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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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
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.
As of July 31, 2002, there were 372,930,403 shares of Loral Space &
Communications Ltd. common stock outstanding.
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PART 1.
FINANCIAL INFORMATION
LORAL SPACE & COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 107,680 $ 159,949
Accounts receivable, net ............................................... 40,363 39,299
Contracts-in-process ................................................... 187,051 178,599
Inventories ............................................................ 106,660 98,179
Other current assets ................................................... 75,429 93,667
----------- -----------
Total current assets ................................................. 517,183 569,693
Property, plant and equipment, net ....................................... 1,983,602 1,977,356
Cost in excess of net assets acquired, net ............................... -- 891,719
Long-term receivables .................................................... 192,574 190,306
Investments in and advances to affiliates ................................ 182,881 189,119
Deposits ................................................................. 105,290 155,490
Deferred tax assets ...................................................... 301,363 297,528
Other assets ............................................................. 104,880 119,494
----------- -----------
$ 3,387,773 $ 4,390,705
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ...................................... $ 165,931 $ 136,616
Accounts payable ....................................................... 113,718 144,841
Accrued employment costs ............................................... 38,218 39,232
Customer advances ...................................................... 138,050 148,990
Accrued interest and preferred dividends ............................... 43,073 31,170
Income taxes payable ................................................... 35,056 34,516
Other current liabilities .............................................. 51,499 46,960
----------- -----------
Total current liabilities ............................................ 585,545 582,325
Pension and other postretirement liabilities ............................. 60,015 55,590
Long-term liabilities .................................................... 137,090 156,716
Long-term debt ........................................................... 2,164,181 2,226,525
Minority interest ........................................................ 15,917 18,681
Convertible redeemable preferred stock:
6% Series C ($133,797 redemption value), $.01 par value ................ 131,996 --
6% Series D ($57,061 redemption value), $.01 par value ................. 55,378 --
Commitments and contingencies (Notes 7, 8 and 9)
Shareholders' equity:
6% Series C convertible redeemable preferred stock
($270,412 and $491,994 redemption value), $.01 par value ............. 266,772 485,371
6% Series D convertible redeemable preferred stock
($112,523 and $305,539 redemption value), $.01 par value ............. 109,205 296,529
Common stock, $.01 par value ........................................... 3,711 3,368
Paid-in capital ........................................................ 3,035,219 2,771,964
Treasury stock ......................................................... (3,360) (3,360)
Unearned compensation .................................................. (4) (81)
Retained deficit ....................................................... (3,195,504) (2,223,710)
Accumulated other comprehensive income ................................. 21,612 20,787
----------- -----------
Total shareholders' equity ............................................... 237,651 1,350,868
----------- -----------
$ 3,387,773 $ 4,390,705
=========== ===========
- ----------
Note: The December 31, 2001 balance sheet has been derived from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
2
LORAL SPACE & COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Revenues from satellite sales ................................. $ 214,579 $ 160,164 $ 413,050 $ 307,986
Revenues from satellite services .............................. 101,781 114,698 211,486 228,011
--------- --------- --------- ---------
Total revenues .............................................. 316,360 274,862 624,536 535,997
Cost of satellite sales ....................................... 193,857 139,125 380,285 265,729
Cost of satellite services .................................... 62,422 73,189 128,718 149,144
Selling, general and administrative expenses .................. 42,373 55,740 83,120 110,390
--------- --------- --------- ---------
Operating income .............................................. 17,708 6,808 32,413 10,734
Interest and investment income ................................ 4,452 6,660 9,861 14,328
Interest expense .............................................. (18,385) (46,751) (36,955) (96,444)
--------- --------- --------- ---------
Income (loss) before income taxes, equity in net loss of
affiliates, minority interest and cumulative effect of
change in accounting principle .............................. 3,775 (33,283) 5,319 (71,382)
Income tax (expense) benefit .................................. (7,724) 25 (13,252) 1,950
--------- --------- --------- ---------
Loss before equity in net loss of affiliates, minority
interest and cumulative effect of change in accounting
principle ................................................... (3,949) (33,258) (7,933) (69,432)
Equity in net losses of affiliates, net of taxes .............. (12,644) (20,707) (28,594) (43,061)
Minority interest, net of taxes ............................... (68) (732) 6 529
--------- --------- --------- ---------
Loss before cumulative effect of change in accounting
principle ................................................... (16,661) (54,697) (36,521) (111,964)
Cumulative effect of change in accounting principle, net of
taxes (Notes 3 and 6) ....................................... -- -- (876,500) (1,741)
--------- --------- --------- ---------
Net loss ...................................................... (16,661) (54,697) (913,021) (113,705)
Preferred dividends ........................................... (46,810) (40,694) (58,773) (56,817)
--------- --------- --------- ---------
Net loss applicable to common shareholders .................... $ (63,471) $ (95,391) $(971,794) $(170,522)
========= ========= ========= =========
Basic and diluted loss per share:
Before cumulative effect of change in accounting
principle ................................................... $ (0.18) $ (0.29) $ (0.27) $ (0.54)
Cumulative effect of change in accounting principle .......... -- -- (2.53) (0.01)
--------- --------- --------- ---------
Loss per share ............................................... $ (0.18) $ (0.29) $ (2.80) $ (0.55)
========= ========= ========= =========
Weighted average shares outstanding:
Basic and diluted ........................................... 358,166 326,859 347,609 312,758
========= ========= ========= =========
See notes to condensed consolidated financial statements.
3
LORAL SPACE & COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------
2002 2001
--------- ---------
Operating activities:
Net loss .................................................................... $(913,021) $(113,705)
Non-cash items:
Equity in net loss of affiliates, net of taxes ........................... 36,792 43,061
Minority interest, net of taxes .......................................... (6) (529)
Cumulative effect of change in accounting principle, net of taxes ........ 876,500 1,741
Deferred taxes ........................................................... 16,913 (2,865)
Non-cash interest (income) expense ....................................... (529) 19,882
Depreciation and amortization ............................................ 95,222 109,676
Changes in operating assets and liabilities:
Accounts receivable ...................................................... (1,064) (8,387)
Contracts-in-process ..................................................... (11,771) (6,270)
Inventories .............................................................. 1,482 (25,667)
Long-term receivables .................................................... (2,268) (17,767)
Deposits ................................................................. 50,200 14,300
Other current assets and other assets .................................... 17,188 11,432
Accounts payable ......................................................... (31,112) 10,851
Accrued expenses and other current liabilities ........................... 5,986 3,565
Customer advances ........................................................ (10,940) 22,409
Income taxes payable ..................................................... 540 586
Pension and other postretirement liabilities ............................. 4,425 3,769
Long-term liabilities .................................................... (19,626) (11,888)
Other .................................................................... 88 (65)
--------- ---------
Net cash provided by operating activities ..................................... 114,999 54,129
--------- ---------
Investing activities:
Capital expenditures ........................................................ (99,330) (126,017)
Investments in and advances to affiliates ................................... (21,714) (20,124)
--------- ---------
Net cash used in investing activities ......................................... (121,044) (146,141)
--------- ---------
Financing activities:
Borrowings under revolving credit facilities ................................ 86,000 85,000
Repayments under term loans ................................................. (32,500) (56,000)
Repayments under revolving credit facilities ................................ (84,000) (85,000)
Repayments of export-import facility ........................................ (1,073) (1,073)
Repayments of other long-term obligations ................................... (927) (1,173)
Preferred dividends ......................................................... (20,878) (28,292)
Proceeds from stock issuances ............................................... 7,154 9,908
--------- ---------
Net cash used in financing activities ......................................... (46,224) (76,630)
--------- ---------
Decrease in cash and cash equivalents ......................................... (52,269) (168,642)
Cash and cash equivalents -- beginning of period .............................. 159,949 394,045
--------- ---------
Cash and cash equivalents -- end of period .................................... $ 107,680 $ 225,403
========= =========
Non-cash activities:
Unrealized gains (losses) on available-for-sale securities, net of taxes .... $ 1,516 $ (20,207)
========= =========
Unrealized net (losses) gains on derivatives, net of taxes .................. $ (779) $ 3,067
========= =========
Conversion of Series C preferred stock and Series D preferred stock
and related issuance of additional common shares on conversion ............ $ 256,444 $ 300,328
========= =========
See notes to condensed consolidated financial statements.
4
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED 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-based communications services
and satellite manufacturing. Loral is organized into three operating
businesses (see Note 11):
Fixed Satellite Services ("FSS"): The Company leases 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") and provides telemetry, tracking and control services
("TT&C") and network services to customers. The Company operates its
business through wholly-owned subsidiaries such as Loral Skynet, Loral
Orion, Inc. ("Loral Orion") and Loral Skynet do Brasil Ltda. ("Skynet do
Brasil") and affiliates such as Satelites Mexicanos, S.A. de C.V.
("Satmex"), Europe*Star Limited ("Europe*Star") and XTAR, L.L.C. ("XTAR").
Satellite Manufacturing and Technology: The Company designs and
manufactures satellites and space systems and develops satellite
technology for a broad variety of customers and applications through Space
Systems/Loral, Inc. ("SS/L").
Data Services: The Company provides managed communications networks
and Internet and intranet services through Loral CyberStar, Inc. ("Loral
CyberStar") and delivers high-speed broadband data communications,
business television and business media services through Loral Cyberstar
and CyberStar, L.P. ("CyberStar LP").
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared pursuant to the rules of the Securities and Exchange
Commission ("SEC") and, in the opinion of the Company, include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
results of operations, financial position and cash flows as of and for the
periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the U.S. have been condensed or omitted
pursuant to SEC rules. The Company believes that the disclosures made are
adequate to keep the information presented from being misleading. The results of
operations for the three and six months ended June 30, 2002 are not necessarily
indicative of the results to be expected for the full year. It is suggested that
these financial statements be read in conjunction with the audited consolidated
financial statements and notes thereto of Loral included in Loral's latest
Annual Report on Form 10-K.
Reclassifications
Certain reclassifications have been made to conform prior period amounts
to the current period presentation.
3. COMPREHENSIVE LOSS
The components of comprehensive loss are as follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 2002 2001
-------- -------- --------- ---------
Net loss ...................................................... $(16,661) $(54,697) $(913,021) $(113,705)
Cumulative translation adjustment ............................. 332 (430) 88 (906)
Unrealized gains (losses) on available-for-sale securities,
net of taxes .............................................. (4,978) (10,096) 1,516 (20,207)
Derivatives classified as cash flow hedges (net of taxes):
Cumulative transition adjustment ............................ -- -- -- 1,220
Net (decrease) increase in foreign currency exchange
contracts ................................................. (1,996) 4,326 (1,279) 8,269
Reclassifications into revenue and cost of sales from
other comprehensive income ................................ 1,145 (3,735) 500 (6,422)
-------- -------- --------- ---------
Comprehensive loss ............................................ $(22,158) $(64,632) $(912,196) $(131,751)
======== ======== ========= =========
5
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. CONTRACTS-IN-PROCESS
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(IN THOUSANDS)
U.S. government contracts:
Amounts billed ............ $ 2,919 $ 1,613
Unbilled receivables ...... 3,548 3,650
-------- --------
6,467 5,263
-------- --------
Commercial contracts:
Amounts billed ............ 169,808 157,153
Unbilled receivables ...... 10,776 16,183
-------- --------
180,584 173,336
-------- --------
$187,051 $178,599
======== ========
Unbilled amounts include recoverable costs and accrued profit on progress
completed, which have not been billed. Such amounts are billed in accordance
with the contract terms, typically upon shipment of the product, achievement of
contractual milestones, or completion of the contract and, at such time, are
reclassified to billed receivables.
5. INVESTMENTS IN AND ADVANCES TO AFFILIATES
Investments in and advances to affiliates consist of (in thousands):
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
Satmex equity investments .............................................. $ 59,525 $ 71,318
Europe*Star equity investments and advances ............................ 68,736 82,346
XTAR equity investments ................................................ 19,433 2,781
Globalstar:
Acquired notes and loans ($630 million and $624 million
principal and accrued interest as of June 30, 2002 and
December 31, 2001, respectively) .................................. 35,187 32,674
Vendor financing ($250 million and $249 million principal
and accrued interest as of June 30, 2002 and December 31, 2001,
respectively ...................................................... -- --
-------- --------
$182,881 $189,119
======== ========
The Company accounts for its investment in Globalstar's $500 million
credit facility at fair value, with changes in the value (net of taxes) recorded
as a component of other comprehensive loss.
Equity in net losses of affiliates consists of (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Satmex ..................................................... $ (3,060) $ (5,841) $(10,656) $ (9,057)
Europe*Star ................................................ (7,568) (5,317) (13,683) (11,415)
XTAR, net of taxes ......................................... (560) -- (913) --
Globalstar and Globalstar service provider partnerships,
net of taxes ............................................... (1,456) (9,549) (3,342) (22,589)
-------- -------- -------- --------
$(12,644) $(20,707) $(28,594) $(43,061)
======== ======== ======== ========
6
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Subsequent to December 31, 2000, the Company has not recognized any income
or loss related to its share of Globalstar's operating losses.
During the second quarter of 2002, the Company recorded a $9 million
charge to equity in net losses of affiliates relating to liabilities it had
guaranteed in connection with a Globalstar service provider partnership, which
is included in other current liabilities in the condensed consolidated balance
sheet.
In connection with recording its share of Globalstar's operating losses in
2000, the Company recorded as a charge to equity in net losses of affiliates,
$22.3 million representing the estimated probable uncollectible costs relating
to subcontractor obligations to be incurred by the Company on Globalstar's
behalf. During the second quarter of 2002, the Company recovered a claim with a
vendor on the Globalstar program. Of this recovery, $14 million ($8 million
after taxes) has been reflected in the statement of operations as equity income
related to Globalstar, which, combined with recoveries recorded in 2001, fully
offset the probable uncollectible costs originally recorded. Globalstar or its
creditors may assert a claim to some portion or all of this recovery. If so, the
Company will vigorously dispute any such claim.
The condensed consolidated statements of operations reflect the effects of
the following amounts related to transactions with or investments in affiliates
(in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues ....................................................... $ 27,947 $ 28,352 $ 50,589 $ 58,831
Investment income .............................................. 294 295 588 589
Interest expense capitalized on development stage enterprise ... 270 -- 397 --
Profits relating to affiliate transactions not eliminated ...... 921 355 2,077 848
Elimination of Loral's proportionate share of profits
relating to affiliate transactions ........................... (958) (341) (2,083) (811)
Amortization of deferred credit, capitalized interest and
profits relating to investments in affiliates ................ 326 (8) 254 254
The following table presents summary statement of operations data of
Loral's affiliates Satmex and Europe*Star (in thousands):
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------
2002 2001
-------------------------- ---------------------------
SATMEX EUROPE*STAR SATMEX EUROPE*STAR
-------- ----------- -------- -----------
Revenues .................................... $ 20,400 $ 3,622 $ 32,847 $ 3,236
Operating income (loss) ..................... (708) (6,244) 10,004 (8,523)
Net loss .................................... (87) (14,680) (6,577) (12,718)
Net loss applicable to common shareholders .. (464) (14,680) (6,954) (12,718)
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------
2002 2001
-------------------------- ---------------------------
SATMEX EUROPE*STAR SATMEX EUROPE*STAR
-------- ----------- -------- -----------
Revenues .................................... $ 43,009 $ 8,119 $ 66,704 $ 4,882
Operating income (loss) ..................... 467 (12,683) 20,537 (15,763)
Net loss .................................... (7,740) (28,781) (7,615) (25,684)
Net loss applicable to common shareholders .. (8,494) (28,781) (8,369) (25,684)
6. ACCOUNTING FOR GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), which addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS 142 provides that intangible assets with finite useful lives
be amortized and that goodwill and intangible assets with indefinite lives not
be amortized, but rather be tested at least annually for impairment. SFAS 142
also changed the evaluation criteria for testing goodwill for impairment from an
undiscounted cash flow approach, which was previously utilized under the
guidance in Accounting Principles Board Opinion No. 17, Intangible Assets, to a
test based on fair value. Fair value is determined by the amount at which an
asset or liability could be bought or sold in a current transaction between
willing parties, that is,
7
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
other than in a forced or liquidation sale. Quoted market prices in active
markets are the best evidence of fair value and must be used as the basis for
the measurement, if available. If quoted market prices are not available, the
estimate of fair value must be based on the best information available,
including prices for similar assets and liabilities and the results of using
other valuation techniques, such as public company trading multiples, future
discounted cash flows and merger and acquisition transaction multiples.
Goodwill
In accordance with SFAS 142, the Company's previously recognized cost in
excess of net assets acquired ("goodwill") of $892 million for business
acquisitions accounted for under the purchase method of accounting completed
prior to July 1, 2001, was reviewed under the new transitional guidance as of
January 1, 2002. Goodwill had been previously assigned to the Company's business
segments as follows (based on the net book value at December 31, 2001): FSS $597
million, satellite manufacturing and technology $286 million and data services
$9 million. The Company hired professionals in the valuation consulting business
to determine the fair value of each of the Company's reporting units. Since
there were no quoted market prices in active markets for the Company's reporting
units, the measurement of fair value for each reporting unit was based on the
best information available for that reporting unit, including reasonable and
supportable assumptions and projections, as follows: (1) FSS -- public company
trading multiples, (2) satellite manufacturing and technology -- future
discounted cash flows, and (3) data services -- merger and acquisition
transaction multiples. Those professionals determined that the goodwill for each
of the Company's reporting units under the new guidance in SFAS 142 was fully
impaired. Accordingly, as of January 1, 2002, the Company recorded a non-cash
charge for the cumulative effect of the change in accounting principle of $892
million before taxes ($877 million after taxes).
The charge is the result of a change in the evaluation criteria for
goodwill from an undiscounted cash flow approach which was previously utilized
under the guidance in Accounting Principles Board Opinion No. 17, Intangible
Assets, to the fair value approach which is stipulated in SFAS 142.
The following table presents the actual financial results and as adjusted
financial results without the amortization of goodwill for the Company for the
three and six months ended June 30, 2001 (in thousands, except per share
amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
------ ----------- ------ -----------
Reported loss before cumulative effect of change in
accounting principle ............................................... $(54,697) $(54,697) $(111,964) $(111,964)
Add back amortization of goodwill, net of taxes ...................... -- 6,656 -- 13,314
-------- -------- --------- ---------
Loss before cumulative effect of change in accounting
principle .......................................................... (54,697) (48,041) (111,964) (98,650)
Cumulative effect of change in accounting principle, net of taxes ... -- -- (1,741) (1,741)
-------- -------- --------- ---------
Net loss ............................................................. (54,697) (48,041) (113,705) (100,391)
Preferred dividends .................................................. (40,694) (40,694) (56,817) (56,817)
-------- -------- --------- ---------
Net loss applicable to common shareholders ........................... $(95,391) $(88,735) $(170,522) $(157,208)
======== ======== ========= =========
Reported basic and diluted loss per share before cumulative
effect of change in accounting principle ........................... (0.29) (0.54)
Add back goodwill amortization per share ............................. 0.02 0.04
-------- ---------
As adjusted loss per share before cumulative effect of
change in accounting principle ..................................... (0.27) (0.50)
Cumulative effect of change in accounting principle .................. -- (0.01)
-------- ---------
Adjusted loss per share .............................................. $ (0.27) $ (0.51)
======== =========
Other Acquired Intangible Assets
The Company evaluated the useful lives of its other acquired intangible
assets in connection with the adoption of SFAS 142 and determined that no
changes to the useful lives were necessary.
8
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Other acquired intangible assets are included in other assets in the
Company's condensed consolidated balance sheets as follows (in millions):
JUNE 30, 2002 DECEMBER 31, 2001
--------------------- ----------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------ ------------ ------ ------------
Regulatory fees .... $22.7 $(3.8) $22.7 $(3.0)
Other intangibles .. 13.0 (7.5) 13.0 (6.6)
----- ------ ----- -----
Total ......... $35.7 $(11.3) $35.7 $(9.6)
===== ====== ===== =====
The weighted average remaining amortization period for regulatory fees was
nine years and for other intangibles was three years, as of June 30, 2002.
Total pre-tax amortization expense for other acquired intangible assets
for the three months ended June 30, 2002 and 2001 was $0.9 million and $1.1
million, respectively and for the six months ended June 30, 2002 and 2001 was
$1.7 million and $1.9 million, respectively. Annual pre-tax amortization expense
for other acquired intangible assets over the next five years is estimated to be
as follows (in millions):
2002 ......................................... $3.4
2003 ......................................... 3.4
2004 ......................................... 3.3
2005 ......................................... 2.5
2006 ......................................... 1.4
7. LONG TERM DEBT
JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
(IN THOUSANDS)
Loral Orion 10.00% Senior notes due 2006 (principal amount
$613 million) ................................................. $ 903,738 $ 903,738
Loral Satellite term loan, 5.63% and 5.64% at June 30, 2002
and December 31, 2001, respectively ........................... 271,500 294,000
Loral Satellite revolving credit facility, 5.41% and 5.14%
at June 30, 2002 and December 31, 2001, respectively .......... 138,000 136,000
LSC term loan facility, 4.29% and 4.17% at June 30, 2002
and December 31, 2001 respectively ............................ 390,000 400,000
LSC revolving credit facility, 4.38% and 4.17% at June 30,
2002 and December 31, 2001, respectively ...................... 165,000 165,000
9.50% Senior notes due 2006 ..................................... 350,000 350,000
Export-import credit facility ................................... 7,507 8,580
Other ........................................................... 548 557
Non-recourse debt of Loral Orion:
11.25% Senior notes due 2007 (principal amount $37
million) ................................................... 40,080 40,385
12.50% Senior discount notes due 2007 (principal amount at
maturity $49 million and accreted principal amount $49
million) ................................................... 54,472 54,696
Other ......................................................... 9,267 10,185
---------- ----------
Total debt ...................................................... 2,330,112 2,363,141
Less, current maturities ........................................ 165,931 136,616
---------- ----------
$2,164,181 $2,226,525
========== ==========
8. SHAREHOLDERS' EQUITY
The Company's 6% Series C convertible redeemable preferred stock ("the
Series C Preferred Stock") and 6% Series D convertible redeemable preferred
stock ("the Series D Preferred Stock") have mandatory redemption dates in 2006
and 2007, respectively. The Company has the ability to make mandatory redemption
payments to the holders in either cash or common stock, or a combination of the
two. Based upon the price of the Company's common stock at June 30, 2002, the
9
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company has not authorized a sufficient number of shares of its common stock to
effect payment of the total mandatory redemptions in common stock in 2006 and
2007. Accordingly, as of June 30, 2002, the Company classified an aggregate of
$187 million of its Series C Preferred Stock and Series D Preferred Stock
outside the shareholders' equity section of the balance sheet, based on the
average of the volume weighted average daily price of the Company's common stock
as defined (approximately $1.22 per share at June 30, 2002). Had the volume
weighted average daily price of the Company's common stock as calculated been
above $1.79 at June 30, 2002, none of the Company's preferred stock would have
been classified outside the shareholders' equity section of the balance sheet.
The exact number of shares of the Company's common stock that may be issued on a
mandatory redemption date cannot be determined at this time. That number will
depend on a number of factors not known today, such as the price of the
Company's common stock and the number of shares of the Company's preferred stock
outstanding at that time. The Company could, subject to shareholder approval,
increase the authorized number of shares of its common stock to effect payment
of the total mandatory redemptions in common stock. The amount, if any, of the
Series C Preferred Stock and Series D Preferred Stock classified outside the
shareholders' equity section will vary in future periods depending on these
factors.
During the second quarter of 2002, in privately negotiated exchange
transactions, Loral converted 1.8 million shares of its Series C Preferred Stock
and 2.7 million shares of its Series D Preferred Stock (representing
approximately 28% of its preferred stock outstanding) into 30.9 million shares
of its common stock. In connection with these transactions, Loral incurred
non-cash dividend charges of $38 million, which primarily relate to the
difference between the value of the common stock issued in the exchanges and the
value of the shares that were issuable under the stated conversion terms of the
preferred stock. The non-cash dividend charges had no impact on Loral's total
shareholders' equity as the offset was an increase in common stock and paid-in
capital. As a result of these transactions, Loral retired preferred stock with
mandatory redemptions of $224 million in 2006 and 2007 and will save $13.4
million in annual dividends that it would otherwise have been obligated to pay
over the life of the preferred stock retired. To the extent that the Company
makes additional exchanges in the future, the Company will reduce the number of
shares of its preferred stock subject to redemption. However, there is no
guarantee that these exchanges will or can be made in the future.
9. COMMITMENTS AND CONTINGENCIES
Loral Skynet has entered into prepaid leases, sales contracts and other
arrangements relating to transponders on its satellites. Under the terms of
these agreements, Loral Skynet continues to operate the satellites which carry
the transponders and originally provided for a warranty for a period of 10 to 14
years, in the case of sales contracts and other arrangements (19 transponders),
and the lease term, in the case of the prepaid leases (nine transponders).
Depending on the contract, Loral Skynet may be required to replace transponders
which do not meet operating specifications. Substantially all customers are
entitled to a refund equal to the reimbursement value if there is no
replacement, which is normally covered by insurance. In the case of the sales
contracts, the reimbursement value is 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 the case of prepaid leases, the reimbursement value is equal to the
unamortized portion of the lease prepayment made by the customer. In the case of
other arrangements, in the event of transponder failure where replacement
capacity is not available on the satellite, one customer is not entitled to
reimbursement, and the other customer's reimbursement value is based on
contractually prescribed amounts that decline over time.
Twelve of the satellites built by SS/L and launched since 1997, five of
which are owned and operated by Loral's subsidiaries or affiliates, have
experienced minor losses of power from their solar arrays. Although to date,
neither the Company nor any of the customers using the affected satellites have
experienced any degradation in performance, there can be no assurance that one
or more of the affected satellites will not experience additional power loss
that could result in performance degradation, including loss of transponder
capacity. In the event of additional power loss, the extent of the performance
degradation, if any, will depend on numerous factors, including the amount of
the additional power loss, the level of redundancy built into the affected
satellite's design, when in the life of the affected satellite the loss occurred
and the number and type of use being made of transponders then in service. A
complete or partial loss of satellites could result in a loss of orbital
incentive payments and, in the case of satellites owned by Loral subsidiaries
and affiliates, a loss of revenues and profits. With respect to satellites under
construction and construction of new satellites, based on its investigation of
the matter, SS/L has identified and is implementing remedial measures that SS/L
believes will prevent newly launched satellites from experiencing similar
anomalies. SS/L does not expect that implementation of these measures will cause
any significant delay in the launch of satellites under construction or
construction of new satellites. Based upon information currently available,
including design redundancies to accommodate small power losses and that no
pattern has been identified as to the timing or specific location within the
solar arrays of the failures, the Company believes that this matter will not
have a material adverse effect on the consolidated financial position or results
of
10
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
operations of Loral.
In September 2001, the PAS 7 satellite built by SS/L for PanAmSat
experienced an electrical power failure on its solar arrays that resulted in the
loss of use of certain transponders on the satellite. As a result, PanAmSat has
claimed that under its contract with SS/L it is entitled to be paid $16 million.
SS/L disputes this claim and is in discussions with PanAmSat to resolve this
matter. SS/L believes that this failure is an isolated event and does not
reflect a systemic problem in either the satellite design or manufacturing
process. Accordingly, SS/L does not believe that this anomaly will affect other
on-orbit satellites built by SS/L. However, as a result of discussions with
insurers relating to the renewal of insurance for Telstar 10/Apstar IIR which
has the same solar array configuration as PAS 7, approximately 25% of the
insurance coverage has excluded losses due to solar array failures and
approximately 75% of the insurance coverage provides for coverage of losses due
to solar array failures in the event of a capacity loss of 65% or more. Three
other satellites operated by Loral Skynet have the same solar array
configuration as Telstar 10/Apstar IIR. There can be no assurance that the
insurers will not require either exclusions of, or similar limitations on,
coverage due to solar array failures in connection with renewals of insurance
for these satellites in 2003 and 2004. In addition, the PAS 8 satellite has
experienced minor losses of power from its solar arrays, the cause of which is
unrelated to the loss of power on the PAS 7 satellite. PanAmSat has claimed that
under its contract with SS/L it is entitled to be paid $7.5 million as a result
of these minor power losses. SS/L disputes this claim. SS/L and PanAmSat are in
discussions to resolve this matter.
SS/L has contracted to build a spot beam, Ka band satellite for a customer
planning to offer broadband data services directly to the consumer. The customer
has failed to make certain payments due to SS/L under the contract and has
asserted that SS/L is not able to meet the contractual delivery date for the
satellite. As of June 30, 2002, SS/L had billed and unbilled accounts receivable
and vendor financing arrangements of $49 million with this customer. SS/L and
the customer have entered into an agreement that provides that, until September
6, 2002, neither party will assert that the other party is in default under the
contract, and the parties are currently engaged in discussions to resolve their
outstanding issues. In addition, SS/L and the customer have agreed to suspend
work on the satellite during these discussions, pending the outcome of the
discussions. If the parties do not resolve their issues, it is likely that each
party would assert that the other is in default. The contract provides that SS/L
may terminate the contract for a customer default 90 days after serving a notice
of default if the default is not cured by the customer; upon such a default,
SS/L would be entitled to recover the contractually agreed price of items
delivered and accepted prior to termination and 115% of its actual costs
incurred for items not delivered prior to termination. The contract also
provides that the customer may terminate the contract for an SS/L default 133
days after serving a notice of default if the default is not cured by SS/L; upon
such a default, SS/L would be obligated to refund all amounts previously paid by
the customer, $78 million as of June 30, 2002, plus interest. Based on the
discussions currently in progress with the customer and other parties who may be
interested in the satellite, management's assessment of the market opportunities
for the satellite and consideration of the satellite's estimated value,
management does not believe that this matter will have a material adverse effect
on the consolidated financial position or results of operations of Loral.
SS/L was a party to an Operational Agreement with Alcatel Space
Industries, pursuant to which the parties had agreed to cooperate on certain
satellite programs, and an Alliance Agreement with Alcatel Space (together with
Alcatel Space Industries, Alcatel), pursuant to which Alcatel had certain rights
with respect to SS/L, including the right to appoint two representatives to
SS/L's seven-member board of directors, rights to approve certain extraordinary
actions and certain rights to purchase SS/L shares at fair market value in the
event of a change of control (as defined) of either Loral or SS/L. The
agreements between Alcatel and SS/L were terminable on one year's notice, and,
on February 22, 2001, Loral gave notice to Alcatel that they would expire on
February 22, 2002. In April 2001, Alcatel commenced an arbitration proceeding
challenging the effectiveness of Loral's notice of termination and asserting
various alleged breaches of the agreements by SS/L relating to the exchange of
information and other procedural or administrative matters. In February 2002,
the arbitral tribunal issued a partial decision, which upheld the validity of
Loral's termination effective February 22, 2002 and Alcatel's claims as to
certain breaches. The partial decision was confirmed by the District Court for
the Southern District of New York on June 25, 2002. The arbitral tribunal has
provided both parties with an opportunity to file any additional claims or
counterclaims they may have. In March 2002, Alcatel submitted additional claims
against Loral and SS/L and is seeking at least $350 million in damages in
respect of all of its claims. The Company believes that Alcatel's claims for
damages are without merit and have been asserted for competitive reasons to
disadvantage SS/L and that this matter will not have a material adverse effect
on its consolidated financial position or results of operations. In April 2002,
Loral and SS/L filed their statement of counterclaims against Alcatel. The
claims being asserted against Alcatel are for breach of contract, defamation,
misappropriation of SS/L's confidential
11
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
property, conversion, and intentional breaches of confidentiality agreements.
Loral and SS/L are seeking injunctive relief, compensatory damages in the amount
of $380 million, and punitive damages. The arbitral tribunal will decide at a
later date whether any of Alcatel's claims or Loral's or SS/L's counterclaims
give rise to damages.
SS/L is required to obtain licenses and enter into technical assistance
agreements, presently under the jurisdiction of the State Department, in
connection with the export of satellites and related equipment, as well as
disclosure of technical data to foreign persons. Delays in obtaining the
necessary licenses and technical assistance agreements have in the past resulted
in, and may in the future result in, the delay of SS/L's performance on its
contracts, which could result in the cancellation of contracts by its customers,
the incurrence of penalties or the loss of incentive payments under these
contracts.
The launch of ChinaSat-8 has been delayed pending SS/L's obtaining the
approvals required for the launch. On December 23, 1998, the Office of Defense
Trade Controls, or ODTC, of the U.S. Department of State temporarily suspended a
previously approved technical assistance agreement under which SS/L had been
preparing for the launch of the ChinaSat-8 satellite. In addition, SS/L was
required to re-apply for new export licenses from the State Department to permit
the launch of ChinaSat-8 on a Long March launch vehicle when the old export
licenses issued by the Commerce Department, the agency that previously had
jurisdiction over satellite licensing, expired in March 2000. On January 4,
2001, the ODTC, while not rejecting these license applications, notified SS/L
that they were being returned without action. On January 9, 2002, Loral, SS/L
and the United States Department of State entered into a consent agreement (the
"Consent Agreement") settling and disposing of all civil charges, penalties and
sanctions associated with alleged violations by SS/L of the Arms Export Control
Act and its implementing regulations. The Company recorded a charge in the
fourth quarter of 2001 for the penalties associated with the Consent Agreement.
The Consent Agreement provides that the State Department agrees, assuming the
Company's and SS/L's faithful adherence to the terms of the Consent Agreement,
and the Arms Export Control Act and its implementing regulations, that decisions
concerning export licenses for the ChinaSat-8 spacecraft will be made on the
basis of the security and foreign policy interests of the United States,
including matters relating to U.S. relations with the People's Republic of
China, without reference to the State Department's previously expressed concerns
regarding SS/L's reliability, which concerns are considered to be appropriately
mitigated through the operation of various provisions of the Consent Agreement.
Discussions between SS/L and the State Department regarding SS/L's obtaining the
approvals required for the launch of ChinaSat-8 are continuing.
If ChinaSat were to terminate its contract with SS/L for ChinaSat-8 as a
result of these delays, ChinaSat may seek a refund of $134 million for payments
made to SS/L as well as penalties of up to $11 million. The Company does not
believe that ChinaSat is entitled to such a refund or penalties and would
vigorously contest any such claims by ChinaSat. A portion of the potential claim
relates to amounts that were paid to a launch vehicle provider. To the extent
that SS/L or ChinaSat is able to recover some or all of the $52 million deposit
payment on the Chinese launch vehicle, this recovery would reduce the amount of
any claim. SS/L believes that ChinaSat bears the risk of loss in the event that
the deposit payments are not refunded by the launch vehicle provider. SS/L has
commenced discussions with the launch vehicle provider to recover this deposit.
There can be no assurance, however, that SS/L will be able either to obtain a
refund from the launch provider or to find a replacement customer for the
Chinese launch vehicle. SS/L estimates that it would incur costs of
approximately $38 million to refurbish and retrofit the satellite so that it
could be sold to another customer, which resale cannot be guaranteed.
As of June 30, 2002, one of SS/L's foreign customers had not made
milestone payments of $21 million that were past due. The customer has asserted
that it is not obligated to make the payments until SS/L obtains the necessary
export licenses. SS/L disputes the customer's interpretation of the contract and
has issued a notice of default to the customer, under which the customer has
until October 14, 2002 to cure its default. SS/L and the customer are currently
in discussions to resolve the matter.
At June 30, 2002, SS/L had outstanding vendor financing receivables
totaling $71 million, including accrued interest, with one customer that is
currently in the process of developing and rolling out its business. The
customer recently announced that it has initiated discussions with certain of
its debtholders, including the Company, regarding the possibility of exchanging
a significant amount of its debt for equity and obtaining new financing from
investors. SS/L's receivable is collateralized by a security interest in an
essential component of the customer's operating system. The Company expects that
the value of the collateral is sufficient to cover the outstanding receivable
and expects that this receivable will be collected, although there can be no
assurance that it will. Any reduction in the expected amount to be collected
under this receivable may have an adverse affect on the Company.
12
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Loral Skynet has an application pending with the FCC for authorization to
use the C-Band frequency at 121(degrees) W.L. in the U.S. using a non-U.S. ITU
filing. Telstar 13, which is currently under construction, is scheduled for
launch into this orbital slot in the fourth quarter of 2002. New Skies
Satellites, which asserts that its non-U.S. ITU filing at 120.8(degrees) W.L.
has date priority over Loral Skynet's ITU filing, has filed comments with the
FCC seeking to impose conditions on Loral Skynet's use of the 121(degrees) W.L.
slot. Loral Skynet has opposed New Skies' comments. Loral Skynet is continuing
its international coordination of the 121(degrees) W.L. slot and is in
discussions with New Skies to resolve the matter. There can be no assurance,
however, that coordination discussions with New Skies and other operators will
be successful, that the FCC will grant Loral Skynet's application, or, if
granted, whether conditions the FCC may impose will constrain Loral Skynet's
operations at the 121(degrees) W.L. slot.
The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, that arise in the ordinary course of business.
Although the outcome of these claims cannot be predicted with certainty, the
Company does not believe that any of these other existing legal matters will
have a material adverse effect on its consolidated financial position or results
of operations.
Globalstar Related Matters
On September 26, 2001, the nineteen separate purported class action
lawsuits filed in the United States District Court for the Southern District of
New York by various holders of securities of Globalstar Telecommunications
Limited ("GTL") and Globalstar, L.P. ("Globalstar") against GTL, Loral, Bernard
L. Schwartz and other defendants were consolidated into one action titled In re:
Globalstar Securities Litigation. In November 2001, plaintiffs in the
consolidated action filed a consolidated amended class action complaint against
Globalstar, GTL, Globalstar Capital Corporation, Loral and Bernard L. Schwartz
alleging (a) that all defendants (except Loral) violated Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated
thereunder, by making material misstatements or failing to state material facts
about Globalstar's business and prospects, (b) that defendants Loral and
Schwartz are secondarily liable for these alleged misstatements and omissions
under Section 20(a) of the Exchange Act as alleged "controlling persons" of
Globalstar, (c) that defendants GTL and Schwartz are liable under Section 11 of
the Securities Act of 1933 (the "Securities Act") for untrue statements of
material facts in or omissions of material facts from a registration statement
relating to the sale of shares of GTL common stock in January 2000, (d) that
defendant GTL is liable under Section 12(2)(a) of the Securities Act for untrue
statements of material facts in or omissions of material facts from a prospectus
and prospectus supplement relating to the sale of shares of GTL common stock in
January 2000, and (e) that defendants Loral and Schwartz are secondarily liable
under Section 15 of the Securities Act for GTL's primary violations of Sections
11 and 12(2)(a) of the Securities Act as alleged "controlling persons" of GTL.
The class of plaintiffs on whose behalf the lawsuit has been asserted consists
of all buyers of securities of Globalstar, Globalstar Capital and GTL during the
period from December 6, 1999 through October 27, 2000, excluding the defendants
and certain persons related or affiliated therewith. Loral and Mr. Schwartz have
filed a motion to dismiss the amended complaint in its entirety as to Loral and
Mr. Schwartz, which motion is pending before the court.
On March 2, 2001, the seven separate purported class action lawsuits filed
in the United States District Court for the Southern District of New York by
various holders of common stock of Loral Space & Communications Ltd. ("Loral")
against Loral, Bernard L. Schwartz and Richard Townsend were consolidated into
one action titled In re: Loral Space & Communications Ltd. Securities
Litigation. On May 6, 2002, plaintiffs in the consolidated action filed a
consolidated amended class action complaint alleging (a) that all defendants
violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder
by making material misstatements or failing to state material facts about
Loral's financial condition and its investment in Globalstar and (b) that Mr.
Schwartz is secondarily liable for these alleged misstatements and omissions
under Section 20(a) of the Exchange Act as an alleged "controlling person" of
Loral. The class of plaintiffs on whose behalf the lawsuit has been asserted
consists of all buyers of Loral common stock during the period from November 4,
1999 through February 1, 2001, excluding the defendants and certain persons
related or affiliated therewith. Loral and Messrs. Schwartz and Townsend have
filed a motion to dismiss the complaint in its entirety.
Loral believes that it has meritorious defenses to the above Globalstar
related class action lawsuits and intends to pursue them vigorously.
Loral holds debt obligations from Globalstar (see Note 5). On February 15,
2002, Globalstar and certain of its direct subsidiaries filed voluntary
petitions under Chapter 11 of Title 11, United States Code in the United States
Bankruptcy Court for the District of Delaware. In other situations in the past,
challenges have been initiated seeking subordination or
13
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
recharacterization of debt held by an affiliate of an issuer. While Loral knows
of no reason why such a claim would prevail with respect to the debt Loral holds
in Globalstar, there can be no assurance that such claims will not be made in
Globalstar's bankruptcy proceeding. If such claims were to prove successful, it
will jeopardize the amount of equity interest Loral will ultimately receive in
the new Globalstar company. Moreover, actions may be initiated in Globalstar's
bankruptcy proceeding seeking to characterize payments previously made by
Globalstar to Loral prior to the filing date as preferential payments subject to
repayment. Loral may also find itself subject to other claims brought by
Globalstar creditors and securities holders, who may seek to impose liabilities
on Loral as a result of its relationship with Globalstar. For instance,
Globalstar's creditors may seek to pierce the corporate veil in an attempt to
recover Globalstar obligations owed to them that are recourse to Loral's
subsidiaries, which are general partners in Globalstar and have filed for
bankruptcy protection. Globalstar's cumulative partners' deficit at June 30,
2002, was $3.1 billion.
In May 2000, Globalstar finalized $500 million of vendor financing
arrangements with Qualcomm. The original terms of this vendor financing provided
for interest at 6%, a maturity date of August 15, 2003 and required repayment
pro rata with the term loans due to Loral under Globalstar's $500 million credit
facility. As of June 30, 2002, $623 million was outstanding under this facility
(including $123 million of capitalized interest). Loral has agreed that if the
principal amount outstanding under the Qualcomm vendor financing facility
exceeds the principal amount due Loral under Globalstar's $500 million credit
facility, as determined on certain measurement dates, then Loral will guarantee
50% of such excess amount. As of June 30, 2002, Loral had no guarantee
obligation.
10. LOSS PER SHARE
Basic loss per share is computed based upon the weighted average number of
shares of common stock outstanding. For the three months and six months ended
June 30, 2002 and 2001, diluted loss per share excludes the assumed conversion
of the Company's Series C Preferred Stock and the Series D Preferred Stock into
shares of common stock, as their effect would have been antidilutive. Weighted
options equating to approximately 2.3 million shares of common stock for the
three months ended June 30, 2002 and approximately 3.0 million and 0.8 million
shares of common stock for the six months ended June 30, 2002 and June 30, 2001,
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 loss
per share (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Numerator:
Loss before cumulative effect of change in accounting
principle ................................................. $ 16,661 $ 54,697 $ 36,521 $111,964
Cumulative effect of change in accounting principle, net
of taxes .................................................. 876,500 1,741
-------- -------- -------- --------
Net loss ..................................................... 16,661 54,697 913,021 113,705
Preferred dividends .......................................... 46,810 40,694 58,773 56,817
-------- -------- -------- --------
Numerator for basic and diluted loss per share-- net
loss applicable to common shareholders .................... $ 63,471 $ 95,391 $971,794 $170,522
======== ======== ======== ========
Denominator:
Weighted average shares:
Common stock .............................................. 358,166 326,859 347,609 312,758
-------- -------- -------- --------
Denominator for basic and diluted loss per share ............. 358,166 326,859 347,609 312,758
======== ======== ======== ========
Basic and diluted loss per share:
Before cumulative effect of change in accounting principle ... $ 0.18 $ 0.29 $ 0.27 $ 0.54
Cumulative effect of change in accounting principle .......... 2.53 0.01
-------- -------- -------- --------
Loss per share ............................................... $ 0.18 $ 0.29 $ 2.80 $ 0.55
======== ======== ======== ========
14
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. SEGMENTS
Loral is organized into three operating businesses: fixed satellite
services, satellite manufacturing and technology and data services (see Note 1).
In evaluating financial performance, management uses revenues and earnings
before interest, taxes, 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 XTAR, which are
accounted for using the equity method in these condensed consolidated financial
statements. Intersegment revenues primarily consist of satellites under
construction by satellite manufacturing and technology for fixed satellite
services and the leasing of transponder capacity by satellite manufacturing and
technology and data services from fixed satellite services.
Summarized financial information concerning the reportable segments is as
follows (in millions):
THREE MONTHS ENDED JUNE 30, 2002
SATELLITE
FIXED MANUFACTURING
SATELLITE AND DATA
SERVICES(1) TECHNOLOGY(2) SERVICES(3) CORPORATE(4) TOTAL
----------- -------------- ----------- ------------ -----
REVENUES AND EBITDA:
Revenues from external customers ....... $ 103.8 $ 190.5 $ 17.1 $ 311.4
Intersegment revenues .................. 9.1 59.5 0.1 68.7
-------- -------- -------- -----
Operating segment revenues ............. $ 112.9 $ 250.0 $ 17.2 380.1
======== ======== ========
Revenues of unconsolidated
affiliates(5) ........................ (24.0)
Intercompany revenues(6) ............... (39.7)
--------
Operating revenues as reported ......... $ 316.4
========
Segment EBITDA before eliminations ..... $ 70.4 $ 16.7 $ (0.1) $ (8.8) $ 78.2
======== ======== ======== ========
EBITDA of unconsolidated
affiliates(5) ........................ (9.8)
Intercompany EBITDA(6) ................. (2.6)
--------
EBITDA(7) .............................. 65.8
Depreciation and amortization(8) ...... (48.1)
--------
Operating income ....................... $ 17.7
========
OTHER DATA:
Depreciation and amortization before
affiliate eliminations(8) ............ $ 53.1 $ 9.5 $ 2.9 $ 0.2 $ 65.7
======== ======== ======== ========
Depreciation and amortization of
unconsolidated affiliates(5)(8) ...... (17.6)
--------
Depreciation and amortization(8) ...... $ 48.1
========
Total assets before affiliate
eliminations ......................... $3,661.7 $ 793.8 $ 47.7 $ 348.8 $4,852.0
======== ======== ======== ========
Total assets of unconsolidated
affiliates(5) ........................ (1,464.2)
--------
Total assets ........................... $3,387.8
========
- ----------
(1) Includes 100% of Europe*Star's and Satmex's revenues and EBITDA and 100%
of XTAR's EBITDA since July 2001. Loral Skynet's revenue was $89 million
and $98 million for the three months ended June 30, 2002 and 2001,
respectively, and $183 million and $191 million for the six months ended
June 30, 2002 and 2001, respectively, and its EBITDA was $61 million and
$70 million for the three months ended June 30, 2002 and 2001,
respectively, and $126 million and $135 million for the six months ended
June 30, 2002 and 2001, respectively.
15
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) Satellite manufacturing and technology consists of 100% of SS/L's results.
(3) Data services consists of 100% of CyberStar LP (in which Loral owns an 82%
equity interest) and 100% of Loral CyberStar. Equipment sales for data
services were $2 million for both the three months ended June 30, 2002 and
2001, and $4 million for both the six months ended June 30, 2002 and 2001.
(4) Represents corporate expenses incurred in support of the Company's
operations.
(5) Represents amounts related to unconsolidated affiliates (Satmex,
Europe*Star and XTAR), which 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 of affiliates in Loral's condensed
consolidated statements of operations.
(6) Represents the elimination of intercompany sales and EBITDA, primarily for
satellites under construction by SS/L for wholly-owned subsidiaries; as
well as eliminating revenues for the lease of transponder capacity by
satellite manufacturing and technology and data services from fixed
satellite services.
(7) EBITDA (which is equivalent to operating income/loss before depreciation
and amortization, including amortization of unearned stock 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.
(8) Includes amortization of unearned stock compensation charges.
16
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2002
SATELLITE
FIXED MANUFACTURING
SATELLITE AND DATA
SERVICES(1) TECHNOLOGY(2) SERVICES(3) CORPORATE(4) TOTAL
----------- ------------- ----------- ------------ -----
REVENUES AND EBITDA:
Revenues from external customers ..... $216.7 $371.4 $ 37.5 $625.6
Intersegment revenues ................ 17.0 121.2 0.1 138.3
------ ------ ------ -----
Operating segment revenues ........... $233.7 $492.6 $ 37.6 763.9
====== ====== ======
Revenues of unconsolidated
affiliates(5) ...................... (51.1)
Intercompany revenues(6) ............. (88.3)
------
Operating revenues as reported ....... $624.5
======
Segment EBITDA before eliminations ... $147.8 $ 27.5 $ (0.1) $(17.5) $157.7
====== ====== ====== ======
EBITDA of unconsolidated
affiliates(5) ...................... (21.3)
Intercompany EBITDA(6) ............... (8.8)
------
EBITDA(7) ............................ 127.6
Depreciation and amortization(8) ..... (95.2)
------
Operating income ..................... $ 32.4
======
OTHER DATA:
Depreciation and amortization
before affiliate eliminations(8) ... $106.2 $ 16.5 $ 7.3 $ 0.4 $130.4
====== ====== ====== ======
Depreciation and amortization of
unconsolidated affiliates(5)(8) .... (35.2)
------
Depreciation and amortization(8) ..... $ 95.2
======
17
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
THREE MONTHS ENDED JUNE 30, 2001
SATELLITE
FIXED MANUFACTURING
SATELLITE AND DATA
SERVICES(1) TECHNOLOGY(2) SERVICES(3) CORPORATE(4) TOTAL
----------- ------------- ----------- ------------ -----
REVENUES AND EBITDA:
Revenues from external customers ..... $119.8 $145.0 $ 26.1 $290.9
Intersegment revenues ................ 13.7 67.0 80.7
------ ------ ------ ------
Operating segment revenues ........... $133.5 $212.0 $ 26.1 371.6
====== ====== ======
Revenues of unconsolidated
affiliates(5) ...................... (36.0)
Intercompany revenues(6) ............. (60.7)
------
Operating revenues as reported ....... $274.9
======
Segment EBITDA before eliminations ... $ 89.5 $ 15.8 $ (3.6) $(12.5) $ 89.2
====== ====== ====== ======
EBITDA of unconsolidated
affiliates(5) ...................... (19.5)
Intercompany EBITDA(6) ............... (7.5)
------
EBITDA(7) ............................ 62.2
Depreciation and amortization(8) ..... (55.4)
------
Operating income ..................... $ 6.8
======
OTHER DATA:
Depreciation and amortization
before affiliate eliminations(8) ... $ 58.6 $ 8.1 $ 6.2 $ 0.5 $ 73.4
====== ====== ====== ======
Depreciation and amortization of
unconsolidated affiliates(5)(8) .... (18.0)
------
Depreciation and amortization(8) ..... $ 55.4
======
18
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001
SATELLITE
FIXED MANUFACTURING
SATELLITE AND DATA
SERVICES(1) TECHNOLOGY(2) SERVICES(3) CORPORATE(4) TOTAL
----------- ------------- ----------- ------------ -----
REVENUES AND EBITDA:
Revenues from external customers ..... $235.8 $270.8 $ 54.8 $561.4
Intersegment revenues ................ 26.9 142.3 169.2
------ ------ ------ ------
Operating segment revenues ........... $262.7 $413.1 $ 54.8 730.6
====== ====== ======
Revenues of unconsolidated
affiliates(5) ...................... (71.6)
Intercompany revenues(6) ............. (123.0)
------
Operating revenues as reported ....... $536.0
======
Segment EBITDA before eliminations ... $173.4 $ 35.0 $(13.6) $(21.9) $172.9
====== ====== ====== ======
EBITDA of unconsolidated
affiliates(5) ...................... (38.6)
Intercompany EBITDA(6) ............... (13.9)
------
EBITDA(7) ............................ 120.4
Depreciation and amortization(8) ..... (109.7)
------
Operating income ..................... $ 10.7
======
OTHER DATA:
Depreciation and amortization
before affiliate eliminations(8) ... $115.2 $ 15.6 $ 11.6 $ 1.1 $143.5
====== ====== ====== ======
Depreciation and amortization of
unconsolidated affiliates(5)(8) .... (33.8)
------
Depreciation and amortization(8) ..... $109.7
======
12. NEW ACCOUNTING PRONOUNCEMENTS
SFAS 143
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and the normal operation of a
long-lived asset, except for certain obligations of lessees. The Company is
required to adopt SFAS 143 on January 1, 2003. The Company has not yet
determined the impact that the adoption of SFAS 143 will have on its results of
operations or its financial position.
SFAS 144
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. It supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB 30, Reporting the Results of Operations -- Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. The Company adopted SFAS 144 on January 1, 2002. The
Company has determined that there was no effect on the Company's consolidated
financial position or results of operations relating to the adoption of SFAS
144.
SFAS 145
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS 145"). SFAS 145 generally requires that any gains or losses
19
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
on extinguishment of debt in current or prior periods be classified as other
income (expense), beginning in fiscal 2003, with early adoption encouraged. The
Company is currently evaluating the impact of adopting the provisions of SFAS
No. 145 in its consolidated financial statements.
SFAS 146
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. Examples of costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). SFAS 146
replaces EITF Issue No. 94-3. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.
13. FINANCIAL INFORMATION FOR PARENT, SUBSIDIARY ISSUER AND GUARANTOR AND
NON-GUARANTOR SUBSIDIARIES
Loral is a holding company (the "Parent Company"), which is the ultimate
parent of all Loral subsidiaries. In December 2001, the Company's wholly owned
subsidiary, Loral Orion (the "Subsidiary Issuer"), issued new senior notes in an
exchange offer which are fully and unconditionally guaranteed, on a joint and
several basis, by the Parent Company and one of Loral Orion's wholly-owned
subsidiaries (the "Guarantor Subsidiary").
Presented below is condensed consolidating financial information for the
Parent Company, the Subsidiary Issuer, the Guarantor Subsidiary and the other
wholly-owned subsidiaries (the "Non-Guarantor Subsidiaries") of Loral Orion as
of June 30, 2002 and December 31, 2001 and for the three and six months ended
June 30, 2002 and 2001. The condensed consolidating financial information has
been presented to show the nature of assets held, results of operations and cash
flows of the Parent Company, Subsidiary Issuer, Guarantor Subsidiary and
Non-Guarantor Subsidiaries assuming the guarantee structure of the new senior
notes was in effect at the beginning of the periods presented.
The supplemental condensed consolidating financial information reflects
the investments of the Parent Company in the Subsidiary Issuer, the Guarantor
Subsidiary and the Non-Guarantor Subsidiaries using the equity method of
accounting. The Parent Company'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 to the Parent Company in 2001 and intercompany payables and
receivables between its subsidiaries resulting primarily from the funding of the
construction of satellites for the fixed satellite services segment.
20
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2002
(IN THOUSANDS)
PARENT SUBSIDIARY GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ---------- ---------- ------------- ------------ ------------
Current assets:
Cash and cash equivalents $ 7,530 $ 54,800 $ -- $ 45,350 $ -- $ 107,680
Accounts receivable, net -- 10,890 686 28,787 -- 40,363
Contracts-in-process -- -- -- 187,051 -- 187,051
Inventories -- -- -- 106,660 -- 106,660
Other current assets 1,984 4,250 3,218 66,880 (903) 75,429
----------- --------- --------- ----------- ----------- -----------
Total current assets 9,514 69,940 3,904 434,728 (903) 517,183
Property, plant and equipment, net -- 328,070 215,208 1,458,144 (17,820) 1,983,602
Long-term receivables -- -- -- 192,574 -- 192,574
Notes receivable from unconsolidated
subsidiaries 200,000 (29,700) -- (170,300) -- --
Due to (from) unconsolidated subsidiaries 19,043 (76,080) 93,526 (51,484) 14,995 --
Investments in unconsolidated subsidiaries 572,637 303,384 (271,698) (1,712,291) 1,107,968 --
Investments in and advances to affiliates 52,362 -- -- 130,519 -- 182,881
Deposits -- -- -- 105,290 -- 105,290
Deferred tax assets -- 32,130 -- 79,057 190,176 301,363
Other assets 5,126 19,249 721 79,784 -- 104,880
----------- --------- --------- ----------- ----------- -----------
$ 858,682 $ 646,993 $ 41,661 $ 546,021 $ 1,294,416 $ 3,387,773
=========== ========= ========= =========== =========== ===========
Current liabilities:
Current portion of long-term debt $ -- $ 80,101 $ -- $ 85,830 $ -- $ 165,931
Accounts payable 1,038 613 713 111,354 -- 113,718
Accrued employment costs -- -- -- 38,218 -- 38,218
Customer advances -- 546 597 136,907 -- 138,050
Accrued interest and preferred dividends 20,646 4,700 -- 17,727 -- 43,073
Other current liabilities 10,218 2,340 179 38,762 -- 51,499
Income taxes payable 7,958 -- -- (39,310) 66,408 35,056
Deferred tax liabilities 23,872 -- -- -- (23,872) --
----------- --------- --------- ----------- ----------- -----------
Total current liabilities 63,732 88,300 1,489 389,488 42,536 585,545
Deferred tax liabilities 19,925 -- 7,462 -- (27,387) --
Pension and other postretirement liabilities -- -- -- 60,015 -- 60,015
Long-term liabilities -- 8,609 1,024 127,457 -- 137,090
Long-term debt 350,000 927,456 -- 886,725 -- 2,164,181
Minority interest -- -- -- 15,917 -- 15,917
6% Series C convertible redeemable preferred
stock 131,996 -- -- -- -- 131,996
6% Series D convertible redeemable preferred
stock 55,378 -- -- -- -- 55,378
Shareholders' equity:
6% Series C convertible redeemable
preferred stock 266,772 -- -- -- -- 266,772
6% Series D convertible redeemable
preferred stock 109,205 -- -- -- -- 109,205
Common stock, par value $.01 3,711 -- -- -- -- 3,711
Paid-in capital 3,035,219 604,166 -- -- (604,166) 3,035,219
Treasury stock, at cost (3,360) -- -- -- -- (3,360)
Unearned compensation (4) -- -- -- -- (4)
Retained (deficit) earnings (3,195,504) (981,538) 31,686 (933,581) 1,883,433 (3,195,504)
Accumulated other comprehensive income 21,612 -- -- -- -- 21,612
----------- --------- --------- ----------- ----------- -----------
Total shareholders' equity (deficit) 237,651 (377,372) 31,686 (933,581) 1,279,267 237,651
----------- --------- --------- ----------- ----------- -----------
$ 858,682 $ 646,993 $ 41,661 $ 546,021 $ 1,294,416 $ 3,387,773
=========== ========= ========= =========== =========== ===========
21
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
Parent Subsidiary Guarantor Non-Guarantor
Company Issuer Subsidiary Subsidiaries Eliminations Consolidated
----------- ---------- ---------- ------------- ------------ ------------
Revenues from satellite sales $ -- $ -- $ -- $ 214,579 $ -- $ 214,579
Revenues from satellite services -- 24,971 11,281 77,227 (11,698) 101,781
Management fee from parent -- -- -- (264) 264 --
----------- --------- --------- ----------- ----------- -----------
Total revenues -- 24,971 11,281 291,542 (11,434) 316,360
Costs of satellite sales -- -- -- 193,857 -- 193,857
Costs of satellite services -- 24,104 7,098 36,993 (5,773) 62,422
Selling, general and administrative expenses 2,438 2,925 310 36,405 295 42,373
Management fee expense (264) -- -- -- 264 --
----------- --------- --------- ----------- ----------- -----------
Operating income (loss) (2,174) (2,058) 3,873 24,287 (6,220) 17,708
Interest and investment income 5,387 81 -- 3,491 (4,507) 4,452
Interest expense (9,805) (3,492) -- (10,282) 5,194 (18,385)
----------- --------- --------- ----------- ----------- -----------
(Loss) income before income taxes, equity in
net loss of unconsolidated subsidiaries
and affiliates and minority interest (6,592) (5,469) 3,873 17,496 (5,533) 3,775
Income tax benefit (provision) (1,605) 433 (1,371) (8,541) 3,360 (7,724)
----------- --------- --------- ----------- ----------- -----------
(Loss) income before equity in net loss of
unconsolidated subsidiaries and
affiliates and minority interest (8,197) (5,036) 2,502 8,955 (2,173) (3,949)
Equity in net income (loss) of
unconsolidated subsidiaries, net of taxes 11,818 2,502 -- -- (14,320) --
Equity in net income (loss) of affiliates,
net of taxes (20,282) -- -- 7,638 -- (12,644)
Minority interest, net of taxes -- -- -- (68) -- (68)
----------- --------- --------- ----------- ----------- -----------
Net (loss) income $ (16,661) $ (2,534) $ 2,502 $ 16,525 $ (16,493) $ (16,661)
=========== ========= ========= =========== =========== ===========
22
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
Parent Subsidiary Guarantor Non-Guarantor
Company Issuer Subsidiary Subsidiaries Eliminations Consolidated
----------- ---------- ---------- ------------- ------------ ------------
Revenues from satellite sales $ -- $ -- $ -- $ 413,050 $ -- $ 413,050
Revenues from satellite services -- 51,807 24,173 161,965 (26,459) 211,486
Management fee from parent -- -- -- 27 (27) --
----------- --------- --------- ----------- ----------- -----------
Total revenues -- 51,807 24,173 575,042 (26,486) 624,536
Costs of satellite sales -- -- -- 380,285 -- 380,285
Costs of satellite services -- 49,879 14,196 84,119 (19,476) 128,718
Selling, general and administrative expenses 2,457 5,629 714 74,320 -- 83,120
Management fee expense 27 -- -- -- (27) --
----------- --------- --------- ----------- ----------- -----------
Operating income (loss) (2,484) (3,701) 9,263 36,318 (6,983) 32,413
Interest and investment income 10,617 301 -- 10,896 (11,953) 9,861
Interest expense (19,652) (6,750) -- (23,880) 13,327 (36,955)
----------- --------- --------- ----------- ----------- -----------
(Loss) income before income taxes, equity in
net loss of unconsolidated subsidiaries
and affiliates, minority interest and
cumulative effect of change in accounting
principle (11,519) (10,150) 9,263 23,334 (5,609) 5,319
Income tax benefit (provision) (3,154) 4,597 (3,228) (12,259) 792 (13,252)
----------- --------- --------- ----------- ----------- -----------
(Loss) income before equity in net loss of
unconsolidated subsidiaries and
affiliates, minority interest and
cumulative effect of change in accounting
principle (14,673) (5,553) 6,035 11,075 (4,817) (7,933)
Equity in net income (loss) of
unconsolidated subsidiaries, net of taxes (862,469) 6,035 -- -- 856,434 --
Equity in net income (loss) of affiliates,
net of taxes (35,879) -- -- 7,285 -- (28,594)
Minority interest, net of taxes -- -- -- 6 -- 6
----------- --------- --------- ----------- ----------- -----------
Loss before cumulative effect of change in
accounting principle (913,021) 482 6,035 18,366 851,617 (36,521)
Cumulative effect of change in accounting
principle, net of taxes (562,201) -- (314,299) -- (876,500)
----------- --------- --------- ----------- ----------- -----------
Net (loss) income $ (913,021) $(561,719) $ 6,035 $ (295,933) $ 851,617 $ (913,021)
=========== ========= ========= =========== =========== ===========
23
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
PARENT SUBSIDIARY GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ---------- ------------- ------------ ------------
Operating activities:
Net loss $(913,021) $(561,719) $ 6,035 $(301,914) $ 857,598 $(913,021)
Non-cash items: -- -- --
Equity in net loss of affiliates, net
of taxes 35,879 -- -- 913 -- 36,792
Minority interest, net of taxes -- -- (6) -- (6)
Cumulative effect of change in
accounting principle, net of taxes 562,201 -- 314,299 -- 876,500
Equity in net loss of unconsolidated
subsidiaries, net of taxes 862,469 (6,035) -- (856,434) -- --
Deferred taxes 3,135 -- 2,248 14,783 (3,253) 16,913
Non-cash interest expense (529) -- -- -- (529)
Depreciation and amortization 27,141 10,506 57,575 -- 95,222
Changes in operating assets and
liabilities:
Accounts receivable, net 2,181 (189) (3,056) -- (1,064)
Contracts-in-process -- -- (11,771) -- (11,771)
Inventories -- -- 1,482 -- 1,482
Long-term receivables -- -- (2,268) -- (2,268)
Deposits -- -- 50,200 -- 50,200
Due to (from) unconsolidated
subsidiaries (6,129) 13,121 (20,151) 2,276 10,883 --
Other current assets and other assets (2,098) 2,375 1,647 15,264 -- 17,188
Accounts payable (317) (2,065) -- (28,730) -- (31,112)
Accrued expenses and other current
liabilities (1,897) 2,811 -- 5,072 -- 5,986
Customer advances (1,192) (40) (9,708) -- (10,940)
Income taxes payable 19 -- -- 2,690 (2,169) 540
Pension and other postretirement
liabilities -- -- 4,425 -- 4,425
Long-term liabilities (1,971) (56) (17,599) -- (19,626)
Other 165 -- -- (77) -- 88
--------- --------- -------- --------- --------- ---------
Net cash provided by (used in) operating
activities (21,795) 36,319 -- (762,584) 863,059 114,999
--------- --------- -------- --------- --------- ---------
Investing activities:
Capital expenditures -- -- (98,740) (590) (99,330)
Investments in and advances to
unconsolidated subsidiaries (857) -- -- 863,326 (862,469) --
Investments in and advances to affiliates (2,162) -- -- (19,552) -- (21,714)
--------- --------- -------- --------- --------- ---------
Net cash (used in) provided by in investing
activities (3,019) -- -- 745,034 (863,059) (121,044)
--------- --------- -------- --------- --------- ---------
Financing activities:
Borrowings under revolving credit
facilities -- 86,000 -- 86,000
Repayments under term loans -- (32,500) -- (32,500)
Repayments under revolving credit
facilities -- (84,000) -- (84,000)
Repayment of export-import facility -- (1,073) -- (1,073)
Repayments of other long-term obligations (918) (9) -- (927)
Preferred dividends (20,878) -- -- -- (20,878)
Proceeds from stock issuances 7,154 -- -- -- 7,154
--------- --------- -------- --------- --------- ---------
Net cash used in financing activities (13,724) (918) -- (31,582) -- (46,224)
--------- --------- -------- --------- --------- ---------
Increase (decrease) in cash and cash
equivalents (38,538) 35,401 -- (49,132) -- (52,269)
Cash and cash equivalents--beginning of
period 46,068 19,399 -- 94,482 -- 159,949
--------- --------- -------- --------- --------- ---------
Cash and cash equivalents--end of period $ 7,530 $ 54,800 $ -- $ 45,350 $ -- $ 107,680
========= ========= ======== ========= ========= =========
24
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001
(IN THOUSANDS)
PARENT SUBSIDIARY GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ---------- ------------- ------------ ------------
Current assets:
Cash and cash equivalents ........... $ 46,068 $ 19,399 $ -- $ 94,482 $ -- $ 159,949
Accounts receivable, net ............ -- 13,071 497 25,731 -- 39,299
Contracts-in-process ................ -- -- -- 178,599 -- 178,599
Inventories ......................... -- -- -- 98,179 -- 98,179
Other current assets ................ 265 6,053 5,151 83,101 (903) 93,667
----------- ----------- --------- ----------- ----------- -----------
Total current assets .............. 46,333 38,523 5,648 480,092 (903) 569,693
Property, plant and equipment, net ..... -- 354,196 225,714 1,415,856 (18,410) 1,977,356
Costs in excess of net assets
acquired, net ....................... -- 562,201 -- 329,518 -- 891,719
Long-term receivables .................. -- -- -- 190,306 -- 190,306
Notes receivable from
unconsolidated subsidiaries ......... 200,000 (29,700) -- (170,300) -- --
Due to (from) unconsolidated
subsidiaries ........................ 12,915 (62,961) 72,978 (48,810) 25,878 --
Investments in unconsolidated
subsidiaries ........................ 1,432,614 297,349 (271,698) (1,703,764) 245,499 --
Investments in and advances to
affiliates .......................... 77,061 -- -- 112,058 -- 189,119
Deposits ............................... -- -- -- 155,490 -- 155,490
Deferred tax assets .................... -- 32,130 -- 74,290 191,108 297,528
Other assets ........................... 6,632 20,836 832 91,194 -- 119,494
----------- ----------- --------- ----------- ----------- -----------
$ 1,775,555 $ 1,212,574 $ 33,474 $ 925,930 $ 443,172 $ 4,390,705
=========== =========== ========= =========== =========== ===========
Current liabilities:
Current portion of long-term debt ... $ -- $ 49,449 $ -- $ 87,167 $ -- $ 136,616
Accounts payable .................... 1,357 2,677 713 140,094 -- 144,841
Accrued employment costs ............ -- -- -- 39,232 -- 39,232
Customer advances ................... -- 952 128 147,910 -- 148,990
Accrued interest and preferred
dividends ......................... 22,543 1,889 -- 6,738 -- 31,170
Other current liabilities ........... -- 5,719 235 41,006 -- 46,960
Income taxes payable ................ 7,939 -- -- (42,000) 68,577 34,516
Deferred tax liabilities ............ 21,222 -- -- (485) (20,737) --
----------- ----------- --------- ----------- ----------- -----------
Total current liabilities ......... 53,061 60,686 1,076 419,662 47,840 582,325
Deferred tax liabilities ............... 21,626 -- 5,214 (503) (26,337) --
Pension and other postretirement
liabilities ......................... -- -- -- 55,590 -- 55,590
Long-term liabilities .................. -- 7,986 1,533 147,197 -- 156,716
Long-term debt ......................... 350,000 959,555 -- 916,970 -- 2,226,525
Minority interest ...................... -- -- -- 18,681 -- 18,681
Shareholders' equity:
6% Series C convertible
redeemable preferred stock ........ 485,371 -- -- -- -- 485,371
6% Series D convertible
redeemable preferred stock ........ 296,529 -- -- -- -- 296,529
Common stock ........................ 3,368 -- -- -- -- 3,368
Paid-in capital ..................... 2,771,964 604,166 -- -- (604,166) 2,771,964
Treasury stock, at cost ............. (3,360) -- -- -- -- (3,360)
Unearned compensation ............... (81) -- -- -- -- (81)
Retained (deficit) earnings ......... (2,223,710) (419,819) 25,651 (631,667) 1,025,835 (2,223,710)
Accumulated other comprehensive
income ............................ 20,787 -- -- -- -- 20,787
----------- ----------- --------- ----------- ----------- -----------
Total shareholders' equity ............. 1,350,868 184,347 25,651 (631,667) 421,669 1,350,868
----------- ----------- --------- ----------- ----------- -----------
$ 1,775,555 $ 1,212,574 $ 33,474 $ 925,930 $ 443,172 $ 4,390,705
=========== =========== ========= =========== =========== ===========
25
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS)
PARENT SUBSIDIARY GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------------
Revenues from satellite sales $ -- $ -- $ -- $ 160,986 $ (822) $ 160,164
Revenues from satellite services -- 23,586 11,501 101,710 (22,099) 114,698
Management fee from parent -- -- -- 13,170 (13,170) --
------------------------------------------------------------------------------
Total revenues -- 23,586 11,501 275,866 (36,091) 274,862
Costs of satellite sales -- -- -- 139,872 (747) 139,125
Costs of satellite services -- 26,362 6,502 53,417 (13,092) 73,189
Selling, general and administrative expenses 285 2,336 38 52,818 263 55,740
Management fee expense 13,170 -- -- -- (13,170) --
------------------------------------------------------------------------------
Operating income (loss) (13,455) (5,112) 4,961 29,759 (9,345) 6,808
Interest and investment income 5,943 80 3 6,632 (5,998) 6,660
Interest expense (9,786) (24,833) (4) (18,846) 6,718 (46,751)
------------------------------------------------------------------------------
(Loss) income before income taxes, equity in
net loss of unconsolidated subsidiaries
and affiliates, minority interest and
discontinued operations (17,298) (29,865) 4,960 17,545 (8,625) (33,283)
Income tax benefit (provision) (1,593) 2,308 (1,736) (9,090) 10,136 25
------------------------------------------------------------------------------
(Loss) income before equity in net loss of
unconsolidated subsidiaries and
affiliates, minority interest and
discontinued operations (18,891) (27,557) 3,224 8,455 1,511 (33,258)
Equity in net (loss) income of
unconsolidated subsidiaries, net of taxes (15,097) 1,462 -- -- 13,635 --
Equity in net (loss) income of affiliates,
net of taxes (20,708) -- -- 1 -- (20,707)
Minority interest, net of taxes -- -- -- (732) -- (732)
------------------------------------------------------------------------------
Loss before discontinued operations (54,696) (26,095) 3,224 7,724 15,146 (54,697)
Loss from operations of discontinued
operations, net of taxes -- (3,208) -- -- 3,208 --
------------------------------------------------------------------------------
Net (loss) income $(54,696) $(29,303) $ 3,224 $ 7,724 $ 18,354 $ (54,697)
==============================================================================
26
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS)
PARENT SUBSIDIARY GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------------
Revenues from satellite sales $ -- $ -- $ -- $ 308,808 $ (822) $ 307,986
Revenues from satellite services -- 45,845 24,161 190,040 (32,035) 228,011
Management fee from parent -- -- -- 23,605 (23,605) --
-----------------------------------------------------------------------------
Total revenues -- 45,845 24,161 522,453 (56,462) 535,997
Costs of satellite sales -- -- -- 266,476 (747) 265,729
Costs of satellite services -- 54,182 12,847 110,650 (28,535) 149,144
Selling, general and administrative expenses 598 5,662 38 104,092 -- 110,390
Management fee expense 23,605 -- -- -- (23,605) --
-----------------------------------------------------------------------------
Operating income (loss) (24,203) (13,999) 11,276 41,235 (3,575) 10,734
Interest and investment income 12,213 194 7 16,021 (14,107) 14,328
Interest expense (18,379) (50,067) (8) (43,538) 15,548 (96,444)
-----------------------------------------------------------------------------
(Loss) income before income taxes, equity in
net loss of unconsolidated subsidiaries
and affiliates, minority interest,
cumulative effect of change in accounting
principle and discontinued operations (30,369) (63,872) 11,275 13,718 (2,134) (71,382)
Income tax benefit (provision) (3,189) 4,824 (3,946) (10,975) 15,236 1,950
-----------------------------------------------------------------------------
(Loss) income before equity in net loss of
unconsolidated subsidiaries and
affiliates, minority interest, cumulative
effect of change in accounting principle
and discontinued operations (33,558) (59,048) 7,329 2,743 13,102 (69,432)
Equity in net (loss) income of
unconsolidated subsidiaries, net of taxes (35,765) 3,824 -- -- 31,941 --
Equity in net (loss) income of affiliates,
net of taxes (44,382) -- -- 1,321 -- (43,061)
Minority interest, net of taxes -- -- -- 529 -- 529
-----------------------------------------------------------------------------
(Loss) income before cumulative effect of
change in accounting principle and
discontinued operations (113,705) (55,224) 7,329 4,593 45,043 (111,964)
Cumulative effect of change in accounting
principle, net of taxes -- -- (1,741) -- (1,741)
-----------------------------------------------------------------------------
(Loss) income from continuing operations (113,705) (55,224) 7,329 2,852 45,043 (113,705)
Loss from operations of discontinued
operations, net of taxes -- (6,340) -- -- 6,340 --
-----------------------------------------------------------------------------
Net (loss) income $(113,705) $(61,564) $ 7,329 $ 2,852 $ 51,383 $(113,705)
=============================================================================
27
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS)
PARENT SUBSIDIARY GUARANTOR NON-GUARANTOR
COMPANY ISSUER SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------------------
Operating activities:
Net loss from continuing operations $(113,705) $(55,224) $ 7,329 $ 2,852 $ 45,043 $(113,705)
Non-cash items:
Equity in net loss of affiliates, net
of taxes 44,382 -- -- (1,321) -- 43,061
Equity in net loss of unconsolidated
subsidiaries, net of taxes 35,765 (3,824) -- -- (31,941) --
Minority interest, net of taxes -- -- -- (529) -- (529)
Cumulative effect of change in
accounting principle, net of taxes -- -- -- 1,741 -- 1,741
Deferred taxes 2,893 2,569 1,800 12,982 (23,109) (2,865)
Non-cash interest expense -- 19,882 -- -- -- 19,882
Depreciation and amortization -- 34,258 10,506 64,912 -- 109,676
Changes in operating assets and
liabilities:
Accounts receivable, net -- (151) (705) (7,531) -- (8,387)
Contracts-in-process -- -- -- (6,270) -- (6,270)
Inventories -- -- -- (25,667) -- (25,667)
Long-term receivables -- -- -- (17,767) -- (17,767)
Deposits -- -- -- 14,300 -- 14,300
Due to (from) unconsolidated
subsidiaries 15,221 19,721 (18,486) (7,698) (8,758) --
Other current assets and other assets 1,092 316 1,667 8,357 -- 11,432
Accounts payable (29) 2,021 (1,934) 10,793 -- 10,851
Accrued expenses and other current
liabilities (2,538) -- -- 6,103 -- 3,565
Customer advances -- (1,252) (6) 23,667 -- 22,409
Income taxes payable 295 -- -- (187) 478 586
Pension and other postretirement
liabilities -- -- -- 3,769 -- 3,769
Long-term liabilities -- 201 1,551 (13,640) -- (11,888)
Other 68 -- -- (133) -- (65)
-----------------------------------------------------------------------------
Net cash provided by (used in) operating
activities (16,556) 18,517 1,722 68,733 (18,287) 54,129
-----------------------------------------------------------------------------
Net cash used in discontinued operations -- (14,203) -- -- 14,203 --
-----------------------------------------------------------------------------
Investing activities:
Capital expenditures -- (46) -- (125,470) (501) (126,017)
Investments in and advances to affiliates (17,175) -- -- (2,949) -- (20,124)
Investments in and advances to
unconsolidated subsidiaries (12,682) -- -- 8,097 4,585 --
-----------------------------------------------------------------------------
Net cash used in investing activities (29,857) (46) -- (120,322) 4,084 (146,141)
-----------------------------------------------------------------------------
Financing activities:
Borrowings under revolving credit
facilities -- -- -- 85,000 -- 85,000
Repayments under term loans -- -- -- (56,000) -- (56,000)
Repayments under revolving credit
facilities -- -- -- (85,000) -- (85,000)
Repayment of export-import facility -- -- -- (1,073) -- (1,073)
Repayments of other long-term obligations -- (1,060) -- (113) -- (1,173)
Preferred dividends (28,292) -- -- -- -- (28,292)
Proceeds from stock issuances 9,908 -- -- -- -- 9,908
Repayment of note payable to Loral
SpaceCom -- (3,197) -- 3,197 -- --
-----------------------------------------------------------------------------
Net cash used in financing activities (18,384) (4,257) -- (53,989) -- (76,630)
-----------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (64,797) 11 1,722 (105,578) -- (168,642)
Cash and cash equivalents--beginning of
period 151,405 2 -- 242,638 -- 394,045
-----------------------------------------------------------------------------
Cash and cash equivalents--end of period $ 86,608 $ 13 $ 1,722 $ 137,060 $ -- $ 225,403
=============================================================================
28
14. SUBSEQUENT EVENT
Under the New York Stock Exchange criteria for continued listing, the
Exchange will normally give consideration to de-listing a company's stock when
the average closing price of the stock is less than $1.00 over a consecutive
30-trading day period. The average closing price of Loral common stock has been
less than $1.00 for 30 consecutive trading days. If the New York Stock Exchange
notifies the Company that its stock price is below the Exchange's price
criteria, the Company must bring its stock price and average stock price back
above $1.00 by six months following receipt of the notification. Failure to do
so will result in the Exchange's commencement of suspension and de-listing
procedures. If shareholder approval is required for an action to cure the price
condition, the Company must obtain such approval no later than its next annual
meeting and implement the action promptly thereafter. In such event, the price
condition will be deemed cured if the Company's stock price promptly exceeds
$1.00 per share, and the price remains above that level for at least the
following 30 trading days. De-listing of the Company's stock by the New York
Stock Exchange would result in a material adverse effect on the liquidity of
Loral shares, have an adverse effect on its trading value and impair Loral's
ability to raise funds in the capital markets. There can be no assurance that if
Loral shares are de-listed from the New York Stock Exchange, there will be any
future trading market for Loral common stock. The Company believes that, if
notified by the New York Stock Exchange that its stock is below the Exchange's
price criteria, it will be able to cure the condition and maintain its listing
on the Exchange.
29
LORAL SPACE & COMMUNICATIONS LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Results of
Operations and Financial Condition 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 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
involves 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 the factors and conditions that could affect the outcome of
forward-looking statements relate to (i) the Company's financial structure, (ii)
Globalstar matters, (iii) litigation and disputes, (iv) operational matters and
(v) other matters. For a detailed discussion of these factors and conditions,
please refer to the section of Loral's latest Annual Report on Form 10-K titled
"Certain Factors that May Affect Future Results" beginning on page 14 and to the
other periodic reports filed with the SEC by Loral, its wholly owned subsidiary
Loral Orion, Inc. ("Loral Orion"), and the Company's affiliate Satelites de
Mexico, S.A. de C.V. ("Satmex"). In addition, we caution you that 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. The
Company undertakes no obligation to update any forward-looking statements.
Loral is one of the world's leading satellite communications companies,
with substantial activities in satellite-based communications services and
satellite manufacturing. Loral is organized into three operating businesses:
Fixed Satellite Services ("FSS"). Through its wholly-owned
subsidiaries, Loral Skynet, Loral Orion, Loral Skynet do Brasil Ltda.
("Skynet do Brasil"), its 49%-owned affiliate Satmex, its 47%-owned
affiliate Europe*Star Limited ("Europe*Star") and its 56%-owned affiliate
XTAR L.L.C. ("XTAR"), 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 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") and provides telemetry, tracking and control services
("TT&C") and network services to customers. The Loral Global Alliance
currently has ten operating high-powered geosynchronous satellites in
orbit: the seven satellite Telstar fleet, two Satmex satellites and one
Europe*Star satellite, with footprints covering almost all of the world's
population.
Satellite Manufacturing and Technology. The Company designs and
manufactures satellites and space systems and develops satellite
technology for a broad variety of customers and applications through Space
Systems/Loral, Inc. ("SS/L").
Data Services: The Company provides managed communications networks
and Internet and intranet services through Loral CyberStar, Inc. ("Loral
CyberStar") and delivers high-speed broadband data communications,
business television and business media services through CyberStar, L.P.
("CyberStar LP").
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 businesses for the three and six
months ended June 30, 2002 and 2001, respectively. See Note 11 to Loral's
condensed consolidated financial statements for additional information on
segment results. The remainder of the discussion relates to the consolidated
results of Loral, unless otherwise noted.
30
REVENUES:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Fixed satellite services:
Loral Skynet .............................. $ 88.9 $ 97.5 $ 182.6 $ 191.1
Affiliates(1) ............................. 24.0 36.0 51.1 71.6
------- ------- ------- -------
Total fixed satellite services ............ 112.9 133.5 233.7 262.7
Satellite manufacturing and technology(2) ... 250.0 212.0 492.6 413.1
Data services(3) ............................ 17.2 26.1 37.6 54.8
------- ------- ------- -------
Segment revenues ............................ 380.1 371.6 763.9 730.6
Affiliate eliminations(4) ................... (24.0) (36.0) (51.1) (71.6)
Intercompany eliminations(5) ................ (39.7) (60.7) (88.3) (123.0)
------- ------- ------- -------
Revenues as reported ........................ $ 316.4 $ 274.9 $ 624.5 $ 536.0
======= ======= ======= =======
EBITDA(6):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
Fixed satellite services:
Loral Skynet .............................. $ 60.6 $ 70.0 $ 126.5 $ 134.8
Affiliates(1) ............................. 9.8 19.5 21.3 38.6
------- ------- ------- -------
Total fixed satellite services ............ 70.4 89.5 147.8 173.4
Satellite manufacturing and technology(2) ... 16.7 15.8 27.5 35.0
Data services(3) ............................ (0.1) (3.6) (0.1) (13.6)
Corporate expenses(7) ....................... (8.8) (12.5) (17.5) (21.9)
------- ------- ------- -------
Segment EBITDA before eliminations .......... 78.2 89.2 157.7 172.9
Affiliate eliminations(4) ................... (9.8) (19.5) (21.3) (38.6)
Intercompany eliminations(5) ................ (2.6) (7.5) (8.8) (13.9)
------- ------- ------- -------
EBITDA as reported .......................... $ 65.8 $ 62.2 $ 127.6 $ 120.4
======= ======= ======= =======
- ----------
(1) Includes 100% of Europe*Star's and Satmex's revenues and EBITDA and 100%
of Loral's 56%-owned affiliate XTAR's EBITDA since July 2001. Also
includes Loral's subsidiary, Loral Skynet do Brasil.
(2) Satellite manufacturing and technology consists of 100% of SS/L's results.
(3) Data services consists of 100% of CyberStar LP (in which Loral owns an 82%
equity interest) and 100% of Loral CyberStar. Equipment sales for data
services were $2 million for both the three months ended June 30, 2002 and
2001, and $4 million for both the six months ended June 30, 2002 and 2001,
respectively.
(4) Represents amounts related to unconsolidated affiliates (Satmex,
Europe*Star and XTAR), which 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 of affiliates in Loral's condensed
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 the elimination of revenues for the lease of transponder capacity
by satellite manufacturing and technology and data services from fixed
satellite services.
(6) EBITDA (which is equivalent to operating income/loss before depreciation
and amortization, including amortization of unearned stock 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.
31
(7) Represents corporate expenses incurred in support of the Company's
operations.
Critical accounting matters
See the Company's latest Annual Report on Form 10-K filed with the SEC and
Other Matters -- Accounting Pronouncements below.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH JUNE 30, 2001
Revenues as reported for Loral's operating businesses increased 15% to
$316 million in 2002 as compared to $275 million in 2001, after intercompany and
affiliate eliminations of $64 million in 2002 and $97 million in 2001. The
increase in revenues was primarily due to higher satellite manufacturing and
technology revenues resulting from the timing of work performed and costs
incurred on satellite programs under the percentage of completion method,
offset by lower data services revenues and lower fixed satellite services
revenues in 2002. The decline in service revenues is due to a decrease in volume
and prices resulting from the global economic downturn, which has caused a delay
in demand for new telecommunications applications and services. Intercompany
eliminations primarily consist of revenues from satellites under construction by
satellite manufacturing and technology for FSS and FSS revenues from data
services and satellite manufacturing and technology for transponder capacity.
Satellite manufacturing and technology revenues from FSS declined in 2002, since
the three satellites under construction are nearing completion. FSS revenues
from data services declined in 2002 due to the global economic downturn.
EBITDA as reported increased 6% to $66 million in 2002 as compared to $62
million in 2001. The increase in 2002 arose primarily from the following: data
services achieving break-even EBITDA, as compared to an EBITDA loss of $4
million in 2001, which resulted from cost savings realized from streamlining
operations; reduced corporate expenses; and slightly higher satellite
manufacturing and technology EBITDA, primarily due to the effects of the
recovery of a claim from a vendor, offset by additional inventory write-downs
recorded due to the absence of new satellite awards and satellite program mix
changes; offset by lower FSS EBITDA primarily due to lower revenues.
Depreciation and amortization was $48 million in 2002 and $55 million in
2001. In 2002, amortization expense decreased by $7 million as a result of the
Company adopting SFAS No. 142 (see Accounting Pronouncements).
As a result of the above, operating income increased to $18 million in
2002, as compared to $7 million in 2001.
Interest and investment income was $4 million in 2002 as compared to $7
million in 2001. This decrease was principally due to lower average cash
balances for investment and lower interest rates in 2002 as compared to 2001.
Interest expense was $18 million in 2002, net of capitalized interest of
$8 million, as compared to $47 million in 2001, net of capitalized interest of
$6 million. The decrease was primarily due to the Company not recognizing any
interest expense on Loral Orion's new 10% senior notes issued in connection with
the Loral Orion exchange offers completed in December 2001 (see Liquidity and
Capital Resources) and lower debt balances and interest rates in 2002 as
compared to 2001.
Loral, as a Bermuda company, 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 the conduct of a
U.S. trade or business. Loral has cumulatively from its inception received no
tax benefit as a result of being established in Bermuda because of substantial
losses incurred outside the U.S. Loral's U.S. subsidiaries are subject to
regular corporate tax on their worldwide income. In 2002, the Company recorded
income tax expense of $8 million on pre-tax income of $4 million as compared to
no income taxes on a pre-tax loss of $33 million in 2001. The increase in tax
expense in 2002 was primarily attributable to a higher amount of income subject
to U.S. tax during the current period.
Equity in net losses of affiliates was $13 million in 2002 as compared to
$21 million in 2001. Loral's share of equity in net losses attributable to
Globalstar related activities, net of taxes, was $1 million in 2002 as compared
to $10 million in 2001. The reduction in 2002 primarily resulted from the
recovery of a claim from a vendor on the Globalstar program of which $14 million
($8 million after taxes) was recorded as a benefit to equity in net losses of
affiliates and reduced equity in net losses of Globalstar service provider
partnerships recorded, offset by a $9 million charge relating to liabilities the
Company guaranteed in connection with a Globalstar service provider partnership.
Loral's share of equity in net losses of Satmex was
32
$3 million in 2002, as compared to $6 million in 2001. Loral's share of equity
in net losses of Europe*Star, managed by Alcatel, was $8 million in 2002, as
compared to $5 million in 2001 (see Note 5 to the condensed consolidated
financial statements).
Preferred dividends were $47 million in 2002 as compared to $41 million in
2001. The increase was primarily due to the non-cash dividend charges of $38
million incurred in the second quarter of 2002 on the conversion of 1.8 million
shares of Loral's 6% Series C convertible redeemable preferred stock (the
"Series C Preferred Stock") and 2.7 million shares of Loral's 6% Series D
convertible redeemable preferred stock (the "Series D Preferred Stock") into
30.9 million shares of the Company's common stock in connection with privately
negotiated exchange transactions, as compared to the non-cash dividend charges
of $29 million incurred on the conversion in April 2001 of 3.7 million shares of
Loral's Series C Preferred Stock and 1.9 million shares of Loral's Series D
Preferred Stock into 30.9 million shares of the Company's common stock, in
connection with the Company's exchange offers (see Liquidity and Capital
Resources).
As a result of the above, net loss applicable to common shareholders was
$63 million or $0.18 per basic and diluted share in 2002, as compared to $95
million or $0.29 per basic and diluted share in 2001 ($89 million or $0.27 per
basic and diluted share on an as adjusted basis to exclude the amortization of
goodwill). Basic and diluted weighted average shares were 358 million in 2002
and 327 million in 2001. The increase in shares was primarily due to the
conversions in 2002 and 2001 of the Company's preferred stock into common stock
mentioned above.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH JUNE 30, 2001
Revenues as reported for Loral's operating businesses increased 17% to
$625 million in 2002 as compared to $536 million in 2001, after intercompany and
affiliate eliminations of $139 million in 2002 and $195 million in 2001. The
increase in revenues was primarily due to higher satellite manufacturing and
technology revenues resulting from the timing of work performed and costs
incurred on satellite programs under the percentage of completion method, offset
by lower volume in data services revenues and FSS revenues in 2002. The decline
in service revenues is due to a decrease in volume and prices resulting from the
global economic downturn, which has caused a delay in demand for new
telecommunications applications and services. Intercompany eliminations were
lower in 2002. Satellite manufacturing and technology revenues from FSS declined
in 2002, since the three satellites under construction are nearing completion.
FSS revenues from data services declined in 2002 due to the global economic
downturn.
EBITDA as reported increased 6% to $128 million in 2002 as compared to
$120 million in 2001. This increase in 2002 arose primarily from the following:
data services achieving break-even EBITDA as compared to an EBITDA loss of $14
million in 2001, which resulted from cost savings realized from streamlining
operations; and decreased corporate expenses in 2002; offset by lower satellite
manufacturing and technology EBITDA, which was due to lower margins primarily
due to satellite program mix changes and additional inventory write-downs
recorded due to the absence of new satellite awards, offset by the effects of
the recovery of a claim from a vendor; and lower FSS EBITDA primarily due to
lower revenues.
Depreciation and amortization was $95 million in 2002 and $110 million in
2001. In 2002, amortization expense decreased by $15 million, primarily as a
result of the Company adopting SFAS No. 142 (see Accounting Pronouncements).
As a result of the above, operating income increased to $32 million in
2002, as compared to $11 million in 2001.
Interest and investment income was $10 million in 2002 as compared to $14
million in 2001. This decrease was principally due to lower average cash
balances for investment and lower interest rates in 2002 as compared to 2001.
Interest expense was $37 million in 2002, net of capitalized interest of
$16 million, as compared to $96 million in 2001, net of capitalized interest of
$11 million. The decrease was primarily due to the Company not recognizing any
interest expense on Loral Orion's new 10% senior notes issued in connection with
the Loral Orion exchange offers completed in December 2001 (see Liquidity and
Capital Resources) and lower debt balances and interest rates in 2002 as
compared to 2001.
Loral, as a Bermuda company, 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 the conduct of a
U.S. trade or business. Loral has cumulatively from its inception received no
tax benefit as a result of being established in Bermuda because of substantial
losses incurred outside the U.S. Loral's U.S. subsidiaries are subject to
regular corporate tax on their
33
worldwide income. In 2002, the Company recorded income tax expense of $13
million on pre-tax income of $5 million as compared to an income tax benefit of
$2 million on a pre-tax loss of $71 million in 2001. The increase in tax expense
in 2002 was primarily attributable to a higher amount of income subject to U.S.
tax during the current period.
Equity in net losses of affiliates was $29 million in 2002 as compared to
$43 million in 2001. Loral's share of equity in net losses attributable to
Globalstar related activities, net of taxes, was $3 million in 2002 and $23
million in 2001. The reduction in 2002 primarily resulted from the recovery of a
claim from a vendor on the Globalstar program of which $14 million ($8 million
after taxes) was recorded as a benefit to equity in net losses of affiliates
and reduced equity in net losses of Globalstar service provider partnerships
recorded, offset by a $9 million charge relating to liabilities the Company
guaranteed in connection with a Globalstar service provider partnership. Loral's
share of equity in net losses of Satmex was $11 million in 2002, as compared to
$9 million in 2001. Loral's share of equity in net losses of Europe*Star,
managed by Alcatel, was $14 million in 2002, as compared to $11 million in 2001
(see Note 5 to the condensed consolidated financial statements).
On January 1, 2002 the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, which resulted in the Company recording a charge for the
cumulative effect of change in accounting principle, net of taxes, of $877
million (see Accounting Pronouncements). The cumulative effect of change in
accounting principle, net of taxes, in 2001 related to the Company's adoption of
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
Preferred dividends were $59 million in 2002 as compared to $57 million in
2001. The increase was primarily due to the non-cash dividend charges of $38
million incurred in the second quarter of 2002 on the conversion of 1.8 million
shares of Loral's 6% Series C convertible redeemable preferred stock (the
"Series C Preferred Stock") and 2.7 million shares of Loral's 6% Series D
convertible redeemable preferred stock (the "Series D Preferred Stock") into
30.9 million shares of the Company's common stock in connection with privately
negotiated exchange transactions, as compared to the non-cash dividend charges
of $29 million incurred on the conversion in April 2001 of 3.7 million shares of
Loral's Series C Preferred Stock and 1.9 million shares of Loral's Series D
Preferred Stock into 30.9 million shares of the Company's common stock, in
connection with the Company's exchange offers (see Liquidity and Capital
Resources).
As a result of the above, net loss applicable to common shareholders
before the cumulative effect of the change in accounting principle relating to
cost in excess of net assets acquired ("goodwill") was $95 million or $0.27 per
basic and diluted share in 2002, as compared to $171 million or $0.55 per basic
and diluted share in 2001 ($157 million or $0.51 per basic and diluted share on
an as adjusted basis to exclude the amortization of goodwill). Basic and diluted
weighted average shares were 348 million in 2002 and 313 million in 2001. The
increase in shares was primarily due to the conversions of the Company's
preferred stock into common stock in 2002 and 2001 mentioned above.
RESULTS BY OPERATING SEGMENT FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
AND 2001
Fixed Satellite Services
FSS revenues (including 100% of Satmex and Europe*Star) decreased to $113
million as compared to $134 million for the three months ended June 30, 2002 and
2001, respectively, and $234 million as compared to $263 million for the six
months ended June 30, 2002 and 2001, respectively. These decreases were
primarily due to a decrease in transponders leased and lower prices in 2002 due
to the global economic downturn and the delay in demand for new applications and
services at Satmex, including the anticipated non-renewal of a large customer,
and to a lesser extent at Loral Skynet. EBITDA (including 100% of Satmex,
Europe*Star and XTAR) was $70 million as compared to $90 million for the three
months ended June 30, 2002 and 2001, respectively, and $148 million as compared
to $173 million for the six months ended June 2002 and 2001 respectively, which
was primarily due to lower sales. As of June 30, 2002, FSS had 10 operational
satellites (three of which are owned by Satmex and Europe*Star). Funded backlog
for the segment totaled $1.8 billion at both June 30, 2002, and December 31,
2001, including intercompany backlog of $50 million and $61 million at June 30,
2002 and December 31, 2001, respectively, and affiliate backlog of $391 million
and $404 million for Satmex and Europe*Star at June 30, 2002 and December 31,
2001, respectively. The average term of customer leases included in Loral
Skynet's backlog has declined to approximately 3.5 years currently, from
approximately 5.5 years at December 31, 2001. Net bookings increased in the
first half of 2002 to $212 million from $31 million in the first half of 2001,
due to a substantial decline in de-bookings, offset by a decline in gross
bookings.
34
Satellite Manufacturing and Technology
Financial performance of the satellite manufacturing industry suffered in
2001 and through the first half of 2002 for several reasons. There is more
capacity in the industry than needed at a time when, because of economic
conditions, customers' capital investment programs have been stretched over
longer time-frames and demand for new and replacement satellites and satellite
systems has slowed. In addition, the introduction of new technologies required
by customer applications has increased development and new technology insertion
costs. To counter these factors, SS/L has increased productivity by reducing its
workforce since the beginning of last year. The Company also is streamlining
certain internal processes and has instituted tighter controls to ensure that
subcontracted components are received on time and meet all customer
requirements, in turn bringing more stability and predictability to Loral's
manufacturing performance. The benefits of these and other changes are expected
to offset, in part, the impact on SS/L's financial performance of the above
mentioned factors.
Revenues at SS/L, before intercompany eliminations, increased to $250
million as compared to $212 million for the three months ended June 30, 2002 and
2001, respectively, and increased to $493 million as compared to $413 million
for the six months ended June 30, 2002 and 2001, respectively. These increases
primarily resulted from the timing of work performed on backlog programs. EBITDA
before intercompany eliminations was $17 million as compared to $16 million for
the three months ended June 30, 2002 and 2001, respectively, and $28 million and
$35 million for the six months ended June 30, 2002 and 2001, respectively. The
decrease for the six months ended 2002 was due to lower margins primarily due to
satellite program mix changes and additional inventory write-downs recorded due
to the absence of new satellite awards, offset by the effects of the recovery of
a claim from a vendor. Funded backlog for SS/L as of June 30, 2002 and December
31, 2001 was $1.0 billion and $1.6 billion, respectively, including intercompany
backlog of $185 million as of June 30, 2002 and $265 million as of December 31,
2001. SS/L gross bookings for the first half of 2002 declined from 2001 by $204
million to $14 million.
Data Services
Revenues are derived primarily from Loral CyberStar's corporate data
networking and Internet and intranet services businesses, which have been
impacted by the global economic downturn which has caused a delay in demand for
telecommunications and Internet services. Revenues for data services were $17
million as compared to $26 million for the three months ended June 30, 2002 and
2001, respectively, and $38 million and $55 million for the six months ended
June 30, 2002 and 2001, respectively. These decreases are due primarily to lower
volume from the VSAT business, Internet services and occasional use revenue from
business television services. Data services achieved break-even EBITDA for both
the three and six months ended June 2002 as compared to EBITDA losses of $4
million and $14 million for the three and six months ended June 30, 2001,
respectively. The substantial improvement in EBITDA in 2002 resulted primarily
from cost savings realized from streamlining operations and reduced satellite
capacity costs. As of June 30, 2002 and December 31, 2001, funded backlog for
the segment was $84 million and $98 million, respectively, which was all from
external sources.
TRANSACTIONS WITH AFFILIATES
Total funded backlog at June 30, 2002 and December 31, 2001 includes $184
million and $341 million, respectively, as a result of transactions entered into
with affiliates and related parties (primarily with Satmex, XTAR and Hisdesat)
for the construction of satellites.
The Company's condensed consolidated statements of operations reflect the
effects of the following amounts related to transactions with or investments in
affiliates (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues ........................................................ $ 27,947 $ 28,352 $ 50,589 $ 58,831
Investment income ............................................... 294 295 588 589
Interest expense capitalized on development stage enterprise .... 270 -- 397 --
Profits relating to affiliate transactions not eliminated ....... 921 355 2,077 848
Elimination of Loral's proportionate share of profits
relating to affiliate transactions ............................ (958) (341) (2,083) (811)
Amortization of deferred credit, capitalized interest and
profits relating to investments in affiliates ................. 326 (8) 254 254
35
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. Loral regularly
engages in discussions with telecommunications service providers, equipment
manufacturers and others regarding possible strategic transactions and alliances
such as joint ventures; strategic relationships involving its fixed satellite
services operations and satellite manufacturing operations, which could involve
business combinations; participation in the Loral Global Alliance; and
dispositions of non-core assets. In order to pursue such opportunities Loral may
utilize funds generated by growth in operations and may seek funds from
strategic partners and other investors and through incurrence of debt or the
issuance of additional equity.
The Satellite Credit Agreement, LSC Amended Credit Agreement, the
indenture relating to Loral Orion's new senior notes and the indenture relating
to Loral's 9.5% senior notes provide in certain circumstances for cross default
or cross acceleration. At June 30, 2002, the Company has met all of the
covenants and conditions under its various lending and funding arrangements and
believes that it will continue to meet these covenants and conditions. The
Company believes that cash, available credit and cash flow from operations will
be adequate to meet its expected cash requirements.
Debt
Satellite Credit Agreement
On December 21, 2001, Loral Satellite, Inc. ("Loral Satellite"), a
subsidiary of Loral Space & Communications Corporation, which in turn is a
subsidiary of Loral, entered into the first amendment to the $500 million
secured credit agreement dated as of November 17, 2000 by and among Loral
Satellite, Bank of America as Administrative Agent, and the other lending
parties thereto (the "Satellite Credit Agreement"). The first amendment provides
for a $200 million revolving credit facility expiring January 7, 2005 and a term
loan of which $272 million was outstanding as of June 30, 2002, subject to the
following remaining amortization payment schedule: $11.25 million per quarter on
September 30, 2002 through September 30, 2004 and $170 million on January 7,
2005. Borrowings under the Satellite Credit Agreement bear interest, at Loral
Satellite's option, at various rates based on fixed margins over the lead bank's
base rate or the London Interbank Offerred Rate for periods of one, two, three
or six months. Loral Satellite pays a commitment fee on the unused portion of
the revolver.
The Satellite Credit Agreement is secured by certain assets of Loral
Satellite, including the Telstar 6 and Telstar 7 satellites and the payments due
to Loral Satellite under Globalstar's $500 million credit facility (see below).
Based on third party valuations, management believes that the fair value of
Telstar 6 and Telstar 7 is in excess of $500 million. As of June 30, 2002, the
net book value of Telstar 6 and Telstar 7 was approximately $318 million. In
addition, as part of the first amendment, lenders under the Satellite Credit
Agreement received a junior lien on the assets of Loral SpaceCom Corporation
("LSC") and its subsidiaries pledged in favor of the banks under the LSC Amended
Credit Agreement. Loral has also agreed to guarantee Loral Satellite's
obligations under the Satellite Credit Agreement.
LSC Amended Credit Agreement
On December 21, 2001, LSC entered into an Amended and Restated Credit
Agreement with Bank of America, N.A., as Administrative Agent, and the other
lenders parties thereto (the "LSC Amended Credit Agreement"). The LSC Amended
Credit Agreement provides for a $200 million revolving credit facility expiring
January 7, 2005 and a term loan of which $390 million was outstanding at June
30, 2002, subject to the following remaining amortization payment schedule: $5
million on September 30, 2002; $25 million on December 31, 2002; $5 million on
each of March 31, June 30, September 30 and December 31, 2003; $20 million on
each of March 31, June 30 and September 30, 2004; and $280 million on January 7,
2005. Borrowings under the LSC Amended Credit Agreement bear interest, at LSC's
option, at various rates based on margins over the lead bank's base rate or the
London Interbank Offered Rate for periods of one, two, three or six months. In
December 2001, the margin levels were increased under the new amended agreement
and are fixed through September 30, 2002. As a result of this increase in margin
levels, interest costs have increased by approximately $11 million annually. LSC
pays a commitment fee on the unused portion of the revolver.
36
The LSC Amended Credit Agreement is secured by substantially all of the
assets of and the stock of LSC and its subsidiaries, including SS/L. LSC's
obligations under the LSC Amended Credit Agreement have been guaranteed by
certain of LSC's subsidiaries, including SS/L. As of June 30, 2002, the net book
value of the assets that secure the LSC Amended Credit Agreement was
approximately $788 million.
Loral Orion Indentures
On December 21, 2001, Loral Orion issued $613 million principal amount of
new senior notes due 2006 and guaranteed by Loral, in exchange for the
extinguishment of $841 million principal amount of Loral Orion senior notes due
in 2007 and senior discount notes due 2007 as discussed below. As part of the
exchange, Loral issued to the new note holders 6.04 million five-year warrants
to purchase Loral common stock (approximately 1.6% of the Company's outstanding
common stock at June 30, 2002) at a price of $2.37 per share. The warrants were
valued at $7 million using the Black Scholes option pricing model with the
following assumptions: stock volatility, 75%, risk free interest rate, 4.36%,
and no dividends during the expected term. Principal amount of $37 million of
the existing senior notes and principal amount of $49 million of the existing
senior discount notes remain outstanding at their original maturities and
interest rates.
The interest rate on the new senior notes is 10%, a reduction from the
11.25% interest rate on the existing senior notes and the 12.5% rate on the
existing senior discount notes. Interest is payable semi-annually on July 15 and
January 15, beginning July 15, 2002. As a result of the lower interest rate and
the $229 million reduction in principal amount of debt, Loral Orion's annual
cash interest payments will be reduced by approximately $39 million. Under U.S.
generally accepted accounting principles dealing with debt restructurings, in
December 2001 the Company recorded an after-tax extraordinary gain of $22
million on the exchange, after expenses of $8 million. The carrying value of the
new senior notes on the balance sheet is $904 million, although the actual
principal amount of the new senior notes is $613 million. The difference between
this carrying value and the actual principal amount of the new senior notes is
being amortized over the life of the new senior notes, fully offsetting interest
expense through maturity of the new senior notes. The indenture relating to the
new senior notes contains covenants, including, without limitation, restrictions
on Loral Orion's ability to pay dividends or make loans to Loral.
Loral 9.5% Senior Notes
In January 1999, Loral sold $350 million of 9.5% senior notes due 2006.
The related indenture contains customary covenants, including, without
limitation, restrictions on incurring indebtedness and paying dividends.
Equity
The Company's 6% Series C convertible redeemable preferred stock ("the
Series C Preferred Stock") and 6% Series D convertible redeemable preferred
stock ("the Series D Preferred Stock") have mandatory redemption dates in 2006
and 2007, respectively. The Company has the ability to make mandatory redemption
payments to the holders in either cash or common stock, or a combination of the
two. Based upon the price of the Company's common stock at June 30, 2002, the
Company has not authorized a sufficient number of shares of its common stock to
effect payment of the total mandatory redemptions in common stock in 2006 and
2007. Accordingly, as of June 30, 2002, the Company classified an aggregate of
$187 million of its Series C Preferred Stock and Series D Preferred Stock
outside the shareholders' equity section of the balance sheet, based on the
average of the volume weighted average daily price of the Company's common stock
as defined (approximately $1.22 per share at June 30, 2002). Had the volume
weighted average daily price of the Company's common stock as calculated been
above $1.79 at June 30, 2002, none of the Company's preferred stock would have
been classified outside the shareholders' equity section of the balance sheet.
The exact number of shares of the Company's common stock that may be issued on a
mandatory redemption date cannot be determined at this time. That number will
depend on a number of factors not known today, such as the price of the
Company's common stock and the number of shares of the Company's preferred stock
outstanding at that time. The Company could, subject to shareholder approval,
increase the authorized number of shares of its common stock to effect payment
of the total mandatory redemptions in common stock. The amount, if any, of the
Series C Preferred Stock and Series D Preferred Stock classified outside the
shareholders' equity section will vary in future periods depending on these
factors.
During the second quarter of 2002, in privately negotiated exchange
transactions, Loral converted 1.8 million shares of its Series C Preferred Stock
and 2.7 million shares of its Series D Preferred Stock (representing
approximately 28% of its
37
preferred stock outstanding) into 30.9 million shares of its common stock. In
connection with these transactions, Loral incurred non-cash dividend charges of
$38 million, which primarily relate to the difference between the value of the
common stock issued in the exchanges and the value of the shares that were
issuable under the stated conversion terms of the preferred stock. The non-cash
dividend charges had no impact on Loral's total shareholders' equity as the
offset was an increase in common stock and paid-in capital. As a result of these
transactions, Loral retired preferred stock with mandatory redemptions of $224
million in 2006 and 2007 and will save $13.4 million in annual dividends that it
would otherwise have been obligated to pay over the life of the preferred stock
retired. To the extent that the Company makes additional exchanges in the
future, the Company will reduce the number of shares of its preferred stock
subject to redemption. However, there is no guarantee that theses exchanges will
or can be made in the future.
On April 16, 2001, the Company completed exchange offers for its Series C
Preferred Stock and its Series D Preferred Stock. As a result, 3.7 million
shares of its Series C Preferred Stock and 1.9 million shares of its Series D
Preferred Stock were tendered and exchanged (representing approximately 26% of
the preferred stock outstanding) into 30.9 million shares of the Company's
common stock. Loral incurred non-cash dividend charges in the second quarter of
2001 of $29 million. As a result of these transactions, Loral retired preferred
stock with mandatory redemptions of $277 million in 2006 and 2007 and will save
$17 million in annual dividends that it would otherwise have been obligated to
pay over the life of the preferred stock retired.
Under the New York Stock Exchange criteria for continued listing, the
Exchange will normally give consideration to de-listing a company's stock when
the average closing price of the stock is less than $1.00 over a consecutive
30-trading day period. The average closing price of Loral common stock has been
less than $1.00 for 30 consecutive trading days. If the New York Stock Exchange
notifies the Company that its stock price is below the Exchange's price
criteria, the Company must bring its stock price and average stock price back
above $1.00 by six months following receipt of the notification. Failure to do
so will result in the Exchange's commencement of suspension and de-listing
procedures. If shareholder approval is required for an action to cure the price
condition, the Company must obtain such approval no later than its next annual
meeting and implement the action promptly thereafter. In such event, the price
condition will be deemed cured if the Company's stock price promptly exceeds
$1.00 per share, and the price remains above that level for at least the
following 30 trading days. De-listing of the Company's stock by the New York
Stock Exchange would result in a material adverse effect on the liquidity of
Loral shares, have an adverse effect on its trading value and impair Loral's
ability to raise funds in the capital market. There can be no assurance that if
Loral shares are de-listed from the New York Stock Exchange, there will be any
future trading market for Loral common stock. The Company believes that, if
notified by the New York Stock Exchange that its stock is below the Exchange's
price criteria, it will be able to cure the condition and maintain its listing
on the Exchange.
Cash and Available Credit
As of June 30, 2002, Loral had $181 million of cash and available credit
(including $73 million of available credit from the credit facilities described
above under the captions "Satellite Credit Agreement" and "LSC Amended Credit
Agreement").
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the six months ended June
30, 2002 was $115 million. This was primarily due to the EBITDA contribution of
$128 million, resulting in net income as adjusted for non-cash items, of $112
million and a decrease in deposits of $50 million resulting from the assignment
of launch vehicles to satellite programs, offset by a decrease in accounts
payable of $31 million primarily due to the timing of payments to vendors.
Net cash provided by operating activities for the six months ended June
30, 2001 was $54 million, primarily due to the EBITDA contribution of $120
million, resulting in net income as adjusted for non-cash items, of $57 million
and the increase in customer advances of $22 million, primarily resulting from
the prepayment by a customer for transponder capacity, offset by an increase in
inventory of $26 million due to the timing of contract satellite awards.
Net Cash Used in Investing Activities
Net cash used in investing activities for the six months ended June 30,
2002 and 2001 was $121 million and $146
38
million, respectively, primarily as a result of capital expenditures mainly for
the construction of satellites and investments in and advances to affiliates.
Net Cash Used in Financing Activities
Net cash used in financing activities for the six months ended June 30,
2002 and 2001 was $46 million and $77 million, respectively, primarily due to
net payments for debt obligations and preferred dividends.
OTHER LIQUIDITY MATTERS
Fixed Satellite Services
Satellites are carefully built and tested and have some redundant
components to permit the continued operation of a satellite in case of a
component failure. Due to the failure of primary components, certain of the
Company and its affiliates satellites are currently operating using back-up
components. If these back-up components fail and the primary components cannot
be restored, these satellites could lose a significant amount of capacity or be
total losses which, until replacement satellites are placed in-orbit, would
result in lost revenues and lost profits.
Satmex
Satmex currently has two satellites in orbit (Solidaridad 2 and Satmex 5)
and one satellite in inclined orbit (Morelos 2). In August 2000, Satmex
announced that its Solidaridad 1 satellite ceased operation and was
irretrievably lost. The loss was caused by the failure of the back-up control
processor on board the satellite. Solidaridad 1, which was built by Hughes Space
and Communications ("Hughes") and launched in 1994, experienced a failure of its
primary control processor in April 1999, and had been operating on its back-up
processor since that time. The majority of Solidaridad 1 customers were provided
replacement capacity on other Satmex satellites or on satellites operated by
Loral Skynet. The loss of Solidaridad 1 was fully covered by insurance proceeds.
Satmex has contracted with SS/L to build a replacement satellite. This
satellite, known as Satmex 6, is scheduled to be launched in the first quarter
of 2003, and is designed to provide broader coverage and higher power levels
than any other satellite currently in the Satmex fleet.
At June 30, 2002, Solidaridad 2 had a remaining estimated useful life of
seven years. Solidaridad 2 was also manufactured by Hughes and is similar in
design to Solidaridad 1 and to other Hughes satellites which have experienced
in-orbit component failures. While Satmex has obtained in-orbit insurance for
Solidaridad 2, a satellite failure may result in a drop in Satmex's profits,
which loss of profits would not be insured. The in-orbit insurance for
Solidaridad 2 expires in November 2002. Satmex cannot guarantee that it will be
able to renew the insurance at the end of this period, or that if renewal is
available, that it would be on acceptable terms. For example, a renewal policy
for Solidaridad 2 may not insure against an in-orbit failure due to the loss of
the satellite's control processor, the same component that caused the loss of
Solidaridad 1 and other Hughes satellites. An uninsured loss would have a
material adverse effect on Satmex's results of operations and financial
condition.
In August 2001, the Mexican government granted market access rights for
satellites owned by non-Mexican satellite operators, including SES Global and
PanAmSat, resulting in increased competition for Satmex.
In connection with the privatization of Satmex by the Mexican Government
of its fixed satellite services business, Loral and Principia formed a joint
venture, Firmamento Mexicano, S.A. de R.L. de C.V. ("Holdings"). In 1997,
Holdings acquired 75% of the outstanding capital stock of Satmex. As part of the
acquisition, Servicios Corporativos Satelitales, S.A. de C.V. ("Servicios"), a
wholly owned subsidiary of Holdings, issued 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 June 30, 2002, 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
accounts for Satmex using the equity method. The covenants of Satmex's debt
instruments restrict the ability of Satmex to pay dividends to Loral.
39
Europe*Star
Europe*Star, a geostationary satellite system that commenced service in
2001, is a member of the Loral Global Alliance, which is led by Loral Skynet.
Through June 30, 2002, Loral has invested $76 million in Europe*Star. As of June
30, 2002, Loral owned 47% of Europe*Star. Pursuant to the terms of the
shareholders agreement, Loral has permitted Alcatel to fund additional
expenditures to develop Europe*Star's business and infrastructure through $181
million in loans to the venture, which Alcatel claims are payable by Europe*Star
on demand.
XTAR, L.L.C.
XTAR, L.L.C. ("XTAR"), a newly formed joint venture between Loral and
Hisdesat Servicios Estrategicos, S.A. ("Hisdesat"), a consortium comprised of
leading Spanish telecommunications companies, including Hispasat, S.A., and
agencies of the Spanish government, plans to construct and launch an X-band
satellite by the end of 2003 to provide X-band services to government users in
the United States and Spain, as well as other friendly and allied nations. XTAR
is owned 56% by Loral (accounted for under the equity method since the Company
does not control certain significant operating decisions) and 44% by Hisdesat.
In addition, XTAR has agreed to lease certain transponders on the Spainsat
satellite, which is being constructed for Hisdesat. As of July 31, 2002, the
partners in proportion to their respective ownership interests, have contributed
$55 million to XTAR. XTAR expects to raise the remaining amount of the funds it
needs to construct and launch its satellite through vendor and other third-party
financings.
Globalstar and GTL
The Company accounts for its investment in Globalstar's $500 million
credit facility at fair value, with changes in the value (net of tax) recorded
as a component of other comprehensive loss (see Notes 3 and 5 to the condensed
consolidated financial statements). The Company recognized unrealized net gains
(losses) after taxes as a component of other comprehensive income (loss) of $2
million in 2002 and $(20) million in 2001, in connection with this security.
In January 2001, Globalstar suspended indefinitely principal and interest
payments on its debt and dividend payments on its redeemable preferred
partnership interests in order to conserve cash for operations.
On February 15, 2002, Globalstar and certain of its direct subsidiaries
filed voluntary petitions under Chapter 11 of Title 11, United States Code in
the United States Bankruptcy Court for the District of Delaware (the "Court").
In connection therewith, Loral/Qualcomm Satellite Services, L.P., the managing
general partner of Globalstar, its general partner, Loral/Qualcomm Partnership,
L.P. ("LQP"), and certain of Loral's subsidiaries that serve as general partners
of LQP also filed voluntary petitions with the Court. As a result of
Globalstar's bankruptcy petition, several of Globalstar's debt facilities and
other debt obligations have been accelerated and are immediately due and
payable. Subcontractors have assumed $83 million of financing related to
deferred billings SS/L has provided to Globalstar at June 30, 2002, which
includes $46 million which is non-recourse to SS/L in the event of non-payment
by Globalstar due to bankruptcy and is included in long-term liabilities in the
condensed consolidated balance sheets.
In February 2002, Globalstar reached an agreement (the "Globalstar
Restructuring Agreement") with Loral and an informal committee of noteholders,
representing approximately 17% principal amount of Globalstar's outstanding
notes, regarding the substantive terms of a financial and legal restructuring of
Globalstar's business. In March 2002, the Court appointed an official committee
of creditors which has been substituted as a party in the Globlastar
Restructuring Agreement in place of the informal committee of noteholders. The
Globalstar Restructuring Agreement is subject to a number of conditions,
including conditions that a plan of reorganization and related disclosure
statement reflecting the Globalstar Restructuring Agreement be approved by the
Court by August 12, 2002, an order confirming Globalstar's plan of
reorganization be entered by the Court by September 27, 2002 and the plan shall
have become effective by November 27, 2002. The condition relating to approval
of the plan and related disclosure statement has not been satisfied. Either
Loral or the official committee of noteholders (as a group) may terminate the
agreement upon written notice to the other within 15 days of any of these
conditions not being satisfied. Globalstar, Loral and the Official Committee are
in discussions to modify the terms and conditions of the Globalstar
Restructuring Agreement. There can be no assurance that a revised agreement will
be reached. In addition, Globalstar has received an offer from a potential new
investor and is in discussions with that investor regarding the terms of its
investment and the overall financial and legal restructuring of Globalstar.
There can be no assurance that Globalstar will be able to negotiate terms of a
restructuring with a new investor satisfactory
40
to Globalstar, Loral, the Official Committee or Globalstar's other creditors or
what aspects, if any, of the Globalstar Restructuring Agreement, such as mutual
releases, might be incorporated in any such restructuring. Any restructuring
plan will have to be submitted for and will be subject to Court approval.
As of June 30, 2002, the Company's investment in Globalstar related
activities was approximately $35 million, consisting primarily of the fair value
of its investment in Globalstar's $500 million credit facility, which was based
on the trading values of Globalstar's public debt at June 30, 2002. If
Globalstar were unable to effectuate a successful restructuring, the Company's
remaining investment in Globalstar's $500 million credit facility would be
impaired, which, as discussed above, would have no effect on the Company's
results of operations. Loral's investment in the operations of those Globalstar
service provider ventures in which it participates as an equity owner is
expected to be less than $5 million in 2002. The Company expects to pay in the
second half of 2002, $9 million it had guaranteed in connection with a
Globalstar service provider partnership. Globalstar service providers own and
operate gateways, are licensed to provide services and, through their sales and
marketing organizations, are actively selling Globalstar service, in their
respective territories.
Contractual Obligations
Contractual obligations as previously disclosed in the Company's Latest
Annual Report on Form 10-K have not materially changed, except for the reduction
in the mandatory redemptions of $224 million resulting from the exchanges of the
Company's preferred stock for common stock in the second quarter of 2002 (See
Liquidity and Capital Resources).
COMMITMENTS AND CONTINGENCIES
Loral Skynet has entered into prepaid leases, sales contracts and other
arrangements relating to transponders on its satellites. Under the terms of
these agreements, Loral Skynet continues to operate the satellites which carry
the transponders and originally provided for a warranty for a period of 10 to 14
years, in the case of sales contracts and other arrangements (19 transponders),
and the lease term, in the case of the prepaid leases (nine transponders).
Depending on the contract, Loral Skynet may be required to replace transponders
which do not meet operating specifications. Substantially all customers are
entitled to a refund equal to the reimbursement value if there is no
replacement, which is normally covered by insurance. In the case of the sales
contracts, the reimbursement value is 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 the case of prepaid leases, the reimbursement value is equal to the
unamortized portion of the lease prepayment made by the customer. In the case of
other arrangements, in the event of transponder failure where replacement
capacity is not available on the satellite, one customer is not entitled to
reimbursement, and the other customer's reimbursement value is based on
contractually prescribed amounts that decline over time.
Twelve of the satellites built by SS/L and launched since 1997, five of
which are owned and operated by Loral's subsidiaries or affiliates, have
experienced minor losses of power from their solar arrays. Although to date,
neither the Company nor any of the customers using the affected satellites have
experienced any degradation in performance, there can be no assurance that one
or more of the affected satellites will not experience additional power loss
that could result in performance degradation, including loss of transponder
capacity. In the event of additional power loss, the extent of the performance
degradation, if any, will depend on numerous factors, including the amount of
the additional power loss, the level of redundancy built into the affected
satellite's design, when in the life of the affected satellite the loss occurred
and the number and type of use being made of transponders then in service. A
complete or partial loss of satellites could result in a loss of orbital
incentive payments and, in the case of satellites owned by Loral subsidiaries
and affiliates, a loss of revenues and profits. With respect to satellites under
construction and construction of new satellites, based on its investigation of
the matter, SS/L has identified and has implemented remedial measures that SS/L
believes will prevent newly launched satellites from experiencing similar
anomalies. SS/L does not expect that implementation of these measures will cause
any significant delay in the launch of satellites under construction or
construction of new satellites. Based upon information currently available,
including design redundancies to accommodate small power losses and that no
pattern has been identified as to the timing or specific location within the
solar arrays of the failures, the Company believes that this matter will not
have a material adverse effect on the consolidated financial position or results
of operations of Loral.
In September 2001, the PAS 7 satellite built by SS/L for PanAmSat
experienced an electrical power failure on its solar arrays that resulted in the
loss of use of certain transponders on the satellite. As a result, PanAmSat has
claimed that under its contract with SS/L it is entitled to be paid $16 million.
SS/L disputes this claim and is in discussions with PanAmSat to resolve this
matter. SS/L believes that this failure is an isolated event and does not
reflect a systemic problem in either the
41
satellite design or manufacturing process. Accordingly, SS/L does not believe
that this anomaly will affect other on-orbit satellites built by SS/L. However,
as a result of discussions with insurers relating to the renewal of insurance
for Telstar 10/Apstar IIR which has the same solar array configuration as PAS 7,
approximately 25% of the insurance coverage has excluded losses due to solar
array failures and approximately 75% of the insurance coverage provides for
coverage of losses due to solar array failures in the event of a capacity loss
of 65% or more. Three other satellites operated by Loral Skynet have the same
solar array configuration as Telstar 10/Apstar IIR. There can be no assurance
that the insurers will not require either exclusions of, or similar limitations
on, coverage due to solar array failures in connection with renewals of
insurance for these satellites in 2003 and 2004. In addition, the PAS 8
satellite has experienced minor losses of power from its solar arrays, the cause
of which is unrelated to the loss of power on the PAS 7 satellite. PanAmSat has
claimed that under its contract with SS/L it is entitled to be paid $7.5 million
as a result of these minor power losses. SS/L disputes this claim. SS/L and
PanAmSat are in discussions to resolve this matter.
SS/L has contracted to build a spot beam, Ka-band satellite for a customer
planning to offer broadband data services directly to the consumer. The customer
has failed to make certain payments due to SS/L under the contract and has
asserted that SS/L is not able to meet the contractual delivery date for the
satellite. As of June 30, 2002, SS/L had billed and unbilled accounts receivable
and vendor financing arrangements of $49 million with this customer. SS/L and
the customer have entered into an agreement that provides that, until September
6, 2002, neither party will assert that the other party is in default under the
contract, and the parties are currently engaged in discussions to resolve their
outstanding issues. In addition, SS/L and the customer have agreed to suspend
work on the satellite during these discussions, pending the outcome of the
discussions. If the parties do not resolve their issues, it is likely that each
party would assert that the other is in default. The contract provides that SS/L
may terminate the contract for a customer default 90 days after serving a notice
of default if the default is not cured by the customer; upon such a default,
SS/L would be entitled to recover the contractually agreed price of items
delivered and accepted prior to termination and 115% of its actual costs
incurred for items not delivered prior to termination. The contract also
provides that the customer may terminate the contract for an SS/L default 133
days after serving a notice of default if the default is not cured by SS/L; upon
such a default, SS/L would be obligated to refund all amounts previously paid by
the customer, $78 million as of June 30, 2002, plus interest. Based on the
discussions currently in progress with the customer and other parties who may be
interested in the satellite, management's assessment of the market opportunities
for the satellite and consideration of the satellite's estimated value,
management does not believe that this matter will have a material adverse effect
on the consolidated financial position or results of operations of Loral.
SS/L was a party to an Operational Agreement with Alcatel Space
Industries, pursuant to which the parties had agreed to cooperate on certain
satellite programs, and an Alliance Agreement with Alcatel Space (together with
Alcatel Space Industries, Alcatel), pursuant to which Alcatel had certain rights
with respect to SS/L, including the right to appoint two representatives to
SS/L's seven-member board of directors, rights to approve certain extraordinary
actions and certain rights to purchase SS/L shares at fair market value in the
event of a change of control (as defined) of either Loral or SS/L. The
agreements between Alcatel and SS/L were terminable on one year's notice, and,
on February 22, 2001, Loral gave notice to Alcatel that they would expire on
February 22, 2002. In April 2001, Alcatel commenced an arbitration proceeding
challenging the effectiveness of Loral's notice of termination and asserting
various alleged breaches of the agreements by SS/L relating to the exchange of
information and other procedural or administrative matters. In February 2002,
the arbitral tribunal issued a partial decision, which upheld the validity of
Loral's termination effective February 22, 2002 and Alcatel's claims as to
certain breaches. The partial decision was confirmed by the District Court for
the Southern District of New York on June 25, 2002. The arbitral tribunal has
provided both parties with an opportunity to file any additional claims or
counterclaims they may have. In March 2002, Alcatel submitted additional claims
against Loral and SS/L and is seeking at least $350 million in damages in
respect of all of its claims. The Company believes that Alcatel's claims for
damages are without merit and have been asserted for competitive reasons to
disadvantage SS/L and that this matter will not have a material adverse effect
on its consolidated financial position or results of operations. In April 2002,
Loral and SS/L filed their statement of counterclaims against Alcatel. The
claims being asserted against Alcatel are for breach of contract, defamation,
misappropriation of SS/L's confidential property, conversion, and intentional
breaches of confidentiality agreements. Loral and SS/L are seeking injunctive
relief, compensatory damages in the amount of $380 million, and punitive
damages. The arbitral tribunal will decide at a later date whether any of
Alcatel's claims or Loral's or SS/L's counterclaims give rise to damages.
SS/L is required to obtain licenses and enter into technical assistance
agreements, presently under the jurisdiction of the State Department, in
connection with the export of satellites and related equipment, as well as
disclosure of technical data to foreign persons. Delays in obtaining the
necessary licenses and technical assistance agreements have in the past resulted
in, and may in the future result in, the
42
delay of SS/L's performance on its contracts, which could result in the
cancellation of contracts by its customers, the incurrence of penalties or the
loss of incentive payments under these contracts.
The launch of ChinaSat-8 has been delayed pending SS/L's obtaining the
approvals required for the launch. On December 23, 1998, the Office of Defense
Trade Controls, or ODTC, of the U.S. Department of State temporarily suspended a
previously approved technical assistance agreement under which SS/L had been
preparing for the launch of the ChinaSat-8 satellite. In addition, SS/L was
required to re-apply for new export licenses from the State Department to permit
the launch of ChinaSat-8 on a Long March launch vehicle when the old export
licenses issued by the Commerce Department, the agency that previously had
jurisdiction over satellite licensing, expired in March 2000. On January 4,
2001, the ODTC, while not rejecting these license applications, notified SS/L
that they were being returned without action. On January 9, 2002, Loral, SS/L
and the United States Department of State entered into a consent agreement (the
"Consent Agreement") settling and disposing of all civil charges, penalties and
sanctions associated with alleged violations by SS/L of the Arms Export Control
Act and its implementing regulations. The Company recorded a charge in the
fourth quarter of 2001 for the penalties associated with the Consent Agreement.
The Consent Agreement provides that the State Department agrees, assuming the
Company's and SS/L's faithful adherence to the terms of the Consent Agreement,
and the Arms Export Control Act and its implementing regulations, that decisions
concerning export licenses for the ChinaSat-8 spacecraft will be made on the
basis of the security and foreign policy interests of the United States,
including matters relating to U.S. relations with the People's Republic of
China, without reference to the State Department's previously expressed concerns
regarding SS/L's reliability, which concerns are considered to be appropriately
mitigated through the operation of various provisions of the Consent Agreement.
Discussions between SS/L and the State Department regarding SS/L's obtaining the
approvals required for the launch of ChinaSat-8 are continuing.
If ChinaSat were to terminate its contract with SS/L for ChinaSat-8 as a
result of these delays, ChinaSat may seek a refund of $134 million for payments
made to SS/L as well as penalties of up to $11 million. The Company does not
believe that ChinaSat is entitled to such a refund or penalties and would
vigorously contest any such claims by ChinaSat. A portion of the potential claim
relates to amounts that were paid to a launch vehicle provider. To the extent
that SS/L or ChinaSat is able to recover some or all of the $52 million deposit
payment on the Chinese launch vehicle, this recovery would reduce the amount of
any claim. SS/L believes that ChinaSat bears the risk of loss in the event that
the deposit payments are not refunded by the launch vehicle provider. SS/L has
commenced discussions with the launch vehicle provider to recover this deposit.
There can be no assurance, however, that SS/L will be able either to obtain a
refund from the launch provider or to find a replacement customer for the
Chinese launch vehicle. SS/L estimates that it would incur costs of
approximately $38 million to refurbish and retrofit the satellite so that it
could be sold to another customer, which resale cannot be guaranteed.
As of June 30, 2002, one of SS/L's foreign customers had not made
milestone payments of $21 million that were past due. The customer has asserted
that it is not obligated to make the payments until SS/L obtains the necessary
export licenses. SS/L disputes the customer's interpretation of the contract and
has issued a notice of default to the customer, under which the customer has
until October 14, 2002 to cure its default. SS/L and the customer are currently
in discussions to resolve the matter.
At June 30, 2002, SS/L had outstanding vendor financing receivables
totaling $71 million, including accrued interest, with one customer that is
currently in the process of developing and rolling out its business. The
customer recently announced that it has initiated discussions with certain of
its debtholders, including the Company, regarding the possibility of exchanging
a significant amount of its debt for equity and obtaining new financing from
investors. SS/L's receivable is collateralized by a security interest in an
essential component of the customer's operating system. The Company expects that
the value of the collateral is sufficient to cover the outstanding receivable
and expects that this receivable will be collected, although there can be no
assurance that it will. Any reduction in the expected amount to be collected
under this receivable may have an adverse affect on the Company.
Loral Skynet has an application pending with the FCC for authorization to
use the C-Band frequency at 121(degrees) W.L. in the U.S. using a non-U.S. ITU
filing. Telstar 13, which is currently under construction, is scheduled for
launch into this orbital slot in the fourth quarter of 2002. New Skies
Satellites, which asserts that its non-U.S. ITU filing at 120.8(degrees) W.L.
has date priority over Loral Skynet's ITU filing, has filed comments with the
FCC seeking to impose conditions on Loral Skynet's use of the 121(degrees) W.L.
slot. Loral Skynet has opposed New Skies' comments. Loral Skynet is continuing
its international coordination of the 121(degrees) W.L. slot and is in
discussions with New Skies to resolve the matter. There can be no assurance,
however, that coordination discussions with New Skies and other operators will
be successful, that the FCC
43
will grant Loral Skynet's application, or, if granted, whether conditions the
FCC may impose will constrain Loral Skynet's operations at the 121(degrees) W.L.
slot.
The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, that arise in the ordinary course of business.
Although the outcome of these claims cannot be predicted with certainty, the
Company does not believe that any of these other existing legal matters will
have a material adverse effect on its consolidated financial position or results
of operations.
Globalstar Related Matters
On September 26, 2001, the nineteen separate purported class action
lawsuits filed in the United States District Court for the Southern District of
New York by various holders of securities of Globalstar Telecommunications
Limited ("GTL") and Globalstar, L.P. ("Globalstar") against GTL, Loral, Bernard
L. Schwartz and other defendants were consolidated into one action titled In re:
Globalstar Securities Litigation. In November 2001, plaintiffs in the
consolidated action filed a consolidated amended class action complaint against
Globalstar, GTL, Globalstar Capital Corporation, Loral and Bernard L. Schwartz
alleging (a) that all defendants (except Loral) violated Section 10(b) of the
Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated
thereunder, by making material misstatements or failing to state material facts
about Globalstar's business and prospects, (b) that defendants Loral and
Schwartz are secondarily liable for these alleged misstatements and omissions
under Section 20(a) of the Exchange Act as alleged "controlling persons" of
Globalstar, (c) that defendants GTL and Schwartz are liable under Section 11 of
the Securities Act of 1933 (the "Securities Act") for untrue statements of
material facts in or omissions of material facts from a registration statement
relating to the sale of shares of GTL common stock in January 2000, (d) that
defendant GTL is liable under Section 12(2)(a) of the Securities Act for untrue
statements of material facts in or omissions of material facts from a prospectus
and prospectus supplement relating to the sale of shares of GTL common stock in
January 2000, and (e) that defendants Loral and Schwartz are secondarily liable
under Section 15 of the Securities Act for GTL's primary violations of Sections
11 and 12(2)(a) of the Securities Act as alleged "controlling persons" of GTL.
The class of plaintiffs on whose behalf the lawsuit has been asserted consists
of all buyers of securities of Globalstar, Globalstar Capital and GTL during the
period from December 6, 1999 through October 27, 2000, excluding the defendants
and certain persons related or affiliated therewith. Loral and Mr. Schwartz have
filed a motion to dismiss the amended complaint in its entirety as to Loral and
Mr. Schwartz, which motion is pending before the court.
On March 2, 2001, the seven separate purported class action lawsuits filed
in the United States District Court for the Southern District of New York by
various holders of common stock of Loral Space & Communications Ltd. ("Loral")
against Loral, Bernard L. Schwartz and Richard Townsend were consolidated into
one action titled In re: Loral Space & Communications Ltd. Securities
Litigation. On May 6, 2002, plaintiffs in the consolidated action filed a
consolidated amended class action complaint alleging (a) that all defendants
violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder
by making material misstatements or failing to state material facts about
Loral's financial condition and its investment in Globalstar and (b) that Mr.
Schwartz is secondarily liable for these alleged misstatements and omissions
under Section 20(a) of the Exchange Act as an alleged "controlling person" of
Loral. The class of plaintiffs on whose behalf the lawsuit has been asserted
consists of all buyers of Loral common stock during the period from November 4,
1999 through February 1, 2001, excluding the defendants and certain persons
related or affiliated therewith. Loral and Messrs. Schwartz and Townsend have
filed a motion to dismiss the complaint in its entirety.
Loral believes that it has meritorious defenses to the above Globalstar
related class action lawsuits and intends to pursue them vigorously.
Loral holds debt obligations from Globalstar (see Note 5 to the condensed
consolidated financial statements). In other situations in the past, challenges
have been initiated seeking subordination or recharacterization of debt held by
an affiliate of an issuer. While Loral knows of no reason why such a claim would
prevail with respect to the debt Loral holds in Globalstar, there can be no
assurance that such claims will not be made in Globalstar's bankruptcy
proceeding. If such claims were to prove successful, it will jeopardize the
amount of equity interest Loral will ultimately receive in the new Globalstar
company. Moreover, actions may be initiated in Globalstar's bankruptcy
proceeding seeking to characterize payments previously made by Globalstar to
Loral prior to the filing date as preferential payments subject to repayment.
Loral may also find itself subject to other claims brought by Globalstar
creditors and securities holders, who may seek to impose liabilities on Loral as
a result of its relationship with Globalstar. For instance, Globalstar's
creditors may seek to pierce the corporate veil in an attempt to recover
Globalstar obligations owed to them that are recourse to Loral's
44
subsidiaries, which are general partners in Globalstar and have filed for
bankruptcy protection. Globalstar's cumulative partners' deficit at June 30,
2002, was $3.1 billion.
During the second quarter of 2002, the Company recovered a claim with a
vendor on the Globalstar program. Globalstar or its creditors may assert a
claim to some portion or all of this recovery. If so, the Company will
vigorously dispute any such claim.
In May 2000, Globalstar finalized $500 million of vendor financing
arrangements with Qualcomm. The original terms of this vendor financing provided
for interest at 6%, a maturity date of August 15, 2003 and required repayment
pro rata with the term loans due to Loral under Globalstar's $500 million credit
facility. As of June 30, 2002, $623 million was outstanding under this facility
(including $123 million of capitalized interest). Loral has agreed that if the
principal amount outstanding under the Qualcomm vendor financing facility
exceeds the principal amount due Loral under Globalstar's $500 million credit
facility, as determined on certain measurement dates, then Loral will guarantee
50% of such excess amount. As of June 30, 2002, Loral had no guarantee
obligation.
OTHER MATTERS
Insurance Costs
The Company, like others in the satellite industry, is faced with
significantly higher premiums on launch and in-orbit insurance and significantly
shorter coverage periods than those that have been available in the past, which
is due in part to the events of September 11, 2001. This development in the
insurance industry will increase the cost of doing business for both the
Company's satellite manufacturing and fixed satellite services segments. The
Company intends to pass on some of the increased cost to its customers. There
can be no assurance, however, that it will be able to do so. Insurance market
conditions have historically been cyclical in nature. While the Company
anticipates that these conditions will improve in the future, there can be no
assurance that they will.
Accounting Pronouncements
SFAS 142
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS 142") which addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS 142 provides that intangible assets with finite useful lives
be amortized and that goodwill and intangible assets with indefinite lives not
be amortized, but rather be tested at least annually for impairment. SFAS 142
also changed the evaluation criteria for testing goodwill for impairment from an
undiscounted cash flow approach, which was previously utilized under the
guidance in Accounting Principles Board Opinion No. 17, Intangible Assets, to a
test based on fair value. Fair value is determined by the amount at which an
asset or liability could be bought or sold in a current transaction between
willing parties, that is, other than in a forced or liquidation sale. Quoted
market prices in active markets are the best evidence of fair value and must be
used as the basis for the measurement, if available. If quoted market prices are
not available, the estimate of fair value must be based on the best information
available, including prices for similar assets and liabilities and the results
of using other valuation techniques, such as public company trading multiples,
future discounted cash flows and merger and acquisition transaction multiples.
In accordance with SFAS 142, the Company's previously recognized cost in
excess of net assets acquired ("goodwill") of $892 million for business
acquisitions accounted for under the purchase method of accounting completed
prior to July 1, 2001, was reviewed under the new transitional guidance as of
January 1, 2002. Goodwill had been previously assigned to the Company's business
segments as follows (based on the net book value at December 31, 2001): FSS $597
million, satellite manufacturing and technology $286 million and data services
$9 million. The Company hired professionals in the valuation consulting business
to determine the fair value of each of the Company's reporting units. Since
there were no quoted market prices in active markets for the Company's reporting
units, the measurement of fair value for each reporting unit was based on the
best information available for that reporting unit, including reasonable and
supportable assumptions and projections, as follows: (1) FSS -- public company
trading multiples, (2) satellite manufacturing and technology -- future
discounted cash flows, and (3) data services -- merger and acquisition
transaction multiples. Those professionals determined that the goodwill for each
of the Company's reporting units under the new guidance in SFAS 142 was fully
impaired. Accordingly, as of January 1, 2002, the Company recorded a non-cash
charge for the cumulative effect of the change in accounting principle of $892
million before taxes ($877 million after taxes).
45
The charge is the result of a change in the evaluation criteria for
goodwill from an undiscounted cash flow approach which was previously utilized
under the guidance in Accounting Principles Board Opinion No. 17, Intangible
Assets, to the fair value approach which is stipulated in SFAS 142.
The following table presents the actual financial results and as adjusted
financial results without the amortization of goodwill for the Company for the
three and six months ended June 30, 2001 (in thousands, except per share
amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
------ ----------- ------ -----------
Reported loss before cumulative effect of change in
accounting principle ............................................... $(54,697) $(54,697) $(111,964) $(111,964)
Add back amortization of goodwill, net of taxes ...................... -- 6,656 -- 13,314
-------- -------- --------- ---------
Loss before cumulative effect of change in accounting
principle .......................................................... (54,697) (48,041) (111,964) (98,650)
Cumulative effect of change in accounting principle, net of taxes ... -- -- (1,741) (1,741)
-------- -------- --------- ---------
Net loss ............................................................. (54,697) (48,041) (113,705) (100,391)
Preferred dividends .................................................. (40,694) (40,694) (56,817) (56,817)
-------- -------- --------- ---------
Net loss applicable to common shareholders ........................... $(95,391) $(88,735) $(170,522) $(157,208)
======== ======== ========= =========
Reported basic and diluted loss per share before cumulative
effect of change in accounting principle ........................... (0.29) (0.54)
Add back goodwill amortization per share ............................. 0.02 0.04
-------- ---------
As adjusted loss per share before cumulative effect of
change in accounting principle ..................................... (0.27) (0.50)
Cumulative effect of change in accounting principle .................. -- (0.01)
-------- ---------
Adjusted loss per share .............................................. $ (0.27) $ (0.51)
======== =========
SFAS 143
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and the normal operation of a
long-lived asset, except for certain obligations of lessees. The Company is
required to adopt SFAS 143 on January 1, 2003. The Company has not yet
determined the impact that the adoption of SFAS 143 will have on its results of
operations or its financial position.
SFAS 144
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. It supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB 30, Reporting the Results of Operations -- Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. The Company adopted SFAS 144 on January 1, 2002. The
Company has determined that there was no effect on the Company's consolidated
financial position or results of operations relating to the adoption of SFAS
144.
SFAS 145
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections
("SFAS 145"). SFAS 145 generally requires that any gains or losses on
extinguishment of debt in current or prior periods be classified as other income
(expense), beginning in fiscal 2003, with early adoption encouraged. The Company
is currently evaluating the impact of adopting the provisions of SFAS No. 145 in
its consolidated financial statements.
46
SFAS 146
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS 146"). SFAS 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. Examples of costs covered by the standard include lease termination costs
and certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). SFAS 146
replaces EITF Issue No. 94-3. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.
47
PART II.
OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
CCD Lawsuits. On September 12, 1991, Loral Fairchild Corp. ("Loral
Fairchild"), a subsidiary of Loral Corporation, filed suit against a number of
companies 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. Loral has the rights to any recovery that may be awarded
as a result of this suit. Although Loral Fairchild had previously either lost or
settled its claims against most of the defendants, in December 2001, a jury
trial was held with respect to the claims against the remaining defendants, and
the jury returned a verdict in favor of the defendants. In June 2002, the trial
court denied Loral Fairchild's motion to overturn the jury verdict as contrary
to law.
Also, see legal proceedings set forth in Note 9 to the condensed
consolidated financial statements.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 2002, at the Company's Annual Meeting of Shareholders, the
following proposals were acted on:
(1) In an uncontested election, three nominees for the Board of
Directors were elected to three-year terms expiring in 2005. The votes
were as follows:
For Withheld
----------- ---------
Bernard L. Schwartz ......... 294,537,071 8,638,076
Malvin A. Ruderman .......... 294,530,121 8,645,026
E. Donald Shapiro ........... 294,237,435 8,937,712
(2) The selection of Deloitte & Touche LLP to serve as independent
auditors for the fiscal year ending December 31, 2002, was approved. The
votes were as follows:
For ......................... 297,835,030
Against ..................... 4,282,074
Abstentions ................. 1,058,043
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
Exhibit 12-- Computation of Deficiency of Earnings to Cover Fixed Charges
Exhibit 99.1 -- Chief Executive Officer Certification
Exhibit 99.2 -- Chief Financial Officer Certification
(b) Reports on Form 8-K
DATE OF REPORT DESCRIPTION
- -------------- -----------
April 3, 2002 Item 5 -- Other Events Exchange of Preferred Stock for Common Stock
June 6, 2002 Item 5 -- Other Events Exchanges of Preferred Stock for Common Stock
48
SIGNATURES
Pursuant to the requirements 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.
Registrant
/s/ RICHARD J. TOWNSEND
----------------------------------------
Richard J. Townsend
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
and Registrant's Authorized Officer
Date: August 14, 2002
49
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ------------ -----------
Exhibit 12 -- Computation of Deficiency of Earnings to Cover Fixed Charges
Exhibit 99.1 -- Chief Executive Officer Certification
Exhibit 99.2 -- Chief Financial Officer Certification
50