other Securities
The Company's investment in Sirius Satellite Radio Inc. ("Sirius")
(formerly known as CD Radio Inc.) and The Fantastic Corporation ("Fantastic")
common stock are classified as available-for-sale, and are recorded at fair
value, with the resulting unrealized gain or loss excluded from net income
(loss) and reported as a component of other comprehensive income (see Notes 3
and 12). As of December 31, 1999 and 1998, the Company owned approximately 1.9
million shares of Sirius, acquired at an average cost of $13.16 per share. As of
December 31, 1999, the Company owned approximately 11,500 shares of Fantastic,
acquired at an average cost of $218.53 per share. These investments are included
in other long-term assets.
The Company has made certain other investments in non-marketable equity
securities which are included in other long-term assets. In the fourth quarter
of 1998, the Company wrote-off certain non-strategic investments totaling $29.5
million, which were determined to have no future value to Loral.
F-9
66
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Revenue Recognition
Revenue from satellite sales under long-term fixed-price contracts is
recognized using the cost-to-cost percentage-of-completion method. Revenue
includes estimated orbital incentives discounted to their present value at
launch date. Costs include the development effort required for the production of
high-technology satellites, non-recurring engineering and design efforts in
early periods of contract performance, as well as the cost of qualification
testing requirements.
Revenue under cost-reimbursable type contracts is recognized as costs are
incurred; incentive fees are estimated and recognized over the contract term.
Contracts with the U.S. government are subject to termination by the U.S.
government for convenience or for default. Other government contract risks
include dependence on future appropriations and administrative allotment of
funds and changes in government policies. Costs incurred under U.S. government
contracts are subject to audit. Management believes the results of such audits
will not have a material effect on Loral's financial position or its results of
operations.
Losses on contracts are recognized when determined. Revisions in profit
estimates are reflected in the period in which the conditions that require the
revision become known and are estimable.
In accordance with industry practice, contracts-in-process include unbilled
amounts relating to contracts and programs with long production cycles, a
portion of which may not be billable within one year.
Loral Skynet and Loral CyberStar provide satellite capacity under lease
agreements that generally provide for the use of satellite transponders and, in
certain cases, earth stations for periods generally ranging from one year to the
life of the satellite. Some of these agreements have certain obligations,
including providing spare or substitute capacity, if available, in the event of
satellite failure. If no spare or substitute capacity is available, the
agreement may be terminated. Revenue under transponder lease and broadband data
services agreements is recognized as services are performed.
Research and Development
Independent research and development costs, which are expensed as incurred,
were $64.7 million, $68.5 million and $56.8 million, respectively, for the years
ended December 31, 1999, 1998 and 1997 and are included in selling, general and
administrative expenses.
Foreign Exchange Contracts
Loral enters into foreign exchange contracts as hedges against exchange
rate fluctuations of future accounts receivable and accounts payable under
contracts-in-process which are denominated in foreign currencies. Realized and
unrealized gains and losses on foreign exchange contracts designated as hedges
are deferred and recognized over the lives of the related contracts-in-process.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), Loral accounts for
stock-based awards to employees using the intrinsic value method in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25").
Income Taxes
Loral Space & Communications Ltd. is subject to U.S. federal, state and
local income taxation at regular corporate rates plus an additional 30% "branch
profits" tax on any income that is effectively connected with
F-10
67
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
the conduct of a U.S. trade or business. U.S. subsidiaries are subject to
regular corporate tax on their worldwide income.
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amount of assets and liabilities for financial and income
tax reporting and are measured by applying tax rates in effect at the end of
each year.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings or financial position. The
Company is required to adopt SFAS 133 on January 1, 2001.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
the current year's presentation.
3. OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income are as follows (in
thousands):
YEARS ENDED
AS OF DECEMBER 31, DECEMBER 31,
------------------- ----------------------------
1999 1998 1999 1998 1997
-------- -------- ------- ------- ------
Cumulative translation adjustment... $ (265) $ 616 $ (881) $ 616
Unrealized gains on
available-for-sale securities..... 79,172 40,263 38,909 32,988 $7,275
------- ------- ------- ------- ------
Accumulated other comprehensive
income............................ $78,907 $40,879 $38,028 $33,604 $7,275
======= ======= ======= ======= ======
4. ACQUISITIONS
Fixed Satellite Services
Loral Skynet
On March 14, 1997, Loral acquired Loral Skynet from AT&T for $462.1 million
in cash. The fair value of assets and liabilities recorded in connection with
the purchase price allocation were $569.8 million and $107.7 million,
respectively, including cost in excess of net assets acquired of $39 million.
Loral's consolidated financial statements include the results of operations of
Loral Skynet from the date of acquisition.
Loral CyberStar
On March 20, 1998, Loral acquired all of the outstanding stock of Loral
CyberStar in exchange for Loral common stock. Loral issued 18 million shares of
its common stock and assumed existing Loral CyberStar vested options and
warrants to purchase 1.4 million shares of Loral common stock representing an
aggregate
F-11
68
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS -- (CONTINUED)
purchase price of $472.5 million. The purchase price represented $447.7 million
in excess of Loral CyberStar's net book value, which was primarily allocated to
cost in excess of net assets acquired of $619.7 million, and a fair value
adjustment of $153.4 million to increase the carrying value of Loral CyberStar's
senior notes and senior discount notes. In addition, Loral agreed to assume
Loral CyberStar's unvested employee stock options, which resulted in a new
measurement date and an unearned compensation charge of $4.5 million, which is
being amortized over the vesting periods of the options. Loral's consolidated
financial statements include Loral CyberStar's results of operations from April
1, 1998.
Broadband Data Services
Loral CyberStar -- see Loral CyberStar above.
On July 31, 1999, Loral's subsidiary, CyberStar LP, acquired Global Access,
a business television unit of Williams Communications, Inc., for approximately
$11 million in cash. Global Access provides business television, video
conferencing and other communication services to companies in various parts of
the world through networks operated in Singapore, Dallas, London and
Johannesburg. Approximately $8.2 million of the purchase price was allocated to
cost in excess of net assets acquired, which is being amortized over 10 years.
Loral's consolidated financial statements include Global Access's results of
operations from August 1, 1999.
Satellite Manufacturing and Technology
SS/L
On April 1, 1996, Loral had an effective 32.7% interest in SS/L. In 1996,
Loral made a strategic decision to increase its ownership in SS/L to 100%. The
first step in implementing this decision was the acquisition by Loral in August
1996 of the 18.3% interest in SS/L owned by certain partnerships affiliated with
Lehman Brothers (the "Lehman Partnerships"). In February 1997, Loral agreed to
acquire the remaining 49% of the common stock of SS/L held by four international
aerospace and communications companies (the "Alliance Partners") for $374
million. In March 1997, Loral acquired 24.5% of SS/L's common stock for $93.5
million in cash and $93.5 million of Loral's Convertible Preferred Equivalent
Obligations ("CPEOs"). In June 1997, the Company acquired the remaining 24.5% of
SS/L's common stock for $187 million in the form of 8,042,922 shares of Loral
common stock and 1,063,663 shares of Series C Convertible Redeemable Preferred
Stock ("Series C Preferred Stock"). The aggregate purchase price of the 67.3%
interest in SS/L acquired by Loral in 1996 and 1997 was $493.2 million. The
purchase price represented $174.4 million in excess of SS/L's proportionate net
book value which was allocated primarily to the incremental value of SS/L's
investment in Globalstar of $62.2 million and cost in excess of net assets
acquired of $105.9 million. The consolidated financial statements include the
results of operations of SS/L since January 1, 1997, with a reduction for the
earnings attributed to the minority shareholders. Prior to this date, the
Company accounted for its investment in SS/L using the equity method.
The three former Alliance Partners who accepted Loral securities in
exchange for their SS/L shares continue to have certain rights as strategic
partners of SS/L for as long as they continue to hold at least 81.6% of their
Loral securities; in return, the parties have agreed generally to operate as a
team on satellite programs worldwide. Each strategic partner is permitted one
representative on SS/L's seven member Board of Directors; certain corporate
actions require the vote of at least five members of the Board. In 1998, two of
the strategic partners merged to form one company; the resulting entity,
however, continued to have the right to designate two representatives to SS/L's
Board of Directors. In the event certain actions are approved by the Board over
the objection of one of the strategic partners, the strategic partner can elect
to sell its Loral securities in the open market within 30 days and be reimbursed
for the amount, if any, such proceeds are less than the original value of the
securities received. In addition, the strategic partners have a right of first
offer at
F-12
69
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS -- (CONTINUED)
fair market value on SS/L shares in the event of a change of control (as
defined) of either Loral or SS/L, including the right to use their Loral
holdings as part of the SS/L purchase price.
The above acquisitions were accounted for using the purchase method. The
results of operations of Global Access are not considered material to the
Company, accordingly, pro forma results have not been presented. Had the
acquisition of Loral CyberStar occurred on January 1, 1998, the unaudited pro
forma revenue, net loss applicable to common stockholders and related basic and
diluted loss per share for the year ended December 31, 1998 would have been:
$1.3 billion, $205 million and $0.74, respectively. These results, which are
based on various assumptions, are not necessarily indicative of what would have
occurred had the acquisition been consummated on January 1, 1998.
5. CONTRACTS-IN-PROCESS AND LONG-TERM RECEIVABLES
Contracts-in-Process
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
U.S. government contracts:
Amounts billed....................................... $ 9,003 $ 9,099
Unbilled receivables................................. 6,965 11,543
-------- --------
15,968 20,642
-------- --------
Commercial contracts:
Amounts billed....................................... 226,609 171,901
Unbilled receivables................................. 197,344 162,653
-------- --------
423,953 334,554
-------- --------
$439,921 $355,196
======== ========
Unbilled amounts include recoverable costs and accrued profit on progress
completed which has not been billed. Such amounts are billed upon shipment of
the product, achievement of contractual milestones, or completion of the
contract and are reclassified to billed receivables.
Long-Term Receivables
Billed receivables relating to long-term contracts are expected to be
collected within one year. Loral classifies billings deferred and the orbital
component of unbilled receivables expected to be collected beyond one year as
long-term. Receivable balances related to satellite orbital incentive payments
and billings deferred as of December 31, 1999 are scheduled to be received as
follows (in thousands):
2000............................................. $ 136,399
2001............................................. 13,079
2002............................................. 48,331
2003............................................. 36,619
2004............................................. 14,678
Thereafter....................................... 54,757
---------
303,863
Less current portion included in
contracts-in-process........................... (136,399)
---------
Long-term receivables $ 167,464
=========
F-13
70
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
Land and land improvements.......................... $ 25,073 $ 25,073
Buildings........................................... 72,216 61,539
Leasehold improvements.............................. 19,289 16,906
Satellites in-orbit................................. 1,652,213 745,649
Satellites under construction....................... 77,370 690,661
Earth stations...................................... 53,309 52,914
Equipment, furniture and fixtures................... 259,640 216,294
Other construction in progress...................... 48,417 50,430
---------- ----------
2,207,527 1,859,466
Accumulated depreciation and amortization........... (322,552) (191,958)
---------- ----------
$1,884,975 $1,667,508
========== ==========
On May 4, 1999, the Company's Orion 3 broadcast video and data
communications satellite was placed into a lower-than-expected orbit after its
launch on a Boeing Delta III rocket. According to Boeing, the Delta III rocket
apparently failed to complete its second stage burn, and, as a result, the
satellite, manufactured by Hughes Space and Communications Corporation, achieved
an orbit well below the planned final altitude. As a result, the satellite
cannot be used for its intended purpose.
The satellite and launch were fully insured for approximately $266 million,
which was received in the third quarter of 1999. DACOM Corporation, a Korean
communications company which had purchased eight transponders on Orion 3 for a
total of $89 million, had made prepayments of approximately $34 million to the
Company. Under the agreement with DACOM, the amount prepaid was refunded in July
1999.
To replace Orion 3, on September 28, 1999, Loral CyberStar purchased from
APT Satellite Company Limited ("APT") the rights to all transponder capacity and
existing customer leases (except for one C-band transponder retained by APT) on
the Telstar 10/Apstar IIR satellite, for $272.9 million. As of September 28,
1999, Telstar 10/Apstar IIR had an estimated remaining useful life of 13 years.
Loral CyberStar has full use of the transponders for the remaining life of
Telstar 10/Apstar IIR. Under the purchase agreement, Loral CyberStar will also
have the option to lease from APT replacement satellites upon the end of life of
Telstar 10/Apstar IIR.
As of December 31, 1999, Loral CyberStar has made payments of approximately
$91 million to APT and will pay approximately $182 million on March 27, 2000.
Insurance proceeds from the Orion 3 failure were used to fund the initial
payments made and will be used to fund a significant portion of the final
payment. Loral has guaranteed Loral CyberStar's obligations to APT under the
purchase agreement.
Depreciation and amortization expense for property, plant and equipment was
$139.9 million, $106.2 million and $52.0 million for the years ended December
31, 1999, 1998 and 1997, respectively. Included in satellites in-orbit is the
cost of satellite transponders where Loral has the rights to transponders for
the remaining life of the related satellite, which amounted to $298.4 million at
December 31, 1999. Accumulated depreciation and amortization as of December 31,
1999 includes $6.2 million, related to such transponder rights.
F-14
71
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INVESTMENTS IN AND ADVANCES TO AFFILIATES
Investments in and Advances to Affiliates consists of (in thousands):
DECEMBER 31,
----------------------
1999 1998
---------- --------
Globalstar, including advances of $219,823 and
$184,311 at December 31, 1999 and 1998,
respectively....................................... $ 878,140 $740,217
Satmex............................................... 70,747 74,159
Europe*Star.......................................... 62,300 45,413
SkyBridge............................................ 14,053
Other affiliates..................................... 86,816 64,709
---------- --------
$1,098,003 $938,551
========== ========
Equity in net loss of affiliates consists of (in thousands):
YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- --------- --------
Globalstar, net of tax benefit........... $ (98,980) $ (67,016) $(40,877)
Satmex................................... (33,403) (16,317) (6,396)
Europe*Star.............................. (4,833) (3,624)
SkyBridge, net of tax benefit............ (13,211) (25,465) (1,764)
Other affiliates, net of tax benefit..... (27,392) (7,995)
--------- --------- --------
$(177,819) $(120,417) $(49,037)
========= ========= ========
The consolidated statements of operations reflect the effects of the
following amounts related to transactions with or investments in affiliates (in
thousands):
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Revenues from satellite sales.............. $409,431 $623,668 $420,370
Interest and investment income............. 30,052 8,464 8,390
Interest expense capitalized on development
stage entities........................... 43,548 25,417 13,187
Elimination of Loral's proportionate share
of intercompany profits.................. 4,541 7,225 6,876
Globalstar
Loral is a founder and the managing general partner of Globalstar. Loral's
investment in Globalstar consists of ordinary partnership interests in
Globalstar, as well as common stock and convertible preferred stock interests in
Globalstar Telecommunications Limited ("GTL"). GTL's sole business is acting as
a general partner of Globalstar, and all funds raised by GTL to date have been
used to purchase Globalstar securities. Partners in Globalstar have the right to
convert their ordinary partnership interests into GTL common stock on an
approximate one interest for four shares basis, under certain defined
circumstances.
As of December 31, 1999, Loral owned directly and indirectly approximately
24.8 million Globalstar ordinary partnership interests (corresponding to
approximately 100.4 million equivalent shares of GTL common stock), or 41% of
the total 59.8 million Globalstar ordinary partnership interests (corresponding
to approximately 242.4 million equivalent shares of GTL common stock)
outstanding. As of December 31, 1999, the market value of the 8.4 million shares
of GTL stock owned by Loral, based on the last reported sale was
F-15
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LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)
$368 million. On February 1, 2000, Loral's ownership in Globalstar was reduced
to 40% as a result of GTL's sale of 8,050,000 common shares to the public and
the accompanying issue of partnership interests by Globalstar. The excess
carrying value of Loral's investment in Globalstar over its interest in the
underlying net assets of Globalstar totalled $478 million at December 31, 1999
and will be amortized on a straight-line basis over a period of 20 years
commencing in 2000.
Loral's original investment in Globalstar was made in 1994 in connection
with its formation. Loral has continued to make investments in Globalstar since
its inception, including the following transactions during the three years ended
December 31, 1999:
- In 1996, Loral purchased $102.5 million principal amount of GTL's 6 1/2%
Convertible Preferred Equivalent Obligations for $99.4 million. On April
30, 1998, these securities were converted into 6,832,030 shares of GTL
common stock, including shares issued in satisfaction of a required
interest make-whole payment.
- In March 1997, Loral exercised warrants to purchase 4,550,088 shares of
GTL common stock at $6.63 per share, which were received in connection
with Loral's partial guarantee of a $250 million Globalstar Credit
Agreement (see Note 13). In April 1997, Loral exercised rights to
purchase an additional 700,696 shares of GTL common stock at $6.63 per
share distributed to the existing shareholders of GTL. The aggregate
purchase price paid was $34.8 million.
- During 1997, Loral acquired 2,748,372 Globalstar ordinary partnership
interests from other Globalstar partners for $122.3 million in cash and
1,255,684 shares of Loral common stock.
- In July 1998, Loral purchased 4.2 million Globalstar ordinary partnership
interests from certain founding service providers for $420 million in
cash. Concurrently, Loral sold 8.4 million shares of GTL common stock to
persons or entities advised by or associated with Soros Fund Management
LLC for $245 million in cash. As a result of this sale, Loral recognized
a gain of approximately $35 million, which is included in gain on
investments, net in the consolidated statements of operations.
- In November 1998, Loral acquired 276,000 Globalstar ordinary partnership
interests from other Globalstar partners in exchange for 717,600 shares
of GTL common stock.
- In January 1999, Loral purchased $150 million principal amount of GTL's
8% Series A convertible redeemable preferred stock, which is convertible
into 6,449,865 shares of GTL's common stock.
- In November 1999, Loral purchased 103,187 shares of GTL common stock for
$2.7 million.
Also in 1999, Loral received warrants to purchase 3,450,000 Globalstar
partnership interests at an exercise price of $91 per interest in consideration
for the guarantee of Globalstar's $500 million credit agreement by certain of
its subsidiaries and the pledge of certain assets, including the Telstar 6 and
Telstar 7 satellites (see Note 13). The warrants were valued at $141 million,
which was based on the guarantee provided. The exercise price was determined by
reference to the fair market value of GTL's common stock on the closing date of
the Credit Agreement, based on the approximate one partnership interest for four
shares of GTL common stock exchange ratio. Assuming the guarantee remains in
effect, the warrants vest 50% in February 2000, 25% in August 2000 and 25% in
August 2001, and expire in 2006. Globalstar may call the warrants any time after
August 2001 if GTL's common stock price exceeds $45.50 for a defined period.
Loral has granted to certain of its officers and directors options to
purchase 1,988,000 of its shares of GTL common stock. During 1999 and 1998,
options were exercised to purchase 40,000 and 320,000 shares at a weighted
average exercise price of $6.25 and $5.84 per share, respectively. At December
31, 1999, options to purchase 1,628,000 shares of common stock at a weighted
average exercise price of $7.01 per share were outstanding. These options expire
beginning in 2006.
SS/L is the prime contractor for the construction and launch of
Globalstar's satellites. SS/L has awarded subcontracts to third parties,
including other investors in Globalstar, for substantial portions of the work
under
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LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)
these contracts. As of December 31, 1999, Loral had delivered and launched 48 of
the 52 satellites required under the space segment contract (the final four
satellites were successfully launched on February 8, 2000), and is constructing
an additional eight spares under a separate contract. Billed and unbilled
receivables and orbital incentives (described below) due within one year under
these contracts were $59.4 million and $187.8 million, as of December 31, 1999
and 1998, respectively, and are included in contracts-in-process on the
consolidated balance sheets.
SS/L has provided $330 million of billings deferred under these
construction contracts comprised of: $105 million of orbital incentives, of
which $44 million was repaid in 1999 and $61 million is expected to be repaid in
2000; $90 million of vendor financing, which bears interest at LIBOR plus 3% and
is repayable over five years commencing in 2001; and $134 million of
non-interest bearing vendor financing, due over five years in equal monthly
installments, commencing in 2000. SS/L's terms with its subcontractors include
$116 million of financing assumed by them, which is to be repaid on
substantially similar terms (of which a portion is non-recourse to SS/L in the
event of non-payment by Globalstar) and is included in long-term liabilities on
the consolidated balance sheets.
In the first quarter of 2000, Globalstar commenced commercial service.
Pursuant to the Globalstar partnership agreement, Loral is entitled to receive a
managing partner's allocation of 2% of Globalstar's annual revenues under $500
million and 2.8% of annual revenues in excess of $500 million. Such allocation
is reduced by 50% to the extent Globalstar has a net loss in any given year.
Globalstar expects to spend $325 million for the enhancement of its system
software, for the eight spare satellites being constructed by SS/L, and for
financing provided to Globalstar's service providers to assist in the purchase
of gateways, fixed access terminals and handsets (of which $231 million is
expected to be received from the service providers as repayment of such
financing). In addition, cash interest, preferred dividends and operating costs
are expected to be approximately $125 million per quarter in 2000. Globalstar
raised $268.5 million through the sale of equity interests on February 1, 2000.
Globalstar believes that its cash on hand, available credit under its two bank
facilities and vendor financing arrangements, service revenues and other
anticipated cash inflows will be sufficient to cover its expected cash outflows
provided that its $250 million credit facility is renegotiated. If Globalstar
cannot renegotiate its $250 million credit facility, it believes it will be able
to obtain additional funds. There can be no assurance, however, that such funds
will be available on favorable terms or on a timely basis, if at all.
Qualcomm Incorporated ("Qualcomm") has agreed to provide Globalstar $500
million of vendor financing (for which the terms of $400 million are still being
finalized). In connection with the agreement, Qualcomm is expected to receive a
number of warrants to purchase Globalstar partnership interests comparable to
those received by Loral pursuant to Loral's guarantee of Globalstar's $500
million credit facility (see above).
F-17
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LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)
The following table presents summary financial data for Globalstar as of
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999 and cumulative (in thousands):
CUMULATIVE
MARCH 23, 1994
(COMMENCEMENT
OF OPERATIONS) YEARS ENDED DECEMBER 31,
TO DECEMBER 31, -----------------------------
1999 1999 1998 1997
--------------- -------- -------- -------
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ -- $ -- $ -- $ --
Operating loss............................ 590,538 186,505 146,684 88,071
Net loss.................................. 526,620 180,364 129,543 67,586
Preferred distributions................... 112,942 52,220 22,197 21,202
Net loss applicable to ordinary
partnership interests................... 639,562 232,584 151,740 88,788
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
BALANCE SHEET DATA:
Current assets.............................................. $ 292,902 $ 236,288
Globalstar System under construction........................ 3,181,189 2,302,333
Total assets................................................ 3,781,459 2,670,025
Current liabilities......................................... 671,302 401,190
Long-term debt.............................................. 1,799,111 1,396,175
Long-term liabilities, including vendor financing........... 282,717 270,259
Partners' capital........................................... 1,028,329 602,401
Satmex
In connection with the privatization by the Federal Government of Mexico
(the "Mexican Government") of its fixed satellite services business, Loral and
Principia, S.A. de C.V. ("Principia"), formerly known as Telefonica Autrey, S.A.
de C.V., formed a joint venture, Firmamento Mexicano, S.A. de R.L. de C.V.
("Holdings"). On November 17, 1997, Holdings acquired 75% of the outstanding
capital stock of Satmex for $646.8 million. The purchase price was financed by a
Loral equity contribution of $94.6 million, a Principia equity contribution of
$50.9 million and debt issued by a subsidiary of Holdings. As part of the
acquisition, Servicios Corporativos Satelitales, S.A. de C.V. ("Servicios"), a
wholly owned subsidiary of Holdings, agreed to issue a seven-year obligation to
the Mexican Government (the "Government Obligation") in consideration for the
assumption by Satmex of the debt incurred by Servicios in connection with the
acquisition. The Government Obligation had an initial face amount of $125
million, which accretes at 6.03% and expires in December 2004. The debt of
Satmex and Servicios is non-recourse to Loral and Principia; however, Loral and
Principia have agreed to maintain assets in a collateral trust in an amount
equal to the value of the Government Obligation through December 30, 2000 and,
thereafter, in an amount equal to 1.2 times the value of the Government
Obligation until maturity. As of December 31, 1999, Loral and Principia have
pledged their respective shares in Holdings in such trust. Loral has a 65%
economic interest in Holdings and a 49% indirect economic interest in Satmex.
Loral and Principia are responsible for managing Satmex. They are entitled
to receive an aggregate management fee, based on a sliding scale, applied to
Satmex's quarterly gross revenues up to a maximum of 3.75% of each year's
cumulative gross revenues. Loral and Principia agreed to waive such fee for 1999
and
F-18
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LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)
1998. Beginning in 1999, Loral licensed certain intellectual property to Satmex
for a fee of up to 1.5% of Satmex's gross revenues, as defined, resulting in
$1.3 million of fees.
On March 30, 1999, Loral acquired 577,554 shares of preferred stock of
Satmex at a purchase price of $30.3 million. The preferred stock has limited
voting rights, pays a dividend in common stock of Satmex and is exchangeable, at
Satmex's option, into common stock of Satmex based upon a predetermined exchange
ratio.
The following table presents summary financial data for Satmex as of
December 31, 1999 and 1998 and for the years ended December 31, 1999 and 1998
and the period November 17, 1997 (date of investment) through December 31, 1997
(in thousands):
YEARS ENDED DECEMBER 31, NOVEMBER 17, 1997
------------------------ TO
1999(1) 1998 DECEMBER 31, 1997
---------- ---------- ------------------
STATEMENT OF OPERATIONS DATA:
Revenues............................. $135,520 $104,779 $12,893
Operating income..................... 24,988 32,841 4,015
Net loss............................. 46,663 23,650 4,440
Net loss applicable to common
stockholders....................... 47,793 23,650 4,440
DECEMBER 31,
------------------------
1999 1998
---------- ----------
BALANCE SHEET DATA:
Current assets...................................... $ 36,461 $ 57,337
Total assets........................................ 1,038,594 1,137,964
Current liabilities................................. 23,845 93,116
Long-term liabilities............................... 121,213 85,535
Long-term debt...................................... 557,000 608,000
Shareholders' equity................................ 336,536 351,313
- ---------------
(1) During 1999, Satmex sold three Ku-band transponders on Satmex 5 to Loral
Skynet for $25.5 million, resulting in a gain of $11.2 million. Loral's
proportionate share of the profit on these transponders of $3.6 million has
been eliminated in Loral's consolidated results.
Europe*Star
In December 1998, Loral finalized its strategic partnership with a
subsidiary of Alcatel to jointly build and operate Europe*Star, a geostationary
satellite system anticipated to provide broadcast and telecommunications
services to Europe, the Middle East, Southeast Asia, India and South Africa.
Alcatel serves as the primary contractor of the Europe*Star turnkey system. SS/L
is providing the satellite bus and will test and integrate the satellites.
During 1999 and 1998, Loral invested $17 million and $49 million in Europe*Star,
respectively, and at December 31, 1999 has a 47% ownership interest therein.
SS/L is a subcontractor for the construction of Europe*Star's satellites. Billed
and unbilled receivables from Europe*Star was $19.5 million as of December 31,
1999. There were no outstanding receivables at December 31, 1998.
SkyBridge
In June 1997, Loral and Alcatel formed a strategic partnership to jointly
develop, deploy and operate high-speed global multimedia satellite networks that
will bring high-bandwidth services to businesses and to
F-19
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LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)
consumers. The agreement includes cross investments in Loral's geostationary
(GEO) satellite-based CyberStar LP project and Alcatel's LEO satellite-based
SkyBridge project. Each company participates in the development of the two
projects. The SkyBridge project is currently in the development stage. As of
December 31, 1999, Loral had contributed to SkyBridge and Alcatel had
contributed to CyberStar LP approximately $46 million and $30 million,
respectively. As of December 31, 1999, Loral owned approximately 15% of the
outstanding partnership interests in SkyBridge. SS/L is a contractor for the
construction of the SkyBridge satellites. There were no outstanding receivables
related to this contract as of December 31, 1999.
The following table presents summary financial data for SkyBridge as of
December 31, 1999 and 1998 and for the years ended December 31, 1999 and 1998,
for the period from February 26, 1997 to December 31, 1997, and cumulative (in
thousands):
CUMULATIVE
FEBRUARY 26, 1997 YEARS ENDED
(INCEPTION) TO DECEMBER 31, FEBRUARY 26, 1997
DECEMBER 31, ------------------- TO
1999 1999 1998 DECEMBER 31, 1997
----------------- -------- -------- -----------------
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $ -- $ -- $ -- $ --
Operating loss.................... 321,537 129,639 144,624 47,274
Net loss.......................... 314,988 126,749 141,714 46,525
DECEMBER 31,
-----------------
1999 1998
------- -------
BALANCE SHEET DATA:
Current assets.............................................. $46,572 $74,186
Total assets................................................ 46,811 74,585
Current liabilities......................................... 24,117 35,132
Net partners' capital....................................... 22,694 39,453
Other Affiliates
Other affiliates include investments in partnerships where Loral and its
partners are the exclusive service providers of Globalstar service and in
Mabuhay Space Holdings Limited ("Mabuhay"), which owns and operates certain
satellite transponders. Loral's proportionate share of losses from Mabuhay for
1999 was $15 million, net of related tax benefits, which primarily relates to a
reduction in the carrying value of its satellite transponders in the fourth
quarter.
In December 1997, Loral sold its 22.5% equity interest in K&F for $80.6
million and recorded a $79.6 million gain on the sale. Prior to that date, Loral
used the equity method to account for its investment in K&F; however, no income
or loss was recognized due to K&F's financial position.
F-20
77
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
Term loan, 7.1% and 6.7% at December 31, 1999 and 1998,
respectively.............................................. $ 256,250 $ 275,000
Revolving credit facility, 7.1% and 6.7% at December 31,
1999 and 1998, respectively............................... 275,000 205,000
Note purchase facility...................................... 139,238 126,657
9.5% Senior notes due 2006.................................. 350,000
Export-Import credit facility............................... 12,872 15,018
Other....................................................... 591 605
Non-recourse debt of Loral CyberStar:
11.25% Senior notes due 2007 (principal amount $443
million)............................................... 501,734 507,573
12.5% Senior discount notes due 2007 (principal amount at
maturity $484 million and accreted principal amount
$378 million and $334 million at December 31, 1999 and
1998, respectively).................................... 448,409 408,812
Other..................................................... 15,228 17,110
---------- ----------
Total debt.................................................. 1,999,322 1,555,775
Less, current maturities.................................... 85,496 22,736
---------- ----------
$1,913,826 $1,533,039
========== ==========
The Amended and Restated Credit Agreement, dated as of November 10, 1999,
among Loral SpaceCom Corporation ("Loral SpaceCom"), a wholly owned subsidiary
of Loral, SS/L and the banks party thereto (the "Credit Agreement") provides for
a $275 million term loan facility, a $500 million revolving credit facility, of
which up to $175 million can be used for letters of credit, and a separate $75
million letter of credit facility. Both the term loan facility and revolving
credit facility are for a period of five years. The separate letter of credit
facility was extended to mature on December 31, 2000. The term loan facility
requires repayment in 12 consecutive quarterly installments beginning December
31, 1999. The first four installments are $18.75 million each with the final
eight installments being $25 million each. Borrowings under the facilities are
secured by the stock of Loral SpaceCom and SS/L and bear interest, at Loral
SpaceCom's option, at various rates based on margins over the lead bank's base
rate or the London Interbank Offer Rate ("LIBOR") for periods of one to six
months. Loral SpaceCom pays a commitment fee on the unused portion of the
facilities. The Credit Agreement contains customary covenants, including an
interest coverage ratio and debt-to-capitalization ratios. In addition, the
Credit Agreement contains limitations on indebtedness, liens, guarantee
obligations, asset sales, dividends, investments and transactions with
affiliates. Under the terms of the Credit Agreement, Loral SpaceCom may pay
dividends to its parent if the cumulative dividend payments do not exceed 50% of
cumulative net income, as defined, and the ratio of funded debt to EBITDA, as
defined, is less than three to one. Notwithstanding this dividend payment
limitation, as of December 31, 1999 Loral SpaceCom could pay a dividend to its
parent of up to $70 million. As of December 31, 1999, and including the effect
of borrowings expected to fund the roll-over of the note purchase facility
discussed below, Loral SpaceCom could borrow an additional $56.9 million under
the Credit Agreement.
In 1994, SS/L entered into a $139.3 million note purchase facility with an
Italian bank. Borrowings were determined by formula and were made in accordance
with a specified schedule. The drawdown period expired on December 31, 1999. The
outstanding principal is to be repaid on August 21, 2000. Interest is charged at
a weighted average annual rate of 4.26% and is payable semi-annually. Interest,
however, on any borrowings that occur after January 13, 1999 ($12.6 million at
December 31, 1999) and until delivery of the satellites related
F-21
78
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT -- (CONTINUED)
to the specific borrowings that have taken place will be at market rates for
this period and not at the 4.26% rate. All borrowings under this facility reduce
the amount available under the Credit Agreement. Upon maturity of this note, it
will be rolled into the revolving credit facility under the Credit Agreement.
On January 21, 1999, Loral sold $350 million principal amount of 9.5%
Senior Notes due 2006 ("Senior Notes"). The Senior Notes are general unsecured
obligations of Loral that: (1) are structurally junior in right of payment to
all existing and future indebtedness of Loral's subsidiaries; (2) are equal in
right of payment with all existing and future senior indebtedness of Loral
(except as to assets pledged to secure such indebtedness); and (3) are senior in
right of payment to any future indebtedness which is by its terms junior in
right of payment to any senior indebtedness of Loral. Interest on the Senior
Notes accrues at the rate of 9.5% per annum and is payable semi-annually. The
Senior Notes will mature on January 15, 2006. Loral may redeem all or part of
the Senior Notes on or after January 15, 2003. Prior to January 15, 2002, Loral
may redeem up to 35% of the Senior Notes from the proceeds of certain equity
offerings. Upon a change of control (as defined), each holder of Senior Notes
will have the right to require Loral to repurchase such holder's Senior Notes at
a price equal to 101% of the principal amount thereof plus accrued interest to
the date of repurchase.
SS/L borrowed a total of $42.9 million under an export-import credit
facility (the "EX-IM Facility") with a Japanese bank. The EX-IM Facility is
fully secured by a letter of credit arrangement with another bank. As of
December 31, 1999, no amounts remained available for borrowing under this
facility. The outstanding principal is to be repaid in semi-annual installments
through November 1, 2005. Interest is charged at LIBOR less 1/4% and is payable
semi-annually on May 1 and November 1.
In connection with the Loral CyberStar acquisition, Loral did not assume
Loral CyberStar's senior notes, senior discount notes or other debt instruments.
Such debt is non-recourse to Loral and includes certain restrictions on Loral
CyberStar's ability to pay dividends or make loans to Loral. The carrying value
of the senior notes and senior discount notes was increased to reflect a fair
value adjustment of $153.4 million based on quoted market prices at the date of
acquisition. Such adjustment resulted in effective interest rates of 8.69% and
9.69% on the senior notes and senior discount notes, respectively, through
maturity.
The Loral CyberStar senior notes are due in 2007, bear interest of 11.25%
and pay interest semi-annually. As of December 31, 1999 and 1998, Loral
CyberStar had $50.0 million and $72.9 million, respectively, in restricted cash
for future interest payments. The senior discount notes are due in 2007, bear
interest of 12.5% and pay interest semi-annually commencing on July 15, 2002.
The accreted principal value of the senior discount notes was $378 million and
$334 million as of December 31, 1999 and 1998, respectively.
Along with the issuance of each senior note and senior discount note, one
warrant was issued to purchase shares of common stock. Upon the acquisition of
Loral CyberStar, each warrant was converted so that it could purchase shares of
Loral common stock. As of December 31, 1999, exercisable warrants for 143,838
shares of Loral common stock at an exercise price of $0.02 per share under the
senior notes and 206,125 shares of Loral common stock at an exercise price of
$0.03 per share under the senior discount notes are yet to be exercised.
The aggregate maturities of total debt for the years 2000 through 2004 are
as follows (in millions): $85.5, $104.7, $494.0, $3.9 and $3.9.
F-22
79
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The (benefit) provision for income taxes consists of the following (in
thousands):
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
Current:
U.S. federal............................... $ 5,591 $ 2,069 $27,204
State and local............................ 1,758 7,248
-------- ------- -------
7,349 2,069 34,452
Deferred:
U.S. federal............................... (44,766) (9,219) 1,762
State and local............................ 4,901 3,279 (1,343)
-------- ------- -------
(39,865) (5,940) 419
-------- ------- -------
Total (benefit) provision for income taxes... $(32,516) $(3,871) $34,871
======== ======= =======
The (benefit) provision for income taxes excludes: (i) current tax benefits
related to the exercise of stock options, credited directly to shareholders'
equity, of $0.4 million for the year ended December 31, 1998; (ii) a current tax
benefit of $4.8 million and $0.3 million, and a deferred tax liability of $1.4
million and a deferred tax benefit of $2.1 million for the years ended December
31, 1999 and 1998, respectively, related to the Globalstar partnership loss, a
deferred tax benefit of $1.8 million and $3.9 million for the years ended
December 31, 1999 and 1998, respectively, related to the SkyBridge partnership
loss, and a deferred tax benefit of $10.3 million for the year ended December
31, 1999, related to other affiliates which are included in equity in net loss
of affiliates; and (iii) a current tax liability of $0.7 million for the year
ended December 31, 1999 and a deferred tax benefit of $0.1 million and a
deferred tax liability of $0.6 million for the years ended December 31, 1999 and
1998, respectively, related to the minority interest for CyberStar LP.
The effective income tax rate differs from the statutory U.S. Federal
income tax rate for the following reasons:
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Statutory U.S. federal income tax rate.......... 35.0% 35.0% 35.0%
State and local income taxes, net of federal
income tax.................................... (7.0) (8.3) 3.0
Non-U.S. income and losses taxed at lower
rates......................................... (10.4) 20.3 (15.0)
Non-deductible amortization of cost in excess of
net assets acquired........................... (14.0) (28.8) 2.6
Reverse valuation allowance for Loral CyberStar
pre-acquisition loss.......................... 54.0
Other, net...................................... (5.3) (3.1) 1.9
----- ----- -----
Effective income tax rate............. 52.3% 15.1% 27.5%
===== ===== =====
As of December 31, 1999, the Company had net operating loss carryforwards
of approximately $382.2 million, which includes $136.4 million related to Loral
CyberStar for its pre-acquisition tax years and $64.6 million related to foreign
partner interests in Globalstar and CyberStar LP, as well as tax credit
carryforwards of approximately $1.8 million, which expire at varying dates from
2003 through 2019. As a result of a tax law change during 1999, the Company
reversed a portion of its valuation allowance relating to the Loral CyberStar
pre-acquisition loss carryforwards. Due to uncertainties regarding its ability
to realize the benefits from the balance of these pre-acquisition net operating
loss carryforwards and certain other net deferred tax assets related to Loral
CyberStar and the loss carryforwards related to the foreign partner interests in
Globalstar and CyberStar LP, the Company has established a valuation allowance
of $52.1 million against these net deferred tax assets. For the years ended
December 31, 1999, 1998 and 1997, income (loss)
F-23
80
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES -- (CONTINUED)
before income taxes includes approximately $(20) million, $15 million and $72
million, respectively, of non-U.S. source income (loss).
The significant components of the net deferred income tax asset (liability)
are (in thousands):
DECEMBER 31,
----------------------
1999 1998
--------- ---------
Postretirement benefits other than pensions.......... $ 13,520 $ 15,547
Inventoried costs.................................... 55,158 44,288
Net operating loss and tax credit carryovers......... 138,724 124,270
Compensation and benefits............................ 12,548 11,655
Premium on senior notes.............................. 98,086 69,203
Investment in affiliates............................. 17,295 (6,051)
Other, net........................................... (3,734) 271
Pension costs........................................ (3,436) (4,335)
Property, plant and equipment........................ (129,530) (92,875)
Income recognition on long-term contracts............ (130,780) (125,967)
--------- ---------
subtotal........................................... 67,851 36,006
Less valuation allowance............................. (52,095) (70,894)
--------- ---------
Net deferred income tax asset (liability).......... $ 15,756 $ (34,888)
========= =========
The net deferred income tax asset (liability) is classified as follows (in
thousands):
DECEMBER 31,
------------------
1999 1998
------ --------
Other current assets..................................... $6,743 $ 3,482
====== ========
Other assets............................................. $9,013
======
Long-term deferred income tax liability.................. $(38,370)
========
10. SHAREHOLDERS' EQUITY
Common Stock
On June 29, 1998, Loral sold 23 million shares of its common stock for $27
per share. The net proceeds were $602 million, of which Loral used $175 million,
net, to fund the purchase of Globalstar ordinary partnership interests (see Note
7).
Series A Preferred Stock
Significant terms of the Company's Series A Preferred Stock include a
liquidation preference of $.01 per share prior to pro rata participation with
the common stock and the ability to convert to common stock upon the receipt of
certain antitrust clearance before selling to an unaffiliated third party. On
March 5, 2000, the Series A Preferred Stock became fully convertible into common
stock (see Note 18). The Series A Preferred Stock has the same voting rights as
the Company's common stock except, it has no right to vote for the election of
directors. Such stock is subject to certain voting limitations, restrictions on
transfer and standstill provisions.
F-24
81
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SHAREHOLDERS' EQUITY -- (CONTINUED)
Series B Preferred Stock
The Series B Preferred Stock will, if issued, be junior to any other series
of preferred stock which may be authorized and issued. The Series B Preferred
Stock becomes issuable upon exercise by holders of rights issued under the
Company's Rights Plan. The rights are issued with the Company's common stock and
become detachable, and thus exercisable, only upon the occurrence of certain
events. Each right, when it becomes exercisable, entitles the holder to purchase
from the Company a unit consisting initially of one-thousandth of a share of
Series B Preferred Stock at a purchase price of $50 per unit, subject to
adjustment.
6% Series C Preferred Stock
On November 1, 1996, the Company sold $600 million of 6% Convertible
Preferred Equivalent Obligations, which were mandatorily exchanged on June 5,
1997 into shares of the Company's Series C Preferred Stock, resulting in a
reclassification of these amounts into shareholders' equity. In addition, the
Company issued additional CPEOs and shares of Series C Preferred Stock in
connection with the acquisition of interests in SS/L and Globalstar. The Series
C Preferred Stock has an aggregate liquidation preference equal to its $745
million aggregate redemption value and a mandatory redemption date of November
1, 2006. The Series C Preferred Stock is convertible into shares of common stock
of the Company at a conversion price of $20 per share. As of December 31, 1999,
the outstanding Series C Preferred Stock was convertible into 37,273,593 shares
of Loral common stock.
The Series C Preferred Stock is non-voting and with respect to dividend
rights and rights upon liquidation, winding up and dissolution, ranks pari passu
with Loral's Series A Preferred Stock and senior to or pari passu with all other
existing and future series of preferred stock of Loral and senior to Loral
common stock. The Series C Preferred Stock is redeemable in cash or Loral common
stock at any time, in whole or in part, at the option of the Company (at a
premium which declines over time).
Stock Plans
In April 1996, Loral established the 1996 Stock Option Plan. An aggregate
of 18 million shares of common stock have been reserved for issuance. Under this
plan, options are granted at the discretion of the Company's Board of Directors
to employees of the Company and its affiliates. Such options become exercisable
as determined by the Board, generally over five years, and generally expire no
more than 10 years from the date of the grant.
As discussed in Note 2, the Company continues to account for stock-based
awards to employees using the intrinsic value method in accordance with APB 25,
and its related interpretations. Accordingly, no compensation expense based on
the fair value method has been recognized in the financial statements for
employee stock arrangements.
SFAS 123 requires the disclosure of pro forma net income and earnings per
share as though the Company had adopted the fair value method. Under SFAS 123,
the fair value of stock-based awards to employees is calculated through the use
of option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life,
six to twelve months following vesting; stock volatility, 30% in 1999 and 25%
for 1998 and 1997; risk free interest rate, 4.4% to 6.6% based on date of grant;
and no dividends during the expected term. The Company's calculations are based
on a multiple option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the 1999, 1998 and 1997 awards, including
stock-
F-25
82
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SHAREHOLDERS' EQUITY -- (CONTINUED)
based compensation awards to employees of the Company's affiliates, had been
amortized to expense over the vesting period of the awards, pro forma net (loss)
income applicable to common stockholders and related earnings (loss) per share
would have been $(254.7) million or $(.88) per diluted share, $(192.7) million
or $(.70) per diluted share and $9.3 million or $.04 per diluted share for 1999,
1998 and 1997, respectively.
A summary of the status of the Company's stock option plans as of December
31, 1999, 1998 and 1997 and changes during the periods then ended is presented
below:
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
---------- ---------
Outstanding at January 1, 1997.............................. 6,411,500 $10.60
Granted at fair market value (weighted average fair value
$3.98 per share).......................................... 642,500 14.41
Granted below fair market value (weighted average fair value
$5.68 per share).......................................... 90,000 10.50
Exercised................................................... (207,750) 10.50
Forfeited................................................... (175,800) 12.98
---------- ------
Outstanding at December 31, 1997............................ 6,760,450 10.90
Granted at fair market value (weighted average fair value
$5.63 per share).......................................... 3,737,400 21.73
Granted below fair market value (weighted average fair value
$12.11 per share)......................................... 600,000 11.72
Loral CyberStar stock options converted in connection with
acquisition (weighted average fair value $11.84 per
share).................................................... 1,443,240 14.78
Exercised................................................... (806,781) 12.15
Forfeited................................................... (857,477) 13.34
---------- ------
Outstanding at December 31, 1998............................ 10,876,832 14.90
Granted at fair market value (weighted average fair value
$5.48 per share).......................................... 3,799,100 16.62
Exercised................................................... (287,635) 13.01
Forfeited................................................... (1,031,433) 17.23
---------- ------
Outstanding at December 31, 1999............................ 13,356,864 $15.25
========== ======
Options exercisable at December 31, 1999.................... 5,667,416 $13.32
========== ======
Options exercisable at December 31, 1998.................... 3,638,305 $12.44
========== ======
Options exercisable at December 31, 1997.................... 2,014,250 $10.53
========== ======
The following table summarizes information about Loral's outstanding stock
options at December 31, 1999:
DECEMBER 31, 1999
----------------------------------------------------------
OUTSTANDING
----------------------------------- EXERCISABLE
WEIGHTED --------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICE RANGE NUMBER LIFE-YEARS PRICE NUMBER PRICE
- -------------------- ---------- ----------- -------- --------- --------
$10.50 - $15.99................... 7,331,897 6.84 $11.51 4,444,418 $11.18
$16.00 - $23.99................... 3,789,627 9.35 16.83 575,930 17.09
$24.00 - $27.28................... 2,235,340 8.14 24.82 647,068 24.70
---------- ---------
13,356,864 7.77 $15.25 5,667,416 $13.32
========== =========
F-26
83
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. SHAREHOLDERS' EQUITY -- (CONTINUED)
All options granted during the year were non-qualified stock options. As of
December 31, 1999, 4,666,140 shares of common stock were available for future
grant under the Plan.
11. PENSIONS AND OTHER EMPLOYEE BENEFITS
Pensions
The Company maintains a pension plan and a supplemental retirement plan.
These plans are defined benefit pension plans and members in certain locations
may contribute to the pension plan in order to receive enhanced benefits.
Eligibility for participation in these plans vary and benefits are based on
members' compensation and/or years of service. None of the employees associated
with the acquisition of Loral CyberStar were transferred into these plans. The
Company's funding policy is to fund the pension plan in accordance with the
Internal Revenue Code and regulations thereon and to fund the supplemental
retirement plan on an actuarial basis, including service cost and amortization
amounts. Plan assets are generally invested in U.S. government and agency
obligations and listed stocks and bonds.
Other Benefits
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees and dependents.
Participants are eligible for these benefits when they retire from active
service and meet the eligibility requirements for the Company's pension plan.
These benefits are funded primarily on a pay-as-you-go basis, with the retiree
generally paying a portion of the cost through contributions, deductibles and
coinsurance provisions.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations and fair value of assets for the years ended December 31,
1999 and 1998, and a statement of the funded status as of December 31, 1999 and
1998, respectively.
PENSION BENEFITS OTHER BENEFITS
-------------------- -------------------
1999 1998 1999 1998
--------- -------- -------- --------
(IN THOUSANDS)
Reconciliation of benefit obligation
Obligation at January 1................... $ 225,957 $204,166 $ 37,187 $ 36,010
Service cost.............................. 8,821 8,340 1,580 1,460
Interest cost............................. 16,499 15,358 2,576 2,553
Participant contributions................. 1,375 1,228 654 593
Plan amendments........................... (422)
Actuarial (gain) loss..................... (24,152) 7,231 (6,443) (1,406)
Benefit payments.......................... (11,630) (9,944) (1,898) (2,023)
--------- -------- -------- --------
Obligation at December 31................. $ 216,870 $225,957 $ 33,656 $ 37,187
--------- -------- -------- --------
F-27
84
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED)
PENSION BENEFITS OTHER BENEFITS
-------------------- -------------------
1999 1998 1999 1998
--------- -------- -------- --------
(IN THOUSANDS)
Reconciliation of fair value of plan
assets
Fair value of plan assets at January 1.... $ 227,235 $198,013 $ 1,940 $ 2,022
Actual return on plan assets.............. 90,973 36,040 66 124
Employer contributions.................... 2,999 1,898 934 1,134
Participant contributions................. 1,375 1,228 654 683
Benefit payments.......................... (11,630) (9,944) (1,898) (2,023)
--------- -------- -------- --------
Fair value of plan assets at December
31...................................... $ 310,952 $227,235 $ 1,696 $ 1,940
--------- -------- -------- --------
Funded status
Funded (unfunded) status at December 31... $ 94,082 $ 1,278 $(31,960) $(35,247)
Unrecognized prior service cost........... (338) (371) (8,926) (10,198)
Unrecognized (gain) loss.................. (102,016) (8,270) 6,127 12,600
--------- -------- -------- --------
Net amount recognized..................... $ (8,272) $ (7,363) $(34,759) $(32,845)
========= ======== ======== ========
The following table provides the details of the net pension liability
recognized in the balance sheet as of December 31, 1999 and 1998, respectively
(in thousands):
1999 1998
-------- --------
Prepaid benefit cost........................................ $ 8,570 $ 10,262
Accrued benefit liability................................... (16,842) (17,625)
-------- --------
Net amount recognized....................................... $ (8,272) $ (7,363)
======== ========
The Company has a supplemental retirement plan, which had an accumulated
benefit obligation in excess of plan assets. The accumulated benefit obligation
was $23.3 million and $25.1 million and the fair value of plan assets was $9.0
million and $8.6 million, as of December 31, 1999 and 1998, respectively.
The following table provides the components of net periodic benefit cost
for the plans for the years ended December 31, 1999, 1998 and 1997, respectively
(in thousands):
PENSION BENEFITS OTHER BENEFITS
------------------------------ ---------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- ------- ------- -------
Service cost..................... $ 8,821 $ 8,340 $ 6,539 $ 1,580 $ 1,460 $ 915
Interest cost.................... 16,499 15,358 14,278 2,576 2,553 2,315
Expected return on plan assets... (21,401) (18,531) (16,433) (184) (192) (196)
Amortization of prior service
cost........................... (34) 4 4 (1,272) (1,272) (1,272)
Amortization of net loss......... 18 20 2 238 319 194
-------- -------- -------- ------- ------- -------
Net periodic benefit cost........ $ 3,903 $ 5,191 $ 4,390 $ 2,938 $ 2,868 $ 1,956
======== ======== ======== ======= ======= =======
The principal actuarial assumptions were:
1999 1998 1997
----- ----- -----
Discount rate............................................. 8.00% 7.00% 7.25%
Expected return on plan assets............................ 9.50% 9.50% 9.50%
Rate of compensation increase............................. 4.25% 4.25% 4.50%
F-28
85
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED)
Actuarial assumptions used a health care cost trend rate of 8.05%
decreasing gradually to 5.25% by 2003. Assumed health care cost trend rates have
a significant effect on the amounts reported for the health care plans. A 1%
change in assumed health care cost trend rates for 1999 would have the following
effects:
1% INCREASE 1% DECREASE
----------- -----------
Effect on total of service and interest cost
components of net periodic postretirement health
care benefit cost................................ $ 696,000 $ (545,000)
Effect on the health care component of the
accumulated postretirement benefit obligation.... 3,785,000 (3,099,000)
Employee Savings Plan
The Company has an employee savings plan which provides that the Company
match the contributions of participating employees up to a designated level.
Under this plan, the matching contributions in Loral common stock or cash were
$7.0 million, $6.1 million and $5.6 million for the years ended December 31,
1999, 1998 and 1997, respectively.
12. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
fair value:
The carrying amount of cash and cash equivalents and restricted cash
approximates fair value because of the short maturity of those instruments. The
fair value of the investments in available-for-sale securities are based on
market quotations. The fair value of the Company's long-term debt is based on
carrying value for those obligations that have short-term variable interest
rates on the outstanding borrowings and quoted market prices for obligations
with long-term or fixed interest rates.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
DECEMBER 31,
----------------------------------------------------
1999 1998
------------------------ ------------------------
CARRYING CARRYING FAIR
AMOUNT FAIR VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
Cash and cash equivalents................. $ 239,865 $ 239,865 $ 546,772 $ 546,772
Restricted and segregated cash............ 187,315 187,315 72,855 72,855
Investments in available-for-sale
securities.............................. 106,783 106,783 65,273 65,273
Long-term debt, including current
maturities.............................. 1,999,322 1,554,979 1,555,775 1,382,890
The fair value of the investments in available-for-sale securities includes
unrealized gains of $79 million and $40 million as of December 31, 1999 and
1998, respectively, which is included in accumulated other comprehensive income
(see Note 3).
Foreign Currency Hedges
As of December 31, 1999 and 1998, the Company had foreign currency exchange
contracts (forwards and swaps) with several banks to purchase and sell foreign
currencies, primarily Japanese yen, aggregating $106.3 million and $197.5
million, respectively. Such contracts were designated as hedges of certain
foreign contracts and subcontracts to be performed by SS/L through May 2006. The
fair value of these contracts, based on quoted market prices, was $104.6 million
and $189.7 million as of December 31, 1999 and 1998, respectively. As of
December 31, 1999 and 1998, deferred gains on forward contracts to sell foreign
currencies,
F-29
86
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. FINANCIAL INSTRUMENTS -- (CONTINUED)
primarily yen, were $2.0 million and $11.7 million, respectively, and deferred
losses on forward contracts to purchase foreign currencies, primarily yen, were
$0.3 million and $3.9 million, respectively.
The Company is exposed to credit-related losses in the event of
non-performance by counter parties to these financial instruments, but does not
expect any counter party to fail to meet its obligation.
The maturity of foreign currency exchange contracts held as of December 31,
1999 is consistent with the contractual or expected timing of the transactions
being hedged, principally receipt of customer payments under long-term contracts
and payments to vendors under subcontracts. As of December 31, 1999, these
foreign exchange contracts mature as follows (in thousands):
TO PURCHASE TO SELL
------------------- -------------------
AT AT AT AT
CONTRACT MARKET CONTRACT MARKET
YEARS TO MATURITY RATE RATE RATE RATE
- ----------------- -------- ------- -------- -------
1................................................... $62,077 $63,044 $16,166 $15,755
2 to 5.............................................. 7,276 6,575 12,101 11,819
6 to 10............................................. 8,699 7,370
------- ------- ------- -------
$69,353 $69,619 $36,966 $34,944
======= ======= ======= =======
13. COMMITMENTS AND CONTINGENCIES
On December 15, 1995, Globalstar entered into a $250 million credit
agreement (the "Globalstar Credit Agreement") with a group of banks. Lockheed
Martin, SS/L and certain other Globalstar partners have guaranteed $206.3
million, $11.7 million and $32.0 million of the Globalstar Credit Agreement,
respectively. In addition, Loral agreed to indemnify Lockheed Martin for any
liability in excess of $150 million.
On August 5, 1999, Globalstar entered into a $500 million credit agreement
with a group of banks for the build-out of the Globalstar System of which $400
million was outstanding as of December 31, 1999. The credit facility is
guaranteed by Loral SatCom Ltd. and Loral Satellite, Inc., wholly owned
subsidiaries of Loral, for which Loral received warrants to purchase Globalstar
partnership interests (see Note 7). The guarantee is secured by the pledge of
certain assets of Loral and its subsidiaries, including the stock of the
guarantors and the Telstar 6 and Telstar 7 satellites. Based on third party
valuations, management believes that the fair value of Telstar 6 and Telstar 7
is in excess of this $500 million credit agreement. As of December 31, 1999, the
net book value of Telstar 6 and Telstar 7 was $392 million. The guarantee
agreement contains customary financial covenants of the guarantors, including
maintenance of a minimum collateral coverage ratio and maintenance of a combined
minimum net worth and combined earnings before interest, taxes, depreciation and
amortization ("EBITDA"). In addition, the guarantee agreement contains customary
limitations on indebtedness, liens, fundamental changes, asset sales, dividends
(except that the guarantors may pay dividends to their parents provided that
combined aggregate cash on hand at the guarantors is at least equal to $50
million and the guarantors hold an intercompany note due from Loral for at least
$100 million), investments, capital expenditures, creating liens other than
those created pursuant to the guarantee and transactions with affiliates.
The Company had outstanding letters of credit of approximately $118 million
and $99 million as of December 31, 1999 and 1998, respectively. The Company also
had a $12.5 million Canadian Dollar letter of credit outstanding at December 31,
1999.
F-30
87
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Loral had a $115 million secured standby bank credit facility, which was
undrawn as of December 31, 1999, supporting a guarantee of a $115 million term
loan of an unaffiliated third party. The term loan was repaid by the
unaffiliated third party in February 2000, resulting in the expiration of the
standby credit facility.
Due to the long lead times required to produce purchased parts and launch
vehicles, the Company has entered into various purchase commitments with
suppliers. These commitments aggregated approximately $685 million as of
December 31, 1999.
Prior to its acquisition by Loral, Loral Skynet sold several transponders
under which title to specific transponders was transferred to the customer.
Under the terms of the sales contracts, Loral Skynet continues to operate the
satellites on which the transponders are located and provides a warranty for a
period of 10 to 14 years. Depending on the contract, Loral Skynet is required to
replace any transponders failing to meet operating specifications. All customers
are entitled to a refund equal to the reimbursement value, as defined, in the
event there is no replacement. The reimbursement value is determined based on
the original purchase price plus an interest factor from the time the payment
was received to acceptance of the transponder by the customer, reduced on a
straight-line basis over the warranty period. In case of satellite failure, the
reimbursement value may be paid from proceeds received from insurance policies.
In 1997, two satellites built by SS/L experienced solar array circuit
failures. SS/L settled one of the customer's claims in 1999 and the other
customer's claims in 1997. In late 1998, following the launch of an SS/L-built
satellite sold to PanAmSat, a manufacturing error was discovered that affected
the geographical coverage of the Ku-band transponders on the satellite. On
January 6, 2000, PanAmSat filed an arbitration proceeding in connection with
this error claiming damages of $225 million for lost profits, and increased
sales and marketing costs. SS/L believes it has meritorious defenses to the
claim and that its liability is limited to a loss of a portion of the applicable
orbital incentives, the estimated impact of which is included in Loral's
consolidated financial statements. PanAmSat has received a recovery from its
insurance carrier that should reduce any damage claim. While this proceeding is
in its very early stages, management believes that this matter will not have a
material adverse effect on the financial condition or results of operations of
Loral.
SS/L is a target of a grand jury investigation being conducted by the
office of the U.S. Attorney for the District of Columbia with respect to
possible violations of export control laws that may have occurred in connection
with the participation of SS/L employees on a committee formed in the wake of
the 1996 crash of a Long March rocket in China and whose purpose was to consider
whether studies of the crash made by the Chinese had correctly identified the
cause of the failure. The Company is not in a position to predict the direction
or outcome of the investigation. If SS/L were to be indicted and convicted of a
criminal violation of the Arms Export Control Act, it would be subject to a fine
of $1 million per violation and could be debarred from certain export privileges
and, possibly, from participation in government contracts. Since many of SS/L's
satellites are built for foreign customers and/or launched on foreign rockets,
such a debarment would have a material adverse effect on SS/L's business and,
therefore, the Company. Indictment for such violations would subject SS/L to
discretionary debarment from further export licenses. Under the applicable
regulations, SS/L could be debarred from export privileges without being
convicted of any crime if it is indicted for these alleged violations, and loss
of export privileges would harm SS/L's business. Whether or not SS/L is indicted
or convicted, SS/L remains subject to the State Department's general statutory
authority to prohibit exports of satellites and related services if it finds a
violation of the Arms Export Control Act that puts SS/L's reliability in
question, and it can suspend export privileges whenever it determines that
grounds for debarment exist and that such suspension "is reasonably necessary to
protect world peace or the security or foreign policy of the United States."
As far as SS/L can determine, no sensitive information or technology was
conveyed to the Chinese, and no secret or classified information was discussed
with or reported to them. SS/L believes that its employees
F-31
88
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
acted openly and in good faith and that none engaged in intentional misconduct.
Accordingly, the Company does not believe that SS/L has committed a criminal
violation of the export control laws. The Company does not expect the grand jury
investigation or its outcome to result in a material adverse effect upon its
business. However, there can be no assurance as to these conclusions.
On December 23, 1998, the Office of Defense Trade Controls ("ODTC") of the
U.S. Department of State temporarily suspended the previously approved technical
assistance agreement under which SS/L had been preparing for the launch of the
ChinaSat-8 satellite. According to ODTC, the purpose of the temporary suspension
is to permit that agency to review the agreement for conformity with
newly-enacted legislation (Section 74 of the Arms Export Control Act) with
respect to the export of missile equipment or technology. SS/L has complied with
ODTC's instructions, and believes that a review of the agreement will show that
its terms comply with the new law. The ODTC, however, has not yet completed its
review, and the scheduled launch date for ChinaSat-8 is being delayed. In
December 1999, Loral reached an agreement with ChinaSat to extend the date for
delivery of the ChinaSat-8 satellite to July 31, 2000. In return for this
extension and other modifications to the contract, Loral has agreed to provide
to the customer two 36 MHz and one 54 MHz transponders on Telstar 10/Apstar IIR
for the customer's use for the life of those transponders. As a result, the
Company recorded a charge to earnings of $35 million. If the suspension is not
lifted by July 31, 2000, ChinaSat could decide to terminate the contract. If
such a termination were to occur, SS/L would have to refund advances received
from ChinaSat ($134 million as of December 31, 1999) and may incur penalties of
up to $13 million and believes it would incur costs of approximately $38 million
to refurbish and retrofit the satellite so that it could be sold to another
customer. There can be no assurance that SS/L will be able to find such a
replacement customer for the satellite or its Chinese launch vehicle. SS/L will
record a charge to earnings of approximately $35 million if it is unable to find
a replacement customer for this launch vehicle.
In March 1999, jurisdiction for satellite licensing was transferred from
the Commerce Department to the State Department, and the State Department has
issued regulations relating to the export of, and disclosure of technical
information related to, satellites and related equipment. SS/L anticipates that
obtaining licenses and technical assistance agreements under these new
regulations will take more time and will be considerably more burdensome than in
the past. Delays in obtaining the necessary licenses and technical assistance
agreements may delay SS/L's performance on existing contracts, and, as a result,
SS/L may incur penalties or lose incentive payments under these contracts. In
addition, such delays may have an adverse effect on SS/L's ability to compete
against foreign satellite manufacturers for new satellite contracts.
Telstar 12, originally intended to operate at 12 degrees W.L., was launched
aboard an Ariane launch vehicle in October 1999 into the orbital slot located at
15 degrees W.L. and commenced commercial operations in December 1999. Under an
agreement reached with Eutelsat, Loral CyberStar agreed to operate Telstar 12 at
15 degrees W.L. while Eutelsat will continue to develop its services at 12.5
degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L.
orbital slot and will assert its priority rights over such location on Loral
CyberStar's behalf. As part of this coordination effort, Loral CyberStar agreed
to provide to Eutelsat four 54 MHz transponders on Telstar 12 for the life of
the satellite. Eutelsat also has the right to acquire, at cost, four
transponders on the next replacement satellite for Telstar 12. As part of the
international coordination process, Loral continues to conduct discussions with
various administrations regarding Telstar 12's operations at 15 degrees W.L. If
these discussions are not successful, Telstar 12's useable capacity may be
reduced.
Lease Arrangements
The Company leases certain facilities, equipment and transponder capacity
under agreements expiring at various dates. Certain leases covering facilities
contain renewal and or purchase options which may be exercised by the Company.
Rent expense, net of sublease income of $4.5 million, $2.6 million and
F-32
89
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
$2.1 million, was $39.8 million, $26.4 million and $17.7 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
Future minimum payments, by year and in the aggregate, under non-cancelable
operating leases with initial or remaining terms of one year or more consisted
of the following as of December 31, 1999 (in thousands):
2000.............................................. $ 23,992
2001.............................................. 21,735
2002.............................................. 20,779
2003.............................................. 16,687
2004.............................................. 8,796
Thereafter........................................ 41,313
--------
$133,302
========
Future minimum payments have been reduced by minimum sublease rentals of
$20.2 million due in the future under non-cancellable subleases.
Future minimum lease receipts due from customers under non-cancelable
operating leases for transponder capacity on satellites in-orbit and for service
agreements as of December 31, 1999, are as follows (in thousands):
2000............................................. $ 320,677
2001............................................. 223,870
2002............................................. 177,214
2003............................................. 116,347
2004............................................. 95,474
Thereafter....................................... 420,028
----------
$1,353,610
==========
14. RELATED PARTY TRANSACTIONS
In connection with contract performance, Loral provided services to and
acquired services from Lockheed Martin. A summary of such transactions and
balances as of December 31, 1999 and 1998, and for the three years ended
December 31, 1999, respectively, is as follows (in thousands):
YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
Revenue from services sold.................................. $ 399 $ 1,301 $ 3,550
Cost of purchased goods and services........................ 151,053 70,569 78,160
Balance at year end:
Receivable................................................ $ 916 $ 2,159
Payable................................................... 60,496 4,317
-------- -------
Net payable................................................. $ 59,580 $ 2,158
======== =======
F-33
90
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. RELATED PARTY TRANSACTIONS -- (CONTINUED)
Loral's sales to, purchase from, and balances with the Alliance Partners
(see Note 4), including the effect of the related party transactions in Note 7,
as of the years ended December 31, 1999 and 1998, and for the three years ended
December 31, 1999, respectively, were as follows (in thousands):
1999 1998 1997
------- -------- --------
Revenue from goods and services sold........................ $13,360 $ 40,791 $ 39,303
Cost of purchased goods and services........................ 80,130 190,070 147,777
Balance at year end:
Receivable................................................ $ 1,524 $ 6,579
Payable................................................... 17,190 72,807
------- --------
Net payable................................................. $15,666 $ 66,228
======= ========
15. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed based upon the weighted average
number of shares of common stock and the Series A Preferred Stock outstanding.
Diluted earnings (loss) per share excludes the assumed conversion of the Series
C Preferred Stock as the effect would have been antidilutive for the years ended
December 31, 1999, 1998 and 1997, respectively. For the years ended December 31,
1999 and 1998, weighted options equating to approximately 1.2 million and 1.8
million shares, respectively, as calculated using the treasury stock method,
were excluded from the calculation of diluted loss per share, as the effect
would have been antidilutive.
The following table sets forth the computation of basic and diluted
earnings per share:
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net income (loss)...................................... $(201,916) $(138,798) $ 40,004
Preferred dividends and accretion...................... (44,728) (46,425) (26,315)
--------- --------- --------
Numerator for basic and diluted earnings per
share -- net income (loss) applicable to common
stockholders........................................ $(246,644) $(185,223) $ 13,689
========= ========= ========
Denominator:
Weighted average shares:
Common stock........................................ 244,335 227,505 196,173
Series A Preferred Stock............................ 45,897 45,897 45,897
--------- --------- --------
Denominator for basic earnings per share............... 290,232 273,402 242,070
Effect of dilutive securities:
Employee stock options.............................. 1,521
--------- --------- --------
Denominator for diluted earnings per share............. 290,232 273,402 243,591
========= ========= ========
Basic and diluted earnings (loss) per share.............. $ (0.85) $ (0.68) $ 0.06
========= ========= ========
F-34
91
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENTS
Loral has four reportable business segments: Fixed Satellite Services,
Broadband Data Services, Satellite Manufacturing and Technology and Global
Mobile Telephone Service (see Note 1).
In evaluating financial performance, management uses revenues and earnings
before interest, taxes and depreciation and amortization ("EBITDA") as the
measure of a segment's profit or loss. Segment results include the results of
its subsidiaries and its affiliates, Satmex, Europe*Star and Globalstar, which
are accounted for using the equity method in these consolidated financial
statements. Intersegment revenues primarily consists of satellites under
construction by Satellite Manufacturing and Technology for Fixed Satellite
Services and Global Mobile Telephone Service and sales by Fixed Satellite
Services to Broadband Data Services for the lease of transponder capacity. The
accounting policies of the reportable segments are the same as those described
in Note 2.
F-35
92
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENTS -- (CONTINUED)
Summarized financial information concerning the reportable segments is as
follows (in thousands):
1999 SEGMENT INFORMATION
SATELLITE GLOBAL
FIXED BROADBAND MANUFACTURING MOBILE
SATELLITE DATA AND TELEPHONE
SERVICES(1) SERVICES(2) TECHNOLOGY(3) SERVICE(4) CORPORATE(5) TOTAL
----------- ----------- ------------- ---------- ------------ -----
REVENUES AND EBITDA:
Revenues from external customers.......... $ 302,879 $ 84,658 $ 776,557 $ 1,164,094
Intersegment revenues..................... 38,946 656,714 695,660
---------- -------- ---------- -----------
Gross revenues............................ $ 341,825 $ 84,658 $1,433,271 1,859,754
========== ======== ==========
Revenues of unconsolidated
affiliates(6)........................... (135,520)
Intercompany revenues(7).................. (266,514)
-----------
Consolidated revenues..................... $ 1,457,720
===========
EBITDA before development and start-up
costs and eliminations.................. $ 193,099 $ (8,376) $ 102,307 $ (39,283) $ 247,747
Development and start-up costs(8)......... (27,248) $ (184,194) (211,442)
---------- -------- ---------- ---------- ---------- -----------
EBITDA before eliminations................ $ 193,099 $(35,624) $ 102,307 $ (184,194) $ (39,283) 36,305
========== ======== ========== ========== ==========
EBITDA of unconsolidated affiliates(6).... 106,709
Intercompany EBITDA(7).................... (30,371)
-----------
EBITDA(9)................................. 112,643
Depreciation and amortization(10)......... 174,906
-----------
Operating loss............................ $ (62,263)
===========
OTHER DATA:
Depreciation and amortization before
affiliate eliminations(10).............. $ 171,317 $ 20,080 $ 40,747 $ 6,344 $ 4,169 $ 242,657
========== ======== ========== ========== ==========
Depreciation and amortization of
unconsolidated affiliates(6)(10)........ (67,751)
-----------
Depreciation and amortization(10)......... $ 174,906
===========
Capital expenditures before affiliate
eliminations............................ $ 575,447 $ 19,051 $ 30,240 $ 695,395 $ 854 $ 1,320,987
========== ======== ========== ========== ==========
Capital expenditures of unconsolidated
affiliates(6)........................... (851,240)
-----------
Capital expenditures...................... $ 469,747
===========
Total assets before affiliate
eliminations............................ $3,901,262 $114,120 $1,641,233 $3,781,459 $1,212,029 $10,650,103
========== ======== ========== ========== ==========
Total assets of unconsolidated
affiliates(6)........................... (5,039,682)
-----------
Total assets.............................. $ 5,610,421
===========
- ---------------
(1) Fixed Satellite Services consists of 100% of the following companies since
their respective dates of acquisition. Loral Skynet acquired on March 14,
1997; Loral CyberStar's transponder leasing business acquired on March 20,
1998; Satmex, a 49% equity investee, acquired on November 17, 1997;
Europe*Star, a 47% equity investee, since December 1998. For the year ended
December 31, 1999, Satmex's results includes $25.5 million in revenues and
$11.2 million in EBITDA, respectively, from the sale of transponders to
Loral Skynet.
(2) Broadband Data Services consists of 100% of CyberStar LP and 100% of Loral
CyberStar's broadband data services business since its acquisition on March
20, 1998.
(3) Satellite Manufacturing and Technology consists of 100% of SS/L's results.
In February 1997, Loral agreed to acquire the remaining 49% of SS/L.
(4) Consists of 100% of Globalstar. Loral owned 41%, 43% and 40% at December
31, 1999, 1998 and 1997, respectively.
(5) Represents unallocated corporate expenses incurred in support of the
Company's operations.
(6) Represents amounts related to unconsolidated affiliates (Satmex,
Europe*Star and Globalstar). These amounts are eliminated in order to
arrive at Loral's consolidated results. Loral's proportionate share of
these affiliates is included in equity in net loss from affiliates in
Loral's consolidated statements of operations.
(7) Represents the elimination of intercompany sales and EBITDA, primarily for
satellites under construction by SS/L for wholly-owned subsidiaries; as
well as eliminating sales for the lease of transponder capacity by
Broadband Data Services from Fixed Satellite Services.
(8) Represents EBITDA for CyberStar LP and Globalstar.
(9) EBITDA (which is equivalent to operating income/loss before depreciation
and amortization, including amortization of unearned compensation) is
provided because it is a measure commonly used in the communications
industry to analyze companies on the basis of operating performance,
leverage and liquidity and is presented to enhance the understanding of
Loral's operating results. EBITDA is not an alternative to net income as an
indicator of a company's operating performance, or cash flow from
operations as a measure of a company's liquidity. EBITDA may be calculated
differently and, therefore, may not be comparable to similarly titled
measures reported by other companies.
(10) Includes amortization of unearned stock compensation charges.
F-36
93
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENTS -- (CONTINUED)
1998 SEGMENT INFORMATION
SATELLITE GLOBAL
FIXED BROADBAND MANUFACTURING MOBILE
SATELLITE DATA AND TELEPHONE
SERVICES(1) SERVICES(2) TECHNOLOGY(3) SERVICE(4) CORPORATE(5) TOTAL
----------- ----------- ------------- ---------- ------------ -----
REVENUES AND EBITDA:
Revenues from external customers....... $ 248,904 $ 39,856 $ 500,918 $ 789,678
Intersegment revenues.................. 5,301 889,253 894,554
---------- -------- ---------- ----------
Gross revenues......................... $ 254,205 $ 39,856 $1,390,171 1,684,232
========== ======== ==========
Revenues of unconsolidated
affiliates(6)........................ (104,779)
Intercompany revenues(7)............... (277,751)
----------
Consolidated revenues.................. $1,301,702
==========
EBITDA before development and start-up
costs and eliminations............... $ 171,239 $(13,306) $ 117,920 $ (42,826) $ 233,027
Development and start-up costs(8)...... (33,354) $ (144,953) (178,307)
---------- -------- ---------- ---------- ---------- ----------
EBITDA before eliminations............. $ 171,239 $(46,660) $ 117,920 $ (144,953) $ (42,826) 54,720
========== ======== ========== ========== ==========
EBITDA of unconsolidated
affiliates(6)........................ 70,184
Intercompany EBITDA(7)................. (23,655)
----------
EBITDA(9).............................. 101,249
Depreciation and amortization(10)...... 135,029
----------
Operating loss......................... $ (33,780)
==========
OTHER DATA:
Depreciation and amortization before
affiliate eliminations(10)........... $ 130,793 $ 10,193 $ 39,696 $ 1,731 $ 2,981 $ 185,394
========== ======== ========== ========== ==========
Depreciation and amortization of
unconsolidated affiliates(6)(10)..... (50,365)
----------
Depreciation and amortization(10)...... $ 135,029
==========
Capital expenditures before affiliate
eliminations......................... $ 638,924 $ 27,287 $ 39,650 $ 564,629 $ 2,387 $1,272,877
========== ======== ========== ========== ==========
Capital expenditures of unconsolidated
affiliates(6)........................ (783,429)
----------
Capital expenditures................... $ 489,448
==========
Total assets before affiliate
eliminations......................... $3,371,073 $152,667 $1,673,030 $2,670,025 $1,238,434 $9,105,229
========== ======== ========== ========== ==========
Total assets of unconsolidated
affiliates(6)........................ (3,876,014)
----------
Total assets........................... $5,229,215
==========
F-37
94
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENTS -- (CONTINUED)
1997 SEGMENT INFORMATION
SATELLITE GLOBAL
FIXED BROADBAND MANUFACTURING MOBILE
SATELLITE DATA AND TELEPHONE
SERVICES(1) SERVICES(2) TECHNOLOGY(3) SERVICE(4) CORPORATE(5) TOTAL
----------- ----------- ------------- ---------- ------------ -----
REVENUES AND EBITDA:
Revenue from external customers...... $ 82,229 $ 822,885 $ 905,114
Intersegment revenue................. 800 619,715 620,515
---------- ---------- -----------
Gross revenue........................ $ 83,029 $1,442,600 1,525,629
========== ==========
Revenue of unconsolidated
affiliates(6)...................... (12,893)
Intercompany revenue(7).............. (200,145)
-----------
Consolidated revenue................. $ 1,312,591
===========
EBITDA before development and
start-up costs and eliminations.... $ 51,821 $ 110,936 $(26,932) $ 135,825
Development and start-up costs(8).... $(32,612) $ (87,055) (119,667)
---------- -------- ---------- ---------- -------- -----------
EBITDA before eliminations........... $ 51,821 $(32,612) $ 110,936 $ (87,055) $(26,932) 16,158
========== ======== ========== ========== ========
EBITDA of unconsolidated
affiliates(6)...................... 77,197
Intercompany EBITDA(7)............... (17,039)
-----------
EBITDA(9)............................ 76,316
Depreciation and amortization(10).... 62,764
-----------
Operating income..................... $ 13,552
===========
OTHER DATA:
Depreciation and amortization before
affiliate eliminations(10)......... $ 31,825 $ 78 $ 35,308 $ 1,016 $ 1,387 $ 69,614
========== ======== ========== ========== ========
Depreciation and amortization of
unconsolidated affiliates(6)(10)... (6,850)
-----------
Depreciation and amortization(10).... $ 62,764
===========
Capital expenditures before affiliate
eliminations....................... $ 212,183 $ 2,623 $ 39,416 $ 589,373 $ 4,149 $ 847,744
========== ======== ========== ========== ========
Capital expenditures of
unconsolidated affiliates(6)....... (592,404)
-----------
Capital expenditures................. $ 255,340
===========
Total assets before affiliate
eliminations....................... $1,825,845 $ 24,921 $1,483,759 $2,149,053 $711,017 $ 6,194,595
========== ======== ========== ========== ========
Total assets of unconsolidated
affiliates(6)...................... (3,184,148)
-----------
Total assets......................... $ 3,010,447
===========
F-38
95
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENTS -- (CONTINUED)
Revenue by Customer Location
The following table presents revenues by country based on customer location
for the years ended December 31, 1999, 1998 and 1997 (in thousands).
1999 1998 1997
---------- ---------- ----------
United States.......................................... $1,248,990 $1,096,497 $ 924,468
People's Republic of China............................. 12,460 48,985 102,147
Japan.................................................. 56,322 53,567 45,179
France................................................. 65,115 43,702 40,719
Philippines............................................ 1,301 8,877 34,629
Thailand............................................... 850 9 77,422
Indonesia.............................................. 1,947 71,880
Other.................................................. 70,735 50,065 16,147
---------- ---------- ----------
$1,457,720 $1,301,702 $1,312,591
========== ========== ==========
During 1999, three customers of the Satellite Manufacturing and Technology
segment accounted for 25%, 18% and 13% of consolidated revenues. During 1998,
three commercial customers of the Satellite Manufacturing and Technology segment
accounted for approximately 46%, 20% and 11%, respectively, of consolidated
revenues. During 1997, one customer of the Satellite Manufacturing and
Technology segment accounted for approximately 31% of consolidated revenues (see
Note 7).
With the exception of the Company's satellites in-orbit (see Note 6), the
Company's long-lived assets are primarily located in the United States.
17. QUARTERLY FINANCIAL INFORMATION (Unaudited, in thousands, except per share
amounts)
QUARTER ENDED
------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30,(1) DECEMBER 31,(1)
--------- -------- ---------------- ---------------
YEAR ENDED DECEMBER 31, 1999
Revenues....................... $305,926 $378,437 $347,152 $426,204
EBITDA (see Note 16)........... 36,627 43,542 35,939 (3,465)
Operating income (loss)........ (1,166) 2,059 (8,585) (54,571)
Loss before income taxes,
equity in net loss of
affiliates and minority
interest..................... 4,201 3,147 8,303 46,487
Net loss....................... 38,501 38,068 12,464 112,883
Preferred dividends and
accretion.................... 11,607 11,606 11,606 9,909
Net loss applicable to common
shareholders................. 50,108 49,674 24,070 122,792
Loss per share -- basic and
diluted(2)................... 0.17 0.17 0.08 0.42
Market price per share
High......................... 22 7/16 20 3/4 22 7/8 24 3/4
Low.......................... 14 7/16 14 3/8 16 1/4 13 1/2
F-39
96
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY FINANCIAL INFORMATION -- (CONTINUED)
QUARTER ENDED
------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30,(3) DECEMBER 31,(3)
--------- -------- ---------------- ---------------
YEAR ENDED DECEMBER 31, 1998
Revenues........................ $295,213 $248,260 $289,588 $468,641
EBITDA (see Note 16)............ 18,410 12,175 19,936 50,728
Operating income (loss)......... 982 (26,266) (19,519) 11,023
Income (loss) before income
taxes, equity in net loss of
affiliates and minority
interest...................... 7,928 (31,299) 16,088 (18,345)
Net loss........................ 15,443 58,973 10,699 53,683
Preferred dividends and
accretion..................... 11,606 11,607 11,606 11,606
Net loss applicable to common
shareholders.................. 27,049 70,580 22,305 65,289
Loss per share -- basic and
diluted(2).................... 0.11 0.27 0.08 0.23
Market price per share
High.......................... 30 1/2 33 15/16 31 7/8 20 1/2
Low........................... 19 24 1/2 12 1/8 10 3/4
- ---------------
(1) The quarter ended September 30, 1999 includes a non-recurring benefit of $34
million relating to a tax law change affecting the utilization of Loral
CyberStar's pre-acquisition loss carryforwards. The results of operations
for the quarter ended December 31, 1999 includes a pre-tax charge of $35
million ($21 million after taxes) relating to an agreement reached with a
customer to extend the delivery date of a satellite and other modifications
to the contract in return for satellite capacity.
(2) The quarterly earnings per share information is computed separately for each
period. Therefore, the sum of such quarterly per share amounts may differ
from the total for the year.
(3) The results of operations for the quarter ended September 30, 1998, includes
a $35 million pre-tax gain on the sale of stock in an affiliate. The results
of operations for the quarter ended December 31, 1998 includes a pre-tax
loss recorded on the write-off of non-strategic investments of $29.5
million.
18. SUBSEQUENT EVENTS
In February 2000, Loral sold $400 million of 6% Series D convertible
redeemable preferred stock due 2007 in an offering exempt from registration. The
preferred stock is convertible into approximately 20.2 million shares of common
stock at a conversion price of $19.83 per share. Loral intends to apply the
proceeds from the sale of the preferred stock for general corporate purposes,
including investment in its broadband strategy and expansion of the Loral Global
Alliance by acquisition of additional satellites and orbital slots.
In February 2000, Loral and Lockheed Martin filed certain notices under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection with Lockheed
Martin's plan to convert its 45,896,977 shares of Loral's Series A preferred
stock into an equal number of shares of Loral common stock. The waiting period
expired on March 5, 2000 and accordingly, Lockheed Martin is now free to convert
the Series A preferred stock at any time. In February 2000, Loral and Lockheed
Martin also entered into an agreement pursuant to which Lockheed Martin agreed
that it will not sell any of the Series A preferred stock or the Loral common
stock into which it is convertible before May 19, 2000. Loral has agreed to use
its best efforts to cause a registration statement relating to the common stock
issuable upon conversion of the Series A preferred stock to be effective on or
before May 19, 2000 and to maintain its effectiveness for at least 12 months
thereafter. Loral has also agreed that it will refrain from selling equity
securities in the public markets for its own account until the six month
anniversary of the effective date of such registration statement.
F-40
97
INDEPENDENT AUDITORS' REPORT
We have audited the consolidated financial statements of Loral Space &
Communications Ltd. (a Bermuda company) as of December 31, 1999 and 1998, and
for each of the three years in the period ended December 31, 1999, and have
issued our report thereon dated February 22, 2000 (March 5, 2000 as to the
second paragraph of Note 18), included elsewhere in this Annual Report on Form
10-K. Our audits also included the financial statement schedule listed in Item
14(a)2 of this Annual Report on Form 10-K. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
San Jose, California
February 22, 2000
S-1
98
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LORAL SPACE & COMMUNICATIONS LTD.
BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31,
------------------------
1999 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 99,211 $ 401,269
Other current assets...................................... 3,275 1,147
---------- ----------
Total current assets........................................ 102,486 402,416
Note receivable from unconsolidated subsidiary.............. 200,000 346,600
Investments in affiliates................................... 729,900 620,202
Investment in unconsolidated subsidiaries................... 1,985,619 1,257,827
Due from unconsolidated subsidiaries........................ 20,506 289,609
Other assets................................................ 115,256 72,277
---------- ----------
$3,153,767 $2,988,931
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities............ $ 1,958 $ 31,041
Accrued interest and preferred dividends.................. 22,787 8,928
Income taxes payable...................................... 5,019 2,844
Deferred income taxes..................................... 9,390 1,796
---------- ----------
Total current liabilities................................... 39,154 44,609
Deferred income taxes....................................... 13,949 6,819
Long-term liabilities....................................... 1,782
Long-term debt.............................................. 350,000
Commitments and contingencies
Shareholders' equity:
Series A convertible preferred stock, $.01 par value;
150,000,000 shares authorized, 45,896,977 shares
issued................................................. 459 459
Series B preferred stock, $.01 par value; 750,000 shares
authorized and unissued................................
6% Series C convertible redeemable preferred stock
($745,472 redemption value), $.01 par value; 20,000,000
shares authorized, 14,909,437 shares issued............ 735,437 735,437
Common stock, $.01 par value; 750,000,000 shares
authorized, 245,204,432 and 243,861,719
shares issued.......................................... 2,452 2,439
Paid-in capital........................................... 2,347,323 2,330,755
Treasury stock, at cost; 174,195 shares................... (3,360) (3,360)
Unearned compensation..................................... (1,253) (8,231)
Retained deficit.......................................... (409,301) (162,657)
Accumulated other comprehensive income.................... 78,907 40,879
---------- ----------
Total shareholders' equity.................................. 2,750,664 2,935,721
---------- ----------
$3,153,767 $2,988,931
========== ==========
See note to financial statements.
S-2
99
LORAL SPACE & COMMUNICATIONS LTD.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- --------- --------
Costs and expenses....................................... $ 45,716 $ 34,112 $ 14,123
--------- --------- --------
Operating loss........................................... (45,716) (34,112) (14,123)
Interest and investment income........................... 67,037 53,217 60,915
Interest expense......................................... 695
Gain on sale of investments, net......................... 15,494 79,591
--------- --------- --------
Income before income taxes and equity in net loss of
unconsolidated subsidiaries and affiliates............. 21,321 34,599 125,688
Income taxes............................................. 13,150 9,872 19,644
--------- --------- --------
Income before equity in net loss of unconsolidated
subsidiaries and affiliates............................ 8,171 24,727 106,044
Equity in net loss of unconsolidated subsidiaries........ (58,452) (47,041) (19,243)
Equity in net loss of affiliates......................... (151,635) (116,484) (46,797)
--------- --------- --------
Net income (loss)........................................ (201,916) (138,798) 40,004
Preferred dividends and accretion........................ (44,728) (46,425) (26,315)
--------- --------- --------
Net income (loss) applicable to common stockholders...... $(246,644) $(185,223) $ 13,689
========= ========= ========
Earnings (loss) per share:
Basic and diluted...................................... $ (0.85) $ (0.68) $ 0.06
========= ========= ========
Weighted average shares outstanding:
Basic.................................................. 290,232 273,402 242,070
========= ========= ========
Diluted................................................ 290,232 273,402 243,591
========= ========= ========
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- -------
Net income (loss)......................................... $(201,916) $(138,798) $40,004
Other comprehensive income - unrealized gains on
available-for-sale securities and accumulated
translation adjustment of subsidiaries.................. 38,028 33,604 7,275
--------- --------- -------
Comprehensive income (loss)............................... $(163,888) $(105,194) $47,279
========= ========= =======
See notes to financial statements.
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LORAL SPACE & COMMUNICATIONS LTD.
STATEMENTS OF CASH FLOWS
(in thousands)
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
--------- --------- -----------
Operating activities:
Net income (loss)......................................... $(201,916) $(138,798) $ 40,004
Non-cash items:
Gain on investments....................................... (15,494) (79,591)
Equity in net loss of affiliates.......................... 151,635 116,484 46,797
Equity in net loss of unconsolidated subsidiaries......... 58,452 47,041 19,243
Deferred income taxes..................................... 15,636 10,359 (2,158)
Non-cash interest and investment income................... (11,451) (6,012) (1,739)
Depreciation and amortization............................. 78
Changes in operating assets and liabilities, net of
acquisitions:
Due from unconsolidated subsidiaries...................... (15,351) (44,520) (244,898)
Accounts payable and other current liabilities............ (29,083) 1,854 4,218
Accrued interest and preferred dividends.................. 13,859 (773) 3,283
Income taxes payable...................................... 2,175 (9,160) 10,741
Other..................................................... 728 (8,951) (64,630)
--------- --------- -----------
Cash used in operating activities........................... (15,316) (47,970) (268,652)
--------- --------- -----------
Investing activities:
Proceeds from the sale of investments, net of expenses.... 246,868 79,591
Investment in affiliates.................................. (250,794) (510,497) (250,496)
Investments in unconsolidated subsidiaries................ (340,979) (50,569) (144,060)
Other assets.............................................. (52,454)
--------- --------- -----------
Cash used in investing activities........................... (591,773) (314,198) (367,419)
--------- --------- -----------
Financing activities:
Proceeds from sale of common stock, net................... 601,816
(Issuance) repayment of note to unconsolidated
subsidiary.............................................. (14,211) 2,400 (349,000)
Proceeds from the issuance of 9.5% senior notes, net...... 343,875
Proceeds from other stock issuances....................... 20,095 32,121 7,338
Preferred dividends....................................... (44,728) (44,750) (25,435)
--------- --------- -----------
Cash provided by (used in) financing activities............. 305,031 591,587 (367,097)
--------- --------- -----------
(Decrease) increase in cash and cash equivalents............ (302,058) 229,419 (1,003,168)
Cash and cash equivalents -- beginning of period............ 401,269 171,850 1,175,018
--------- --------- -----------
Cash and cash equivalents -- end of period.................. $ 99,211 $ 401,269 $ 171,850
========= ========= ===========
Non-cash transactions:
Common stock issued to acquire Loral CyberStar............ $ 469,025
=========
Unrealized gain on available-for-sale securities.......... $ 38,909 $ 32,988 $ 7,275
========= ========= ===========
Contributions to capital of receivables from
unconsolidated subsidiaries............................. $ 445,265
=========
Mandatory exchange of Convertible Preferred Equivalent
Obligations............................................. $ 583,282
===========
Issuance of Series C Preferred Stock to acquire equity
interest in SS/L........................................ $ 149,600
===========
Issuance of Loral common stock to acquire equity interest
in SS/L and Globalstar partnership interests............ $ 148,387
===========
Deferred purchase price to acquire Globalstar partnership
interests............................................... $ 24,787
===========
Supplemental information:
Interest paid............................................. $ 16,071 $ 2,023 $ 22,823
========= ========= ===========
Taxes paid................................................ $ -- $ 8,586 $ 6,205
========= ========= ===========
See notes to financial statements.
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101
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO FINANCIAL STATEMENTS
1. Loral Space & Communications Ltd. ("Loral"), a Bermuda company, is a
holding company which is the ultimate parent of all Loral subsidiaries and is
the registrant of all Loral securities. The accompanying financial statements
reflect the financial position, results of operations and cash flows of Loral on
a separate company basis. All subsidiaries of Loral are reflected as investments
accounted for under the equity method of accounting. Accordingly intercompany
payables and receivables have not been eliminated. This condensed financial
information should be read in conjunction with the consolidated financial
statements of Loral, included in Loral's Annual Report on Form 10-K for the year
ended December 31, 1999.
Loral's significant transactions with its subsidiaries other than the
investment account and related equity in net loss of unconsolidated subsidiaries
are the management fee charged by Loral SpaceCom Corporation ("SpaceCom") to
Loral and intercompany payables and receivables resulting primarily from the
funding of the construction of satellites for the Fixed Satellite Services
segment. The note receivable, which was originally due from SpaceCom relating to
the Loral Skynet acquisition, has been assumed by Loral Space & Communications
Corporation ("LSC"). The note bears interest at 8.2% per annum with the final
due date being October 1, 2008. Interest payments are deferred until October 1,
2001, when LSC will begin to make semi-annual installments of $30 million on the
last day of April and October of each year until the note is paid in full.
No cash dividends were paid to Loral by its subsidiaries or its affiliates
during the years ended December 31, 1999, 1998 and 1997.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Restructuring, Financing and Distribution Agreement, dated
as of January 7, 1996, among Loral Corporation, Loral
Aerospace Holdings, Inc., Loral Aerospace Corp., Loral
General Partner, Inc., Loral Globalstar L.P., Loral
Globalstar Limited, the Registrant and Lockheed Martin
Corporation(1)
2.2 Amendment to Restructuring, Financing and Distribution
Agreement, dated as April 15, 1996(1)
2.3 Agreement for the Purchase and Sale of Assets dated as of
September 25, 1996 by and between AT&T Corp., as Seller, and
Loral Space & Communications Ltd., as Buyer(2)
2.4 First Amendment to Agreement for the Purchase and Sale of
Assets dated as of March 14, 1997 by and between AT&T Corp.,
as Seller, and Loral Space & Communications Ltd., as
Buyer(3)
2.5 Agreement and Plan of Merger dated as of October 7, 1997 by
and among Orion Network Systems, Inc., Loral Space &
Communications Ltd. and Loral Satellite Corporation(4)
2.6 First Amendment to Agreement and Plan of Merger dated as of
February 11, 1998 by and among Orion Network Systems, Inc.,
Loral Space & Communications Ltd. and Loral Satellite
Corporation(5)
2.7 Second Amendment to Agreement and Plan of Merger dated as of
March 20, 1998 by and among Orion Network Systems, Inc.,
Loral Space & Communications Ltd. and Loral Satellite
Corporation(12)
3.1 Memorandum of Association(1)
3.2 Memorandum of Increase of Share Capital(1)
3.3 Third Amended and Restated Bye-laws+
3.4 Schedule IV to the Third Amended and Restated Bye-laws+
4.1 Rights Agreement dated March 27, 1996 between the Registrant
and The Bank of New York, Rights Agent(1)
4.2 Indenture dated as of January 15, 1999 relating to
Registrant's 9 1/2% Senior Notes due 2006(14)
10.1 Shareholders Agreement dated as of April 23, 1996 between
Loral Corporation and the Registrant(1)
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102
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1.1 Amended Shareholders Agreement dated as of March 29, 2000
between the Registrant and Lockheed Martin Corporation+
10.2 Tax Sharing Agreement dated as of April 22, 1996 between
Loral Corporation, the Registrant, Lockheed Martin
Corporation and LAC Acquisition Corporation(1)
10.3 Exchange Agreement dated as of April 22, 1996 between the
Registrant and Lockheed Martin Corporation(1)
10.4 Amended and Restated Agreement of Limited Partnership of
Globalstar, L.P., dated as of January 26, 1999 among
Loral/Qualcomm Satellite Services, L.P., Globalstar
Telecommunications Limited, AirTouch Satellite Services,
Inc., Dacom Corporation, Dacom International, Inc., Hyundai
Corporation, Hyundai Electronics Industries Co., Ltd.,
Loral/DASA Globalstar, L.P., Loral Space & Communications
Ltd., San Giorgio S.p.A., TeleSat Limited, TE.S.AM and
Vodafone Satellite Services Limited(14)
10.4.1 Amendment dated as of December 8, 1999 to the Amended and
Restated Agreement of Limited Partnership of Globalstar,
L.P.(15)
10.4.2 Amendment dated as of February 1, 2000 to the Amended and
Restated Agreement of Limited Partnership of Globalstar,
L.P.+
10.5 Service Provider Agreements by and between Globalstar, L.P.
and each of Loral General Partner, Inc. and Loral/DASA
Globalstar, L.P.(8)
10.6 Contract between Globalstar, L.P. and Space Systems/Loral,
Inc.(8)
10.7 1996 Stock Option Plan(1)++
10.7.1 Amendment to 1996 Stock Option Plan(14)++
10.8 Common Stock Purchase Plan for Non-Employee Directors(1)++
10.9 Employment Agreement between the Registrant and Bernard L.
Schwartz(1)++
10.9.1 Amendment dated as of March 1, 1997 to Employment Agreement
between the Registrant and Bernard L. Schwartz(12)++
10.10 Registration Rights Agreement dated as of August 9, 1996
among Loral Space & Communications Ltd., Lehman Brothers
Capital Partners II, L.P., Lehman Brothers Merchant Banking
Portfolio Partnership L.P., Lehman Brothers Offshore
Investment Partnership L.P. and Lehman Brothers Offshore
Investment Partnership-Japan L.P.(9)
10.11 Registration Rights Agreement dated November 6, 1996
relating to the Registrant's 6% Convertible Preferred
Equivalent Obligations due 2006(6)
10.12 Registration Rights Agreement (Series C Preferred Stock)
dated as of March 31, 1997 between Loral Space &
Communications Ltd. and Finmeccanica S.p.A. and dated as
June 23, 1997 among Loral Space & Communications Ltd.,
Aerospatiale SNI and Alcatel Espace(10)
10.13 Registration Rights Agreement (Common Stock) dated as of
June 23, 1997 among Loral Space & Communications Ltd.,
Aerospatiale SNI and Alcatel Espace(10)
10.14 Alliance Agreement dated as of June 23, 1997 among Loral
Space & Communications Ltd., Aerospatiale SNI, Alcatel
Espace and Finmeccanica S.p.A.(10)
10.15 Principal Stockholder Agreement dated as of October 7, 1997
among Loral Space & Communications Ltd., Loral Satellite
Corporation, Orion Network Systems, Inc. and certain Orion
stockholders signatory thereto(4)
10.16 Amended and Restated Credit and Participation Agreement,
dated as of November 14, 1997, among Loral SpaceCom
Corporation, Space Systems/Loral, Inc., the Banks parties
thereto, Bank of America National Trust and Savings
Association, as Administrative Agent, and Istituto Bancario
San Paolo di Torino S.p.A, individually and as Italian
Export Financing and Arranger and as Selling Bank(11)
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103
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.16.1 First Amendment dated as of May 7, 1998 to and of the
Amended and Restated Credit and Participation Agreement,
dated as of November 14, 1997, among Loral SpaceCom
Corporation, Space Systems/Loral, Inc. and, the banks
parties thereto(14)
10.16.2 Second Amendment dated as of September 4, 1998 to and of the
Amended and Restated Credit Agreement dated as of November
14, 1997, among Loral SpaceCom Corporation, Space
Systems/Loral, Inc. and the banks parties thereto.+
10.16.3 Third Amendment dated as of July 12, 1999 to and of the
Amended and Restated Credit Agreement dated as of November
14, 1997, among Loral SpaceCom Corporation, Space
Systems/Loral, Inc. and the banks parties thereto.+
10.16.4 Fourth Amendment dated as of November 10, 1999 to and of the
Amended and Restated Credit Agreement dated as of November
14, 1997, among Loral SpaceCom Corporation, Space Systems/
Loral, Inc. and the banks parties thereto.+
10.17 Agreement of Limited Partnership of CyberStar, L.P. dated as
of June 30, 1997(12)
10.18 Purchase and Sale Agreement dated November 17, 1997 between
the Federal Government of the United Mexican States and
Corporativo Satelites Mexicanos, S.A. de C.V. for the
purchase and sale of the capital stock of Satelites
Mexicanos, S.A. de C.V. (English translation of Spanish
original)(12)
10.19 Amended and Restated Membership Agreement dated and
effective as of August 21, 1998 among Loral Satmex Ltd. and
Ediciones Enigma, S.A. de C.V. and Firmamento Mexicano, S.
de R.L. de C.V.(14)
10.20 Letter Agreement dated December 29, 1997 between Loral Space
& Communications Ltd., Telefonica Autrey S.A. de C.V.,
Donaldson, Lufkin & Jenrette Securities Corporation, Lehman
Brothers Inc. and Lehman Commercial Paper Inc. and related
Agreement between the Federal Government of United Mexican
States, Telefonica Autrey, S.A. de C.V., Ediciones Enigma,
S.A. de C.V., Loral Space & Communications Ltd., Loral
Satmex Ltd. and Servicios Corporativos Satelitales, S.A. de
C.V.(12)
10.21 Shareholders Agreement dated December 7, 1998 by and among
Alcatel SpaceCom, Loral Space & Communications Ltd., Dr.
Jurgen Schulte-Hillen and EuropeStar Limited(14)
10.22 Registration Rights Agreement dated as of January 21, 1999
relating to Registrant's 9 1/2% Senior Notes due 2006(14)
10.23 Guarantee and Collateral Agreement dated as of August 5,
1999, made by Loral Satcom Ltd. and Loral Satellite, Inc. in
favor of Bank of America, National Association as Collateral
Agent(16)
10.24 Lease Agreement dated as of August 18, 1999 by and between
Loral Asia Pacific Satellite (HK) Limited and APT Satellite
Company Limited(17)
10.25 Guarantee of Loral Space & Communications Ltd. dated August
18, 1999(17)
10.26 Registration Rights Agreement dated as of February 18, 2000
relating to Registrant's 6% Series D Convertible Redeemable
Preferred Stock due 2007+
12 Statement Re: Computation of Ratios+
21 List of Subsidiaries of the Registrant+
23 Consent of Deloitte & Touche LLP+
27 Financial Data Schedule (EDGAR only)+
99.1 Consolidated Financial Statements of Globalstar, L.P. and
Independent Auditors' Report(13)
- ---------------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form 10 (No. 1-14180).
(2) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on September 27, 1996.
S-7
104
(3) Incorporated by reference from the Registrant's Current Report on Form 8-K
on March 28, 1997.
(4) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on October 10, 1997.
(5) Incorporated by reference from the Registrant's Registration Statement on
Form S-4 filed on February 17, 1998 (File No. 333-46407).
(6) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the nine month period ended December 31, 1996.
(7) Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 filed by Globalstar Telecommunications
Limited (File No. 0-25456).
(8) Incorporated by reference from the Registration Statement on Form S-1 of
Globalstar Telecommunications Limited (File No. 33-86808).
(9) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on August 13, 1996.
(10) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on July 8, 1997.
(11) Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on December 9, 1997.
(12) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
(13) Incorporated by reference from the Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 filed by Globalstar Telecommunications
Limited and Globalstar, L.P. (File No. 0-25456).
(14) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
(15) Incorporated by reference from the Current Report on Form 8-K filed on
December 21, 1999 by Globalstar Telecommunications Limited and Globalstar,
L.P.
(16) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on August 6, 1999.
(17) Incorporated by reference from Registrant's Current Report on Form 8-K
filed on August 23, 1999.
+ Filed herewith.
++ Management compensation plan.
DATE OF REPORT DESCRIPTION
-------------- -----------
September 28, 1999 Item 5 -- Other Events Lease Agreement relating to Apstar II-R
S-8