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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1996
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Commission file number 1-14180
LORAL SPACE & COMMUNICATIONS LTD.
600 Third Avenue
New York, New York 10016
Telephone: (212) 697-1105
Jurisdiction of incorporation: Bermuda
IRS identification number: 13-3867424
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 par value...................................... New York Stock Exchange
The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months or
such shorter period. The registrant has not been subject to such filing
requirements for the past 90 days.
No disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is contained herein, and will not be contained, to the best of registrant's
knowledge, in information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
At May 31, 1996, 183,592,308 common shares were outstanding, and the
aggregate market value of such shares (based upon the closing price on the New
York Stock Exchange) held by non-affiliates of the registrant was approximately
$2,894,000,000.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Loral Space & Communications Ltd. ("Loral SpaceCom" or the "Company")
manages and is the largest equity owner of both Globalstar, L.P. ("Globalstar")
and Space Systems/Loral, Inc. ("SS/L") (together the "Operating Affiliates").
The Company will also act as a Globalstar service provider in Canada, Brazil and
Mexico, and is evaluating additional satellite-based service opportunities.
Loral SpaceCom was formed to effectuate the distribution of Loral Corporation's
("Loral") space and telecommunications businesses (the "Distribution") to
shareholders of Loral and holders of options to purchase Loral common stock
pursuant to a merger agreement (the "Merger") dated January 7, 1996 between
Loral and Lockheed Martin Corporation ("Lockheed Martin").
Globalstar and SS/L have established strategic alliances with world-class
telecommunications service providers and equipment manufacturers and with
leading aerospace companies. In addition, the Company has established a
relationship with Lockheed Martin through which the Company and its Operating
Affiliates will have certain rights to use intellectual property and access to
research and development, technical consulting and support services.
The Company, in partnership with established international
telecommunications companies, as well as local wireless or telephone companies,
will act as a Globalstar service provider in several key territories, including
Canada, Brazil and Mexico. The Company, together with QUALCOMM Incorporated
("Qualcomm"), also has the exclusive right to provide in-flight phone service
using Globalstar in the United States.
The Company also intends to pursue additional satellite-based
communications services opportunities, including (i) CyberStar, a proposed
high-speed satellite-delivered communications system designed to provide users
with communications services such as desktop video-conferencing, high-data rate
computer networking and data transmission; (ii) domestic and international
direct broadcast services; and (iii) telecommunications satellites for voice
telephony, video teleconferencing, transmission to television networks and cable
head-ends and remote news and sports feeds.
The Distribution of approximately 183.6 million shares of Loral SpaceCom
common stock was made on April 23, 1996 (the "Distribution Date"). In connection
with the Distribution, Lockheed Martin contributed $612 million in cash to the
Company. Of the amount contributed, $344 million represented the purchase of a
20% fully-diluted equity interest in the Company in the form of Loral SpaceCom
Series A Convertible Preferred Stock. Such stock is subject to certain voting
limitations, restrictions on transfer and standstill provisions. The Company has
invested its $612 million in marketable securities pending investment in the
Company's satellite telecommunications programs and opportunities. The Company
also holds $102.5 million principal amount of Globalstar Telecommunications
Limited's ("GTL") 6 1/2% Convertible Preferred Equivalent Obligations and a
minority non-controlling equity investment in K&F Industries, Inc. ("K&F").
GLOBALSTAR
Globalstar is building and preparing to launch and operate a worldwide,
low-earth orbit ("LEO") satellite-based digital telecommunications system (the
"Globalstar(TM) System"). The Globalstar System is designed to enable local
service providers to offer low-cost, high quality wireless voice telephony and
data services in virtually every populated area of the world. The Globalstar
System's worldwide coverage is designed to enable its service providers to
extend modern telecommunications services to people who currently lack basic
telephone service and to enhance wireless telecommunications in areas
underserved or not served by existing or future cellular systems, providing a
telecommunications solution in parts of the world where the build-out of
terrestrial systems cannot be economically justified.
The Company owns, directly and indirectly, 33.7% of Globalstar's
outstanding equity and has overall management responsibility for the design,
construction, deployment and operation of the Globalstar System. A
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portion of the Company's interest in Globalstar is held through GTL, a Bermuda
company traded on the Nasdaq National Market.
Globalstar users will make and receive calls through a variety of
Globalstar phones, including hand-held and vehicle-mounted units similar to
today's cellular telephones, fixed telephones similar either to phone booths or
ordinary wireline telephones, and data terminals and facsimile machines
(collectively, the "Globalstar Phones"). Dual-mode Globalstar Phones will
provide access to both the Globalstar System and the subscriber's land-based
cellular service. Each Globalstar Phone will communicate through one or more
satellites to a local Globalstar service provider's interconnection point (known
as a gateway) which will, in turn, connect into existing telecommunications
networks.
Globalstar is on schedule to begin launching satellites in the second half
of 1997, to commence commercial operations in the second half of 1998 (the
"In-Service Date") and to have its full constellation of 48 satellites, plus
eight in-orbit spare satellites, launched by the end of 1998 (the "Full
Constellation Date"). Significant regulatory and licensing milestones have been
achieved for the Globalstar System, including allocation of required frequencies
by the Federal Communications Commission ("FCC") and the 1995 World
Radiocommunication Conference ("WRC '95"). To date, Globalstar has raised or
received commitments for approximately $1.4 billion in equity, debt and vendor
financing, representing over 75% of the total external financing expected to be
required to complete the system and to achieve worldwide operations. Globalstar
intends to raise the balance of its external financing needs in the capital
markets and may also seek financing support from its strategic partners.
Full satellite critical design review has been successfully completed,
manufacturing of long-lead-time components of the Globalstar satellites has
commenced, engineering models are under construction and the non-recurring
design phase of the satellite contract is close to completion. Definitive
agreements have been reached with three launch providers for the launch of the
full Globalstar satellite constellation. These agreements provide for a variety
of launch options, giving Globalstar considerable launch flexibility.
Internationally, Globalstar's partners have been seeking alliances in their
assigned territories with service providers and have entered into such
agreements in certain territories. Globalstar believes these relationships with
in-country service providers may facilitate the granting of local regulatory
approval for operation of the Globalstar System and provide local marketing and
technical expertise.
The Globalstar System has been designed to address the substantial and
growing demand for telecommunications services worldwide, particularly in
developing countries. More than 3 billion people today live without residential
telephone service, many of them in rural areas where the cost of installing
wireline service is prohibitively high. Moreover, even where telephone
infrastructure is available in developing countries, outdated equipment often
leads to unreliable local service and limited international access. The number
of worldwide fixed phone lines has increased from 473 million to 647 million
since 1988 and is projected to increase to one billion by 2002. Nonetheless,
since 1988, waiting lists for fixed service have increased from 36 million to 46
million, resulting in an average waiting time before installation of
approximately one and a half years. Similarly, the cellular market has grown
from 4 million worldwide subscribers in 1988 to an estimated 87 million in 1995
and is projected to increase to 334 million by 2001. At that time, it is
projected that only 40% of the world's population will live in areas with
cellular coverage. The remaining 60% of the world population will have access to
wireless telephone service principally through satellite-based systems like the
Globalstar System. Globalstar's business plan requires penetration of only a
small fraction of these potential markets to achieve its objectives.
The Globalstar System has been designed with attributes which the Company
believes compare favorably to other proposed global mobile satellite service
systems including: (i) Globalstar's unique combination of code division multiple
access ("CDMA") technology and path diversity through multiple satellite
coverage will reduce call interruptions and signal blockage from obstructions
and will use satellite power more efficiently; (ii) a proven space segment
design without complex intersatellite links or on-board call processing and a
ground segment with flexible, low-cost gateways and competitively priced
Globalstar Phones; (iii) lower average wholesale prices than other proposed
mobile satellite service ("MSS") systems; and (iv) gateways installed in most
major countries, minimizing tail charges (i.e. amounts charged by carriers other
than the
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Globalstar service provider for connecting a Globalstar call through its
network), resulting in low costs for domestic and regional calls, which will
account for the vast majority of Globalstar's anticipated usage.
Globalstar is a development stage company and has no operating history. It
has incurred net losses from inception and expects such losses to continue until
commercial service operations have commenced. Globalstar will require
expenditures of significant funds for development, construction, testing and
deployment before commercialization. Globalstar does not expect to commence
operations before 1998 or to achieve positive cash flow before 1999. There can
be no assurance that Globalstar will achieve its objectives by the target dates.
In March and April, 1996, GTL sold a total of $310,000,000 of its 6 1/2%
Convertible Preferred Equivalent Obligations due 2006 in a Rule 144A offering,
of which the Company purchased $102,500,000 principal amount. These securities
are convertible into GTL common stock at any time after 60 days from the date of
original issuance and prior to maturity at $65.00 per share. GTL utilized the
proceeds of this offering to purchase Redeemable Preferred Partnership Interests
in Globalstar, the terms of which are generally similar to those of the
securities issued in the offering, and Globalstar will use such proceeds for the
design, construction and deployment of the Globalstar System. On June 21, 1996,
GTL filed a registration statement on Form S-3 to register its 6 1/2%
Convertible Preferred Equivalent Obligations and the shares of GTL common stock
issuable upon the conversion thereof.
THE GLOBALSTAR SYSTEM
The Globalstar System is comprised of the Space Segment, consisting of 48
satellites and eight in-orbit spare satellites, and the Ground Segment
consisting of two Satellite Operations Control Centers ("SOCCs") and two Ground
Operations Control Centers ("GOCCs"), Globalstar gateways in each region served,
and mobile and fixed Globalstar Phones. Globalstar will own and operate the
satellite constellation, the SOCCs and the GOCCs, as well as one gateway; the
remaining elements of the system will be owned by Globalstar's service providers
and their subscribers. The descriptions of the Globalstar System are based upon
current design and are subject to modification in light of future technical and
regulatory developments.
Globalstar's most important service will be voice telephony service, which
Globalstar expects to offer through telephone booth-like installations and other
fixed telephones located in areas without any landline or cellular telephone
coverage, and through hand-held and vehicle-mounted units, similar to existing
cellular telephones. Globalstar is also expected to offer paging, facsimile and
messaging services and position location capabilities, which may be integrated
with its voice services or marketed separately, as well as environmental and
asset monitoring from remote locations and other forms of data transmission.
VOICE SERVICES
The majority of the world's population does not have ready access to any of
the basic telephone services that are available to most residents of developed
nations. Public installations of one or more Globalstar Phones, configured as
telephone booths, powered by local generators or solar panels and connected to a
directional antenna aimed at the satellites overhead, would be important
resources for remote villages currently lacking basic telephone service.
Government officials, among other individuals, as well as commercial enterprises
in remote areas such as mining and logging operations, are expected to utilize
fixed Globalstar Phones which will operate like landline telephones, but will be
connected to a directional Globalstar antenna. Directional antennae also provide
for more efficient use of the system's capacity.
In certain regions, land-based cellular systems cannot be justified
economically because of their population density or geographic characteristics.
As a satellite-based system with worldwide coverage, Globalstar can efficiently
offer both hand-held and vehicle-mounted mobile service in these areas through
its single-mode mobile Globalstar Phones. These units are expected to be similar
in size, function and cost to today's full-featured cellular telephones. Unlike
any cellular telephone in existence today, however, these units are designed to
have the ability to operate (both for making and receiving calls) in virtually
every inhabited area of the world where Globalstar service is authorized.
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The Globalstar mobile telephone will be equipped with an omnidirectional
antenna, similar to a cellular telephone antenna. Each mobile telephone is
designed to communicate with all satellites in view and will have the built-in
signal processing intelligence to constantly seek out and select the strongest
signal transmitted from overhead, combining the signals received to ensure
maximum service quality. Further, Globalstar Phones will automatically vary
their power output as necessary to maintain call quality and connectivity.
Current cellular system subscribers who need a mobile telephone that also
works when they travel to areas without compatible cellular coverage (or that
have no cellular coverage at all) will be offered Globalstar service through
dual-mode handsets and vehicle-mounted units. A dual-mode telephone will also
permit the user to access Globalstar service when cellular access is temporarily
blocked by interference, terrain or over-capacity. Like Globalstar's single-mode
mobile telephones, dual-mode telephones are designed to enable the user to make
and receive calls through a unique access number anywhere in the world where
service is authorized.
Dual-mode Globalstar Phones can be programmed by the service provider to
automatically utilize the chosen land-based cellular service whenever it is
available and to otherwise process the call through Globalstar; they can also be
programmed for manual selection between Globalstar and the land-based cellular
system. Dual-mode Globalstar Phones are being developed for the most
widely-based conventional cellular modulation. The dual-mode pairs are expected
to include: Globalstar/CDMA, Globalstar/Advanced Mobile Phone Systems (AMPS) and
Globalstar/Global System for Mobile Communications (GSM).
Based on terrestrial simulations of the Globalstar System, Globalstar
expects that its digital voice services will have a clarity and quality better
than those of analog land-based cellular systems currently in use. Moreover, the
system has been designed to minimize call interruptions ("dropped calls")
resulting from movements on the part of the user or the satellites. Nonetheless,
obstacles such as buildings, trees or mountainous terrain may degrade service
quality, as they would in the case of terrestrial cellular systems, and service
may not be available in the core of high-rise buildings. Globalstar is expected
to offer the full range of voice services provided by modern land-based
telephone networks, including options such as call forwarding, conferencing,
call waiting, call transfer and reverse charging (collect calls). Globalstar's
voice services will be digital in nature and therefore difficult for
unauthorized listeners to intercept and decode and as a result will be more
secure than those offered by analog systems such as existing cellular
telephones.
By planning for volume production and utilizing commercially available
off-the-shelf components where possible, Globalstar expects that its Globalstar
Phones will be priced comparably to current state-of-the-art digital cellular
telephones. Qualcomm has agreed to design and manufacture a number of versions
of Globalstar Phones. It has recently granted a license to Orbitel Mobile
Communications Ltd., an affiliate of L.M. Ericsson, to manufacture Globalstar
Phones and has also agreed to license at commercially reasonable royalty rates
at least two other qualified Globalstar Phone manufacturers.
OTHER SERVICES
Messaging and Paging Services. In addition to supporting voice services,
the Globalstar System is also expected to function as a worldwide paging and
alphanumeric messaging service. Hand-held or vehicle-mounted Globalstar Phones
are currently being designed with a built-in paging and messaging feature that
allows the user to receive a page or a short alphanumeric message while the unit
is in a very-low-power "quiet listening only" mode. Separate Globalstar
messaging and paging units may also be developed by Globalstar or by third party
vendors. The Globalstar System can readily support these functions without
taxing system resources since, as compared with voice services, messages and
pages have a relatively low data content and do not require instantaneous,
two-way transmission.
Remote Monitoring. Globalstar data terminals integrated with automatic
sensing equipment of various kinds can provide a continuous stream of valuable
information concerning natural events such as weather conditions, seismic shifts
and forest fires, as well as the condition of remote assets, such as oil and gas
pipelines and electric utility transmission lines.
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Facsimile and Other Data Services. The Globalstar System is expected to
support fax traffic, as well as transmissions of digital computer data.
Position Location. Frequent, accurate readings of position location for
large numbers of vehicles is critical information for the efficient management
of fleets of trucks and railcars. Qualcomm's OmniTRACS system, which relays
position location information to a central location and offers messaging
capabilities, will be offered to Globalstar service providers to address this
need.
GLOBALSTAR SYSTEM CAPACITY
The estimated capacity of the Globalstar System is anticipated to be in the
range of approximately 800 million to 1 billion call minutes per month assuming
equal fixed and mobile usage. However, Globalstar's total effective system
capacity will depend on a number of variables. The number of call minutes per
month the system can support will depend primarily on (i) the total bandwidth
available to CDMA MSS systems, (ii) the number of systems sharing that
bandwidth, (iii) the total number of subscribers, (iv) the type of Globalstar
Phones (fixed or mobile) they use and (v) the level of average system
availability required. Capacity will also depend upon a number of other
variables, including (i) the peak hour system utilization pattern, (ii) average
call length and (iii) the distribution of Globalstar Phones in use over the
surface of the Earth.
COMPETITION
Competition in the telecommunications industry is intense, fueled by rapid
and continuous technological advances and alliances between industry
participants seeking to implement such advances on an international scale.
Although no present participant is currently providing the same global personal
telecommunications service to be provided by Globalstar, it is anticipated that
one or more additional competing MSS systems will be launched and that the
success, or anticipated success, of Globalstar and its direct competitors could
attract other entrants. Although not anticipated, if any of Globalstar's
competitors succeed in marketing and deploying their systems substantially
earlier than Globalstar, Globalstar's ability to compete in areas served by such
competitors may be adversely affected.
Globalstar's most direct competitors are: the two other FCC-licensed MSS
applicants, Motorola, Inc.'s ("Motorola") Iridium system and TRW, Inc.'s ("TRW")
Odyssey system; and I-CO Global Communication's ICO system. ICO was not an
applicant or a licensee before the FCC, and is seeking to operate in a different
frequency band not available for use by MSS systems. A number of other
satellite-based telecommunications systems have been proposed using
geosynchronous satellites. Because some of these proposed systems involve
relatively simple ground control requirements and are expected to deploy no more
than two satellites, they may succeed in deploying and marketing their systems
before Globalstar. In addition, coordination of standards among regional
geostationary systems could enable these systems to provide worldwide service to
their subscriber base, thereby increasing the competition to Globalstar.
It is expected that as land-based telecommunications service expands to
regions currently not served by wireline or cellular services, demand for
Globalstar service in those regions may be reduced. If such systems are
constructed at a more rapid rate than that anticipated by Globalstar, the demand
for Globalstar service may be reduced at rates higher than those assumed by
Globalstar. Globalstar may also face competition in the future from companies
using new technologies and new satellite systems. New technology could render
Globalstar obsolete or less competitive by satisfying consumer demand in
alternative ways, or through the introduction of incompatible telecommunications
standards. A number of these new technologies, even if they are not ultimately
successful, could have an adverse effect on Globalstar as a result of their
initial marketing efforts.
REGULATION
United States FCC Regulation. On January 31, 1995, the FCC authorized the
construction, launch and operation of the Globalstar System and assigned bands
of the radio frequency spectrum for the user links (the "FCC License"). This
license is currently held by L/Q Licensee, Inc. ("L/Q Licensee"), a subsidiary
of the Company which has agreed to use the FCC License exclusively for the
benefit of Globalstar. The FCC is the
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United States agency with jurisdiction over commercial uses of the radio
spectrum. All commercial MSS systems such as Globalstar must obtain an
authorization from the FCC to construct and launch their satellites and to
operate the satellites to provide MSS services in assigned spectrum segments in
the United States. The FCC may also adopt from time to time rules applicable to
MSS systems, which may impose constraints on the operation of Globalstar
satellites, subscriber terminals and/or gateway earth stations.
The Globalstar System requires regulatory authorization for two pairs of
frequencies: user links (from the user to the satellites, and vice versa) and
feeder links (from the gateways to the satellites, and vice versa). The FCC
License grants authority to construct, launch and operate the Globalstar System
with user links in the 1 and 2 GHz bands, consistent with the United States band
plan for MSS Above 1 GHz Systems. At the time it granted the FCC License in
January of 1995, the FCC deferred action on feeder link assignments until after
the WRC '95 (which, in October of that year, allocated such frequencies
internationally), but granted authority to construct the system at Globalstar's
own risk using the feeder link bands originally requested. L/Q Licensee has
applied to the FCC for feeder links in the 5 GHz and 7 GHz bands, consistent
with the international allocation for non-geostationery MSS feeder links adopted
at WRC '95, and has filed a request for an appropriate modification of its
interim construction authority.
The authorization granted by the FCC to LQP for Globalstar requires that
construction, launch and operation of the system must be accomplished in
accordance with the technical specifications set forth in the Globalstar FCC
application, as amended, and consistent with the FCC's rules unless specifically
waived. During the process of constructing the Globalstar System, there may be
certain modifications to the design set forth in the application on file with
the FCC which may require filing an application to modify the authorization,
such as the application for feeder link assignments. There can be no assurance
that the FCC will grant these requests or do so in a timely manner. Denial of
such requests or delay in grant of such requests could adversely affect the
performance of the Globalstar System or result in schedule delays or cost
increases. In addition, use and operation of Globalstar's feeder and user links
are subject to FCC regulations regarding interference protection and
coordination with other systems which may have an adverse effect on the
usefuless of such frequencies.
LQP's MSS application was one of six considered concurrently by the FCC. On
January 31, 1995, Motorola and TRW also were granted FCC licenses for MSS above
1 GHz systems. The applications of three other applicants were deferred and
these three applicants were given until January 1996 to establish that they are
financially qualified to receive an MSS license. In January 1996, at the request
of two of the deferred applicants, the FCC granted an extension of the deadline
for demonstrating financial qualification.
The FCC License only authorizes the construction, launch and operation of
the Globalstar System's satellite constellation. Separate authorizations must be
obtained from the FCC for operation of gateways and Globalstar Phones in the
United States. Globalstar's authorized service provider, AirTouch Communications
("AirTouch"), Globalstar's service provider in the United States, will apply for
the required regulatory authorizations for gateways and Globalstar Phones, and
the manufacturer will apply for equipment authorization for Globalstar Phones.
Failure to obtain, or delay in obtaining, such licenses would adversely affect
the implementation of the Globalstar System. Similar procedures are expected to
apply internationally.
Globalstar proposes to operate on an international basis, but the FCC
License only authorizes construction and launch of the system for operation in
the United States. Even though the Globalstar System is licensed to operate in
the United States by the FCC, in order to provide MSS service in other
countries, Globalstar or its service providers must obtain the required
regulatory authorizations in those countries. There can be no assurance that the
required regulatory authorizations will be obtained in any other country in
which Globalstar proposes to operate, or that they will be obtained in a timely
manner, or that, if granted, they will authorize MSS service on the same terms
as the U.S. license. Failure or delay in obtaining licenses for the Globalstar
System in other countries or grant of licenses on substantially different terms
and conditions would have an adverse effect on Globalstar.
In May 1996, the FCC initiated a notice-and-comment rulemaking to adopt
rules governing procedures to authorize service in the United States by
satellite systems licensed by foreign countries. If a foreign satellite
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system were authorized to operate in the United States on frequencies assigned
to Globalstar, additional coordination obligations may be required.
In its order (the "Order") adopting rules and policies for MSS above 1 GHz,
the FCC stated that an MSS above 1 GHz license would impose implementation
milestones on licensed systems. If these milestones are not met, the FCC has
stated that the license would be deemed null and void. Globalstar's current
estimated implementation schedule falls within the milestones adopted by the
FCC. Moreover, the milestone schedule will not become effective until Globalstar
is granted an unconditional authorization which includes an assignment of feeder
link frequencies. Delays in construction, launch or commencing operations of the
Globalstar System could result in loss of the FCC License. The FCC License will
be effective for 10 years from the date on which the licensee certifies to the
FCC that its initial satellite has been successfully placed into orbit and that
the operations of that satellite conform to the terms and conditions of its MSS
license. While a licensee may apply to replace its MSS license to continue
operations beyond the initial 10-year license term, there can be no assurance
that, if applied for, such a replacement license would be granted.
The rules and policies adopted for MSS above 1 GHz in the Order have been
challenged in a judicial appeal and were the subject of petitions for
reconsideration at the FCC. On February 15, 1996, the FCC released an order
resolving petitions for reconsideration of the Order. Three petitions seeking
further reconsideration or clarification of the Order have been filed. Judicial
appeals regarding the FCC's decision on the petitions for reconsideration may
also be filed. In the event that the FCC were to be judicially required to
reconsider its licensing procedures as a result of the pending judicial appeal,
or an appeal of the orders on reconsideration, there is a risk that the FCC
would reprocess the MSS applicants and adopt a different licensing procedure.
Under these circumstances, there can be no assurance that the FCC would not use
an auction procedure to award licenses. If the FCC were to use an auction
procedure, there can be no assurance that Globalstar or its affiliates would be
willing or able to outbid other applicants to obtain a license for the spectrum
needed to operate the Globalstar System. In addition, even if Globalstar or its
affiliates were successful in obtaining an MSS license in the spectrum auction,
the increased cost and expenses incurred in bidding for the license would
adversely affect Globalstar.
Applicable statutes and regulations permit a judicial appeal of the grant
of the FCC License in order to seek reversal of the FCC's decision to grant the
license. Petitions for reconsideration and an application for review of the
order granting the FCC License were filed and have been denied. A judicial
appeal of the order resolving these petitions and application is possible. There
can be no assurance that such appeals will not be filed, or, if filed, that such
appeals will not be granted. Furthermore, there can be no assurance that if such
appeals are filed, the court will take timely action. If such an appeal were
successful, there can be no assurance that on remand the FCC would not decide to
deny the application for the Globalstar System, or that on remand the FCC would
take action on the application in a timely manner.
UNITED STATES INTERNATIONAL TRAFFIC IN ARMS REGULATIONS
The United States International Traffic in Arms Regulations under the
United States Arms Export Control Act authorize the President of the United
States to control the export and import of articles and services that can be
used in the production of arms. Among other things, these regulations limit the
ability to export certain articles and related technical data to certain
nations. The scope of these regulations is very broad and extends to certain
spacecraft, including certain satellites. Certain information involved in the
performance of Globalstar's operations will fall within the scope of these
regulations. As a result, Globalstar may have to restrict access to that
information.
EXPORT REGULATION
From time to time, Globalstar requires import licenses and general
destination export licenses to receive and deliver components of the Globalstar
System.
The United States Department of Commerce has imposed restrictions on
certain transfer of technology, including rocket technology, to China and
certain republics of the former Soviet Union. Because Globalstar's launch
strategy contemplates using Chinese and Ukrainian launch providers with launch
sites located in China
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and Kazakhstan, special export licenses are required to be obtained by SS/L in
connection with these launches.
While Globalstar and SS/L have received informal confirmations from various
governmental officials that all necessary permits should be forthcoming, and
Globalstar has no reason to believe such permits will not be obtained, there can
be no assurance that such export licenses will be granted, or, once granted,
that the United States will not impose additional restrictions or trade
sanctions against China or republics of the former Soviet Union in the future
that would adversely affect the planned launches of the Globalstar satellite
constellation.
The Export Administration Act and the regulations thereunder control the
export and re-export of United States-origin technology and commodities capable
of both civilian and military applications (so-called "dual use" items). These
regulations may prohibit or limit export and re-export of certain
telecommunications equipment and related technology which are not affected by
the International Traffic in Arms Regulations by requiring a license from the
Department of Commerce before controlled items may be exported or re-exported to
certain destinations. Although these regulations should not affect Globalstar's
ability to deploy the satellite constellation, the export or re-export of
Globalstar Phones, as well as gateways and related equipment and technical data,
may be subject to these regulations, if such equipment is manufactured in the
United States and then exported or re-exported. These regulations may also
affect the export, from one country outside the United States to another, of
United States-origin technical data or the direct products of such technical
data. As a result, Globalstar may not be able to ensure the unrestricted
availability of such equipment or technical data to certain customers and
suppliers. The Company does not believe that these regulations will have a
material adverse effect on Globalstar's operations.
INTERNATIONAL COORDINATION
The Globalstar System proposes to operate in frequencies which were
allocated on an international basis for MSS user links at World Administrative
Radio Conference '92 and for MSS feeder links at WRC '95. Globalstar is required
to engage in international coordination procedures with other proposed MSS
systems under the aegis of the International Telecommunications Union (the
"ITU").
Because Globalstar's proposed feeder link bands are allocated on an
international basis for low-earth orbit ("LEO") MSS feeder links, foreign LEO
MSS systems may also seek to use these bands for MSS feeder links. ICO has filed
with the ITU its plans to use the same feeder link spectrum as Globalstar.
Globalstar will be required to coordinate the use of its feeder links with ICO
and any other foreign system which has similar plans. Both a Russian and a
Brazilian low-earth orbit MSS system have filed with the ITU their intention to
use the same feeder link spectrum as Globalstar. There can be no assurance that
such coordination will not adversely affect the use of these bands by
Globalstar.
Pursuant to the Intelsat and Inmarsat treaties, international satellite
operators are required to demonstrate that they will not cause economic or
technical harm to Inmarsat or Intelsat and to coordinate with Intelsat and
Inmarsat under obligations imposed on United States satellite systems by
international treaties. Globalstar will engage in technical coordination of its
feeder downlinks with Intelsat, which uses the same frequency band for an
uplink. Globalstar believes that the proposed provision of competitive MSS
service by ICO, in which Inmarsat is a significant investor, may effectively
eliminate the requirement to demonstrate lack of economic harm. Globalstar
expects such coordination to be successful.
EUROPEAN UNION
European Union competition law proscribes agreements that have the effect
of appreciably restricting or distorting competition in the European Union.
Globalstar has received an inquiry from the Commission of the European Union
requesting information regarding its activities. A violation of European Union
competition law could subject Globalstar to fines or enforcement actions that
could result in expenses to Globalstar, delay the commencement of Globalstar
service in western Europe, and/or depending on the circumstances, adversely
affect Globalstar's contractual rights vis-a-vis its European strategic
partners. In addition, the Commission has proposed legislation at the European
Union level which, if adopted, would give the Commission broad regulatory
authority over "satellite PCS" systems such as Globalstar. The Commission's
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investigation and proposed legislation are in their preliminary stages, and the
Company is unable to predict what effect, if any, the results of such
investigation or proposed legislation may have on Globalstar's operations.
REGULATION OF SERVICE PROVIDERS
In order to operate gateway earth stations, including the user uplink
frequency, the Globalstar service provider in each country will be required to
obtain a license from that country's telecommunications authority. In addition,
the Globalstar service provider will need to enter into appropriate
interconnection and financial settlement agreements with local and interexchange
telecommunications providers. Globalstar intends to use in-country service
providers to facilitate the obtaining of such licenses and agreements.
Although many countries have moved to privatize the provision of
telecommunications service and to permit competition in the provision of such
service, some countries continue to require that all telecommunications service
be provided by a government-owned entity. While service providers have been
selected, in part, based upon their perceived qualifications to obtain the
requisite local approvals, there can be no assurance that they will be
successful in doing so. If a service provider does not obtain a license,
Globalstar will have the right to substitute another service provider to attempt
to obtain such a license, but if no service provider in a territory is
successful in obtaining the requisite local authorization, Globalstar service
will not be available in such territory. In that event, depending upon
geographical and market considerations, Globalstar may or may not have the
ability to redirect the system capacity that such territories would have
otherwise used to serve territories in which service is authorized.
SPACE SYSTEMS/LORAL, INC.
SS/L is a worldwide leader in the design, manufacture and systems
integration of telecommunications, weather and direct broadcast satellites. The
Company believes that SS/L's technical expertise, advanced manufacturing and
testing facilities and long-term customer relationships have enabled SS/L to
compete effectively in the commercial space systems marketplace. The Company has
a 32.7% beneficial equity interest in SS/L, and receives a management fee from
SS/L ranging from 0.5% to 1% of revenue, as defined. See "Item 13 -- Certain
Relationships and Related Transactions."
SPACE SYSTEMS ALLIANCE
In 1991, SS/L entered into a strategic alliance with three major European
space systems manufacturers: Aerospatiale Societe Nationale Industrielle
("Aerospatiale"), Alcatel Espace ("Alcatel") and Finmeccanica S.p.A.
("Finmeccanica") (the "Alliance Partners"). In 1992, Daimler-Benz Aerospace AG
("DASA") joined the Alliance Partners. The Alliance Partners hold an aggregate
of 49% of the common stock of SS/L. With certain exceptions, SS/L and the
Alliance Partners have agreed generally to bid and operate as a team on
satellite programs worldwide, to coordinate research and development activities
and to share technological resources. SS/L believes that this strategic alliance
enhances its technological and manufacturing capabilities and marketing
resources, and affords it access to international government and commercial
customers more effectively than its U.S.-based competitors.
PROGRAMS
Some of SS/L's current programs include:
Telecommunications
Telstar. This new generation telecommunications satellite to be built for
AT&T will provide service to the United States, the Caribbean, Mexico and
Southern Canada.
Apstar-IIR. SS/L is building a telecommunications satellite for a
consortium comprised of Chinese state-owned companies and commercial firms based
in Taiwan, Thailand, Macau and Singapore, that will provide regional and
international telecommunications services to the Asia-Pacific region. Once
operational, the Apstar-IIR will provide regional voice, video and data
services.
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Mabuhay. SS/L is currently under contract with the Mabuhay Philippines
Satellite Corp. to build the Mabuhay satellite, a telecommunications satellite
that will provide commercial telephone, broadcasting and data services in the
Philippines and the South China region.
PAS-7 and PAS-8. SS/L has entered into an agreement with PanAmSat for the
PAS-7 and PAS-8 spacecraft which will be used for various applications as part
of PanAmSat's basic constellation.
Direct Broadcast Satellites (DBS)
SS/L is currently building DBS satellites for MCI/News Corp. and Tempo
Satellite, Inc. to serve the U.S. markets and for PanAmSat to serve the Central
and South American markets.
Globalstar
SS/L is the prime contractor for the design and manufacture of Globalstar's
56-satellite low-earth orbit constellation.
Weather and Environment
GOES Weather Satellites. SS/L is the prime contractor for NOAA's next
generation of advanced weather and environmental GOES satellites. These
satellites will provide 24-hour monitoring and measurement of dynamic weather
events in real time. The first satellite in the five-member series, GOES-8, was
launched in April 1994 and the second, GOES-9 in May 1995.
MTSAT. In February 1995, Japan's Ministry of Transport awarded a contract
for the Multifunctional Transport Satellite (MTSAT) to SS/L. This advanced
geostationary satellite will provide enhancement of communication and position
information to Japan's air traffic capability. MTSAT will also provide weather
observation and meteorological data transmission for the region. In addition to
its advanced imaging capability, MTSAT is a complete data collection and
dissemination system. MTSAT will broadcast processed data and imagery to users
through the Asia-Pacific region, including airports, weather forecasting
agencies and ships at sea.
International Space Station Alpha
SS/L has contracted with the Rocketdyne Division of Rockwell International
to develop flight equipment for International Space Station Alpha's on-board
electrical power systems. The program includes the design, development and
production of nickel-hydrogen batteries, power control and power conditioning
electronics equipment, and consolidated procurement of electronic parts for the
entire power system.
Payload Subcontracts
SS/L has leveraged its alliance relationship with Aerospatiale to enter the
payload business in support of Aerospatiale's prime contracts from the Eutelsat,
Thaicom and Sirius programs.
SS/L has been a subcontrator to NASA, supporting lunar, Mars and deep space
programs. Teamed with Aerospatiale, SS/L provided the payload and subsystems for
the Arab Satellite Organization ("Arabsat") regional communications and
television broadcast system. SS/L also provides components as a subcontractor to
other space systems manufacturers for defense and other applications.
CUSTOMERS
Sales to the U.S. government represented 10%, 23% and 23% of revenues from
contracts for the years ended March 31, 1996, 1995 and 1994, respectively. Sales
to foreign customers, primarily in Asia, represented 27%, 15% and 31% of
revenues from contracts for the years ended March 31, 1996, 1995 and 1994,
respectively. In 1996, two commercial customers represented 30% and 13% of
revenues from contracts. In 1995, four commercial customers represented 23%,
20%, 15% and 13% of revenues from contracts. Two commercial customers
represented 35% and 29% of revenues from contracts in 1994.
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COMPETITION
Competition in the commercial satellite industry is intense. Among SS/L's
significant competitors are Hughes Electronics Corporation ("Hughes"), Lockheed
Martin, Matra Marconi and TRW, many of which have significantly greater
financial, manufacturing, marketing and technical resources than those of SS/L.
To the extent these companies offer products and services that are more
sophisticated, cost-effective, efficient or reliable than those now offered or
to be offered by SS/L, they could have a material adverse effect on SS/L.
Further, SS/L's telecommunications satellites face competition from alternative
technologies, including fiber optics cable technology, which could reduce demand
for the services of SS/L's customers and thus for SS/L's telecommunications
products.
SATELLITE CONTRACTS
SS/L's major contracts fall into two categories: firm fixed-price contracts
and cost-plus-award-fee contracts. Under firm fixed-price contracts, work
performed and products shipped are paid for at a fixed price without adjustment
for actual costs incurred in connection with the contract. Risk of loss due to
increased cost, therefore, is borne by SS/L. Under fixed-price contracts
requiring work with lead times in excess of six months prior to delivery, SS/L
may receive progress payments, generally in an amount equal to between 80% and
95% of monthly costs, or it may receive milestone payments upon the occurrence
of certain program achievements. Under a cost-plus-award-fee contract, the
contractor recovers its actual costs incurred and receives a fee consisting of a
base amount that is fixed at the inception of the contract (the base amount may
be zero) and an award amount that is based on the customer's subjective
evaluation of the contractor's performance in terms of the criteria stated in
the contract.
Many of SS/L's contracts and subcontracts provide that such contracts and
subcontracts may be terminated at will by the customer or the prime contractor,
respectively. In the event of a termination at will, SS/L is normally entitled
to recognize the purchase price for delivered items, reimbursement for allowable
costs for work in process and an allowance for profit thereon or adjustment for
loss if completion of performance would have resulted in a loss. While SS/L has
not experienced material contract terminations in the past, no assurance can be
given that such terminations will not occur in the future.
REGULATION
SS/L's business activities are regulated by various agencies and
departments of the U.S. government. Operation of commercial communications
satellites requires licenses from the FCC and frequently requires the approval
of international regulatory authorities as well. Private land remote sensing
satellites require a license from the Department of Commerce. Exports of
space-related products, services and technical information frequently require
licenses from the Department of State or the Department of Commerce. There is no
assurance that SS/L will be able to obtain necessary licenses or regulatory
approvals. The inability of SS/L to secure any necessary licenses or approvals
could have a material adverse effect on its business. In addition, certain of
the products or components produced or used by SS/L may become subject to
limitations on production or deployment as a result of international agreements
or treaties to which the United States is, or may become, a party.
In addition, since the Alliance Partners are owned and controlled by
foreign entities, two of which are foreign governments, SS/L is subject to
compliance with certain regulations and to government oversight to which it
would not be subject if its stockholders were all U.S. citizens. SS/L has
established certain procedures to comply with various defense related
regulations, to negate the risks of foreign control, ownership and influence, to
ensure that it will be able to maintain the security clearances necessary for
continued work on classified programs and to protect classified information and
export-controlled technical data. Specifically, SS/L and the Alliance Partners
have entered into a memorandum of agreement with the DOD with respect to
security matters. Pursuant to such agreement, certain protections have been
established to control the actions of SS/L and the Alliance Partners, including,
among others: (a) policies and practices by SS/L to safeguard classified
information and export-controlled technical data; (b) exclusion of the Alliance
Partners and their agents and representatives from access to classified
information and export-controlled technical data entrusted
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to SS/L, except as may be permitted by law; and (c) establishment of a permanent
Government Security Committee, composed of seven resident United States citizens
who hold (or will obtain) personnel security clearances, which reviews and
monitors the adequacy and implementation of SS/L's security procedures to ensure
that it maintains policies, practices and procedures adequate to safeguard the
classified information and export-controlled technical data entrusted to it.
The memorandum of agreement provides that the Government Security Committee
will hold periodic meetings and report annually to the DIS Cognizant Security
Office as to the operation of SS/L's security procedures. In addition, the
Government Security Committee is charged with monitoring compliance with the
International Traffic in Arms Regulations and the Export Administration
Regulations. The memorandum of agreement also contemplates that SS/L and the
Alliance Partners will create, with the approval of the Department of Defense,
formal arrangements to ensure proper record keeping by SS/L and monitoring by
the Government Security Committee with regard to visits between SS/L personnel
and personnel of the Alliance Partners, who are not directors, officers,
employees or resident contractors of SS/L, at a cleared facility or dealing with
the disclosure of classified information or export-controlled technical data.
The nominees of the Company on SS/L's Board of Directors have the sole
responsibility for the supervision, implementation and performance of: (a)
classified work by SS/L under all contracts and agreements with the U.S.
government, (b) research programs by SS/L for the U.S. government to the extent
that any classified information is utilized or produced therefrom, (c)
resolutions of SS/L's Board of Directors under the Defense Industrial Security
Program to exclude non-U.S. persons and the Alliance Partners and their
representatives from access to classified data and export-controlled technical
data in the custody of SS/L and (d) all other United States national security
policy matters and matters affecting the safeguarding of classified information.
All of SS/L's major programs and proposed ventures are commercial rather
than military or intelligence related, so that classified work is not a material
part of SS/L's business.
RESEARCH AND DEVELOPMENT
SS/L's internally-funded research and development expenditures were
approximately $11.2 million, $9.5 million and $6.7 million, respectively, for
the fiscal years ended March 31, 1996, 1995 and 1994.
BACKLOG
As of March 31, 1996 and 1995, SS/L's funded backlog was approximately $1.2
billion. Backlog consists of aggregate contract values for firm product orders,
excluding the portion previously included in operating revenues on the basis of
percentage of completion accounting and priced options not awarded.
Approximately $902 million of total backlog as of March 31, 1996 is currently
scheduled to be performed within the next 12 months.
EXPORT SALES
Export sales, principally to Asia, were $301 million, $98 million and $186
million for the years ended March 31, 1996, 1995 and 1994, respectively.
RAW MATERIALS
SS/L generally obtains the raw materials required for use in satellite
construction, such as aluminum, graphite, resins and epoxies, from distributors
of such materials and occasionally directly from suppliers. SS/L is not
dependent on any one source for supply of such materials and has not in the
past, and does not expect in the future to have, difficulty in obtaining such
materials.
K&F INDUSTRIES, INC.
K&F, through its wholly owned subsidiary, Aircraft Braking Systems
Corporation, is one of the world's leading manufacturers of aircraft wheels,
brakes and anti-skid systems for commercial transport, general
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aviation and military aircraft. K&F sells its products to virtually all major
airframe manufacturers and most commercial airlines and to the United States and
certain foreign governments. In addition, K&F through its wholly owned
subsidiary, Engineered Fabrics Corporation ("Engineered Fabrics"), is one of the
leading worldwide manufacturer of aircraft fuel tanks, supplying approximately
90% of the worldwide general aviation and commercial transport market and nearly
one-half of the domestic military market. Engineered Fabrics also manufactures
and sells iceguards and specialty coated fabrics used for storage, shipping,
environmental and rescue applications for commercial and military uses. Some of
K&F's customers include American Airlines, Delta Air Lines, Alitalia, Lufthansa,
Swissair, Northwest Airlines, United Airlines and USAir. Its products are also
used in a number of military aircraft, including the F-14, F-16, F-18 and the
C-130. Backlog at March 31, 1996 and 1995 amounted to approximately $150.5
million and $151.4 million, respectively. Backlog consists of firm orders for
K&F's products which have not been shipped. Approximately 84% of total backlog
at March 31, 1996 is expected to be shipped during the fiscal year ended March
31, 1997, with the balance expected to be shipped over the subsequent two-year
period.
PATENTS AND PROPRIETARY RIGHTS
In connection with the Globalstar System, Globalstar's and SS/L's design
and development efforts have yielded five patents issued and 22 patents pending
in the United States, as well as one patent issued and 91 patents pending
internationally for various aspects of communication satellite system design and
implementation of CDMA technology relating to the Globalstar System. Qualcomm
has obtained 42 issued patents and 179 patents pending in the United States
applicable to Qualcomm's implementation of CDMA. The issued patents cover, among
other things, Globalstar's process of combining signals received from multiple
satellites to improve the signal received and minimize call fading.
SS/L relies, in part, on patents, trade secrets and know-how to develop and
maintain its competitive position. It holds 119 patents in the U.S. and 123
patents abroad and has applications for 39 patents pending in the U.S. and 122
patents pending abroad. SS/L holds patents relating to communications, station
keeping, power, control systems, antennae, filters and oscillators, phase arrays
and thermal control as well as assembly and inspections technology. The SS/L
patents that are currently in force expire between 1996 and 2015.
There can be no assurance that any of the pending patent applications by
Globalstar or SS/L will be issued. Moreover, because the U.S. patent application
process is confidential, there can be no assurance that third parties, including
competitors of Globalstar and SS/L, do not have patents pending that could
result in issued patents which Globalstar or SS/L would infringe.
PERSONNEL
As of May 31, 1996, the Company had approximately 50 full-time employees,
none of whom is subject to any collective bargaining agreement. The Company's
management considers its relations with its employees to be good.
As of March 31, 1996, Globalstar had approximately 100 full-time employees,
none of whom is subject to any collective bargaining agreement. Globalstar's
management considers its relations with its employees to be good.
As of March 31, 1996, SS/L had approximately 2,400 full-time employees none
of whom is subject to any collective bargaining agreement. SS/L's management
considers its relations with its employees to be good.
CERTAIN FACTORS THAT MAY EFFECT FUTURE RESULTS
This annual report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
from time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but are
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not limited to, various filings made by the Company with the Securities and
Exchange Commission, press releases or oral statements made by or with the
approval of an authorized executive officer of the Company. Actual results could
differ materially from those projected or suggested in any forward-looking
statements as a result of a wide variety of factors and conditions, including,
but not limited to, the factors summarized below. These factors and other
factors and conditions have been described in the section of the Company's
Information Statement, dated April 12, 1996, entitled, "Risk Factors" and other
documents the Company files from time to time with the Securities and Exchange
Commission including the Company's annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K, and the shareholder is
specifically referred to these documents with regard to the factors and
conditions that may affect future results.
COMPANY
Conflicts of Interest. Shareholders and partners of the Operating
Affiliates, and shareholders of the Company are principal suppliers to,
subcontractors for, and customers of or service providers for the Operating
Affiliates. In addition, SS/L is the prime contractor for Globalstar's satellite
constellation and SS/L and its subcontractors have provided vendor financing to
Globalstar in connection therewith. As a result, conflicts of interest may arise
with respect to such contracts and arrangements. The Globalstar partnership
agreement and the SS/L stockholders agreement provide for certain procedures
relating to the approval of agreements entered into by Globalstar and its
partners, and by SS/L and its stockholders.
Limited Control over Operating Affiliates. While the Company manages the
Operating Affiliates, the Globalstar partnership agreement and the SS/L
stockholders agreement limit the ability of the Company to take certain actions
without the approval of, in the case of Globalstar, at least one Independent
Representative (as defined) to the General Partners' Committee (as defined) or,
in the case of SS/L, at least two and in some cases all, of the directors
appointed by the Alliance Partners. As a result, the Company may be unable to
cause the Operating Affiliates to take actions which the Company might deem to
be in its best interests.
Additional Financing Requirements. Although the Company commenced
operations with $612 million in cash, the financing requirements of all of the
various opportunities it is currently considering, if funded solely by the
Company, when combined with the obligations that the Company may incur to fund
certain SS/L stockholders puts, may exceed such amount. The extent of such total
capital requirements cannot be quantified at this time since many of these
opportunities are at an early stage of consideration. The financial requirements
to satisfy any SS/L stockholder puts if validly exercised will depend upon the
fair market value of SS/L and the decision of such stockholders regarding the
exercise of their put rights. In order to fully fund all such projects and to
provide for any such contingencies, the Company may need to issue debt or equity
securities or engage in other financing activities, which may include offerings
of debt or equity securities by its Operating Affiliates. Any such issuance of
equity securities by the Operating Affiliates may result in a dilution of the
Company's equity interest to the extent the Company does not participate
therein. There can be no assurance that such financing will be available on
favorable terms or on a timely basis, if at all. A shortfall in meeting such
capital needs would prevent completion of some or all of the projects currently
being pursued by the Company.
Future FCC Proceedings. The Company has several applications to construct
and operate satellite systems pending before the FCC, including its application
for CyberStar. There can be no assurance that any of these licenses will be
granted. Several competing FCC applicants have filed objections to the financial
qualification of Loral in these proceedings, arguing that the current assets of
Loral were inadequate to satisfy the FCC financial requirements with respect to
all systems, including Globalstar, for which Loral had submitted applications.
The Company, which succeeded Loral as the applicant under these applications
before the FCC, has current assets substantially less than those of Loral. There
can be no assurance that challenges to the Company's financial qualifications
may not adversely affect or delay the Company's ability to be granted additional
FCC licenses, thus limiting a portion of the Company's future opportunities.
Certain Antitakeover Provisions. The Company's classified Board of
Directors, voting provisions with respect to certain business combinations and
the Company's rights plan, may have the effect of making more difficult or
discouraging an acquisition of the Company deemed undesirable by the Board.
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Reliance on Key Personnel. The success of the Company's business will be
partially dependent upon the ability of the Company to attract and retain highly
qualified technical and management personnel. Except for Mr. Bernard L.
Schwartz, the Company's Chairman and Chief Executive Officer, none of the
Company's officers has an employment contract with the Company nor does the
Company expect to maintain "key man" insurance with respect to any such
individuals. The loss of any of these individuals and the subsequent effect on
business relationships could have a material adverse effect on the Company's
business.
Rights of Shareholders under Bermuda Law. The Company is incorporated
under the laws of the Islands of Bermuda. Principles of law relating to such
matters as the validity of corporate procedures, the fiduciary duties of the
Company's management, directors and controlling shareholders, and the rights of
its shareholders, are governed by Bermuda law and the Company's Memorandum of
Association and Bye-Laws. Such principles of law may differ from those that
would apply if the Company were incorporated in a jurisdiction in the United
States. In addition, there is uncertainty as to whether the courts of Bermuda
would enforce (i) judgments of United States courts obtained against the Company
or its officers and directors resident in foreign countries predicated upon the
civil liability provisions of the securities laws of the United States or (ii)
in original actions brought in Bermuda, liabilities against the Company or such
persons predicated upon the securities laws of the United States or any state.
Tax Considerations. Special U.S. tax rules apply to U.S. taxpayers who own
stock in a "passive foreign investment company" (a "PFIC"). Although the Company
believes that it will not be a PFIC because it expects through Globalstar, SS/L
and other businesses to earn sufficient active business income and to hold
sufficient active business assets to avoid PFIC status, there is a risk that it
may be a PFIC. In such an event, a U.S. shareholder would be subject at his
election either to (i) a current tax on undistributed earnings or (ii) a tax
deferral charge on certain distributions and on gains from a sale of shares of
the Common Stock (taxed as ordinary income).
Investment Company Act Considerations. The Company believes that it is not
an investment company within the meaning of the Investment Company Act of 1940,
as amended (the "Investment Company Act") and intends to conduct its business in
such a manner as to avoid becoming an investment company. Any determination that
the Company were an investment company would have a material adverse effect on
the tax status of the Company and its contractual relationships with its
affiliates.
GLOBALSTAR
Development Stage Company; Expectation of Continued Losses; Negative Cash
Flow. Globalstar is a development stage company and has no operating history.
It has incurred net losses from inception and expects such losses to continue
until commercial service operations have commenced. Globalstar will require
expenditures of significant funds for development, construction, testing and
deployment before commercialization. Globalstar does not expect to commence
operations before 1998 or to achieve positive cash flow before 1999. There can
be no assurance that Globalstar will achieve its objectives by the targeted
dates.
Additional Financing Requirements. Globalstar expects to require total
capital of approximately $2.2 billion for capital expenditures, development and
operating costs of the system through 1998. Globalstar has raised approximately
$1.4 billion through March 31, 1996, representing over 75% of the total external
financing requirement. Globalstar believes that its current capital base is
sufficient to fund its requirements into the first quarter of 1997. Additional
funds of $828 million to complete the Globalstar System are expected to be
obtained from a combination of sources including over $400 million from
projected service provider payments, projected net service revenues from initial
operations and anticipated payments from the sale of gateways and Globalstar
Phones. There can be no assurance that additional funds required to complete the
Globalstar System from external or internal sources will be available at
favorable terms or on a timely basis, if at all. Globalstar is presently
evaluating a plan to purchase long-lead-time component parts for possible use in
constructing 6 to 12 additional satellites. The current estimated additional
cost for these components is approximately $75 to $120 million, depending upon
the quantity purchased. The plan has two purposes: (i) to enable Globalstar to
have on-orbit at least 38 to 44 satellites during 1999, even in the event of
launch failures of up to two launches of 12 satellites each, and (ii) to provide
ground spares that would be readily available to replenish the satellite
constellation in the event of satellite attrition during the first generation or
if there are opportunities for increasing capacity. If Globalstar were to
experience a launch failure, the long-lead-time
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components would be used to build replacement satellites and the cost associated
with the construction and launch of such satellites would be reimbursed through
insurance.
Sources of Possible Delay and Increased Cost. There may be problems,
delays, and expenses encountered by Globalstar, many of which may be beyond
Globalstar's control. These may include, but are not limited to, problems
related to technical development of the system, testing, regulatory compliance,
manufacturing and assembly, the competitive and regulatory environment in which
Globalstar will operate, marketing problems and costs and expenses that may
exceed current estimates. Delay in the timely design, construction, deployment,
commercial operation and achievement of positive cash flow of the Globalstar
System could result from a variety of causes, including delays associated with
the regulatory process in various jurisdictions, delay in the integration of the
Globalstar System into the land-based network, changes in the technical
specifications of the Globalstar System due to regulatory developments or
otherwise, delays encountered in the construction, integration or testing of the
Globalstar System by Globalstar vendors, delayed or unsuccessful launches,
delays in financing, insufficient or ineffective service provider marketing
efforts, slower-than-anticipated consumer acceptance of Globalstar service and
other events beyond Globalstar's control. Substantial delays in any of the
foregoing matters would delay Globalstar's achievement of profitable operations.
Worldwide Regulatory Approvals Required to Operate. The operations of the
Globalstar System are and will continue to be subject to United States and
foreign regulation. In order to operate in the United States and on an
international basis, the Globalstar System must be authorized to provide MSS in
each of the jurisdictions in which its service providers intend to operate. Even
though the Globalstar System has been authorized by the FCC to launch and
operate for the purpose of providing MSS in the United States, there can be no
assurance that the further regulatory approvals required for worldwide
operations will be obtained, or that they will be obtained in a timely manner or
in the form necessary to implement Globalstar's proposed operations.
Satellite Launch Risks; Limited Life of Satellites. Satellite launches are
subject to significant risks, including damage to or loss of the satellites
("hot failures"). Historically, launch failure ("hot failure") rates on low
earth orbit and geostationary satellite launches have been approximately 10%.
However, launch failure rates may vary depending on the particular launch
vehicle. Globalstar currently anticipates launching satellites in groups of
either four satellites or 12 satellites in each launch. Satellite launches of
more than eight commercial satellites have not been attempted before. There is
no assurance that Globalstar satellite launches will be successful or that its
launch failure rate will not exceed the industry average.
A number of factors will affect the useful lives of Globalstar's
satellites. Random failure of satellite components could result in partial or
total failure of a satellite ("cold failure"). The first-generation satellite
constellation (including spares) is designed to operate at full performance for
a minimum of 7 1/2 years, after which performance is expected to gradually
decline. However, there can be no assurance of the constellation's specific
longevity. Globalstar's operating results would be adversely affected in the
event the useful life of the satellites is significantly shorter than 7 1/2
years.
Limited Insurance. Globalstar will obtain insurance against launch failure
which would cover the cost of relaunch and the replacement cost of lost
satellites in the event of hot failures for 56 satellites in its constellation.
However, Globalstar may self-insure for hot failures for up to 12 such
satellites. Globalstar's contract with SS/L provides for the construction and
launch of eight spare satellites to minimize the effect of any launch or orbital
failures. Globalstar currently does not intend to purchase insurance to cover
any cold failures that may occur once the satellites have been successfully
deployed from the launch vehicle. There can be no assurance that additional
satellites and launches will not be required. In such an event, in addition to
the replacement costs incurred by Globalstar, the date for commencement of full
commercial operations may be delayed.
Substantial Leverage. Globalstar has entered into an agreement with a bank
syndicate for a $250 million credit facility expiring on December 15, 2000 (the
"Globalstar Credit Agreement"). Globalstar also
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expects to utilize $310 million of committed vendor financing provided by SS/L
and its subcontractors. In March and April, 1996, Globalstar received net
proceeds of $300 million from the offering of GTL 6 1/2% Convertible Preferred
Equivalent Obligations due March 1, 2006. Significant additional debt is
expected to be incurred in the future. As a result, Globalstar will be highly
leveraged. Globalstar will be dependent on its cash flow from operations to
service this debt. Any significant delay in the commencement of operations will
adversely affect Globalstar's ability to service its debt obligations. The
Globalstar Credit Agreement and other debt financing that Globalstar may incur
in the future may restrict or limit Globalstar's ability to make payments,
including distributions to its partners, including the Company, incurring
additional indebtedness and entering into certain other transactions. There can
be no assurance that Globalstar's leverage and such restrictions will not
materially and adversely affect Globalstar's ability to finance its future
operations or capital needs or to engage in other business activities.
Competition. Competition in the telecommunications industry is intense,
fueled by rapid and continuous technological advances and alliances between
industry participants on an international scale. Although no present industry
participant is currently providing the same global personal telecommunications
service expected to be provided by Globalstar, it is anticipated that one or
more additional competing MSS systems will be launched and that the success, or
anticipated success, of Globalstar and its competitors could attract other
entrants. If any of Globalstar's competitors succeed in marketing and deploying
their systems substantially earlier than Globalstar, Globalstar's ability to
compete in areas served by such competitors may be adversely affected. A number
of satellite-based telecommunications systems have also been proposed, using
geostationary satellites, or, in one case, a mid-earth orbit system.
Some of these potential competitors have financial, personnel and other
resources substantially greater than those of Globalstar. Many of these
competitors are raising capital and may compete with Globalstar for service
providers and financing. Technological advances and a continuing trend toward
strategic alliances in the telecommunications industry could give rise to
significant new competitors. There can be no assurance that some of these
competitors will not provide a more efficient or less expensive service.
However, Globalstar believes that based upon the public FCC filings of the other
MSS applicants, Globalstar will be a low-cost provider.
Satellite-based telecommunications systems are characterized by high
up-front costs and relatively low marginal costs of providing service. Several
systems are being presently proposed, and, while the proponents of these systems
foresee substantial demand for the services they will provide, the actual level
of demand will not become known until such systems are constructed, launched and
begin operations. If the capacity of Globalstar and any competing systems
exceeds demand, price competition could be particularly intense.
Compliance with European Union Competition Laws. European Union
competition law proscribes agreements that have the effect of appreciably
restricting or distorting competition in the European Union. Globalstar has
received an inquiry from the Commission of the European Union requesting
information regarding its activities. A violation of European Union law could
subject Globalstar to fines or enforcement actions that could result in expenses
to Globalstar, delay the commencement of Globalstar service in western Europe,
and/or depending on the circumstances, adversely affect Globalstar's contractual
rights vis-a-vis its European strategic partners. In addition, the Commission
has proposed legislation at the European Union level which, if adopted, would
give the Commission broad regulatory authority over "satellite PCS" systems such
as Globalstar. The Commission's investigation and proposed legislation are in
their preliminary stages, and the Company is unable to predict what effect, if
any, the results of such investigation or proposed legislation may have on
Globalstar's operations.
Future Operating Risks. Globalstar's ability to succeed after commencement
of operations will depend upon numerous factors, including the cooperation,
operational and marketing efficiency, competitiveness, finances and regulatory
status of Globalstar's service providers, who are the parties responsible for
obtaining all necessary local regulatory approval for, and the marketing and
distribution of, Globalstar service. Subscriber acceptance of the Globalstar
System, which is dependent upon price, demand for service and the availability
of alternatives, will also have a direct impact on Globalstar's operations and
cash flow. Because Globalstar's largest potential markets are in developing
countries, Globalstar and its service providers may face market, inflation,
interest rate and currency fluctuation, government policy, expropriation and
other economic, political
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or diplomatic conditions that are significantly more volatile than those
commonly experienced in the United States and other industrialized countries.
Globalstar may also incur risks related to currency fluctuations as a result of
operations in such countries. Pricing risks, whether arising from the recent
downward pricing trend in the telecommunications industry or the limitations on
Globalstar's ability to increase its pricing to service providers, may result in
a material adverse effect on Globalstar's business.
Risk of Accelerated Build-Out and Competing Technological Advances. It is
expected that as land-based telecommunications services expand to regions
currently underserved or not served by wireline or cellular services, demand for
Globalstar service in those regions may be reduced. If such systems are
constructed at a more rapid rate than that anticipated by Globalstar, the demand
for Globalstar service may be reduced at rates higher than those assumed in
Globalstar's market analysis. Globalstar may also face competition in the future
from companies using new technologies and new satellite systems. New technology
could render Globalstar obsolete or less competitive by satisfying consumer
demand in alternative ways or through the introduction of incompatible
telecommunications standards. A number of these new technologies, even if they
are not ultimately successful, could have an adverse effect on Globalstar as a
result of their initial marketing efforts. Globalstar's business would be
adversely affected if competitors begin operations or existing or new
telecommunications service providers penetrate Globalstar's target markets
before completion of the Globalstar System.
SS/L
Dependence on Limited Number of Customers and Programs. The Company
historically has derived a large portion of its total revenues from a limited
number of customers. Sales to the U.S. government represented 10%, 23% and 23%
of revenues from contracts for the years ended March 31, 1996, 1995 and 1994,
respectively. Sales to foreign customers, primarily in Asia, represented 27%,
15% and 31% of revenues from contracts for the years ended March 31, 1996, 1995
and 1994, respectively. In 1996, two commercial customers represented 30% and
13% of revenues from contracts. In 1995, four commercial customers represented
23%, 20%, 15% and 13% of revenues from contracts. Two commercial customers
represented 35% and 29% of revenues from contracts in 1994.
Although SS/L is currently pursuing a significant number of new programs,
there can be no assurance that SS/L will be successful in capturing any of these
new programs to replace the revenue lost by the completion of its current
programs. Certain of SS/L's customers prefer to alternate satellite
manufacturers they employ in order to reduce dependence on any single
manufacturer. This may have an adverse effect on SS/L's ability to obtain future
program awards from its current customers.
Competition. Competition in the commercial satellite industry is intense.
Among SS/L's significant competitors are Hughes, Lockheed Martin, Matra Marconi
and TRW. Some of SS/L's competitors have significantly greater financial,
manufacturing, marketing and technical resources than those of SS/L. To the
extent these companies offer products and services that are more sophisticated,
cost-effective, efficient or reliable than those now offered or to be offered by
SS/L, they could have a material adverse effect on SS/L. Further, SS/L's
telecommunications satellites face competition from alternative technologies,
including fiber optic cable technology, which could reduce demand for the
services of SS/L's customers and thus for SS/L's telecommunications products.
Risk of Loss of Revenues Due to Satellite Malfunction or Launch
Failure. Certain of SS/L's contracts provide that up to one-quarter of the
total contract price is payable in the form of orbital payments, earned during
the life of the satellite in orbit as its mission is performed. Although SS/L
generally receives the present value of orbital payments in the event of launch
failure or a failure caused by an operator error by the customer, it forfeits
orbital revenues in the event of a loss caused by system failure or an error on
its part. While insurance against loss of orbital revenues has been available in
the past, its cost and availability are subject to substantial fluctuations. In
addition, SS/L is prohibited under agreements with certain of its customers from
insuring its orbital incentives. Moreover, certain of SS/L's contracts call for
on-orbit delivery, allocating launch risk to SS/L. It is SS/L's intention to
obtain insurance for this exposure. However, SS/L cannot predict whether, and
there can be no assurance that, insurance against launch failure and loss of
orbital revenues will continue to be available on commercially reasonable terms.
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Regulation. The ability of SS/L and its customers to pursue their business
activities is regulated by various agencies and departments of the U.S.
government. Operation of commercial communications satellites requires licenses
from the FCC and frequently requires the approval of foreign regulatory
authorities as well. Private land remote sensing satellites require a license
from the Department of Commerce. Exports of space-related products, services and
technical information frequently require licenses from the Department of State
or the Department of Commerce. There is no assurance that SS/L or its customers
will be able to obtain necessary licenses or regulatory approvals. The inability
of SS/L or its customers to secure any necessary licenses or approvals could
have a material adverse effect on its business.
SS/L and the Alliance Partners have entered into a memorandum of agreement
with the U.S. Department of Defense ("DOD") with respect to security matters. In
addition, because the Alliance Partners are foreign entities, two of which are
owned and controlled by foreign governments, SS/L is subject to certain
regulations and to U.S. government oversight to which it would not be subject if
substantially all of its stockholders were United States citizens.
Dependence on Subcontractors and Alliance Partners. SS/L depends on other
companies, including its Alliance Partners, for the development and manufacture
of various products that are material to its business. The failure of a
subcontractor to perform at expected levels could under certain circumstances
have a material adverse effect on SS/L's profitability and its ability to win
future program awards.
Dependence on Long-Term Fixed-Price Contracts. The financial results of
long-term fixed-price contracts are recognized using the cost-to-cost
percentage-of-completion method. Revisions in revenue and profit estimates are
reflected in the period in which the conditions that require the revision become
known and are estimable. Adjustments for profits or losses may therefore have a
material effect on results for the quarter in question. The risks inherent in
long-term fixed-price contracts include the forecasting costs and schedules,
contract revenues related to contract performance (including revenues from
orbital payments) and the potential for component obsolescence in connection
with long-term procurements.
Competitive Bidding. SS/L generally obtains its contracts through the
process of competitive bidding. There can be no assurance that SS/L will
continue to be successful in having its bids accepted or, if accepted, that
awarded contracts will generate sufficient revenues to result in profitability
for SS/L. SS/L has in the past submitted bids which would result in minimal or
no profitability due to a high level of non-recurring engineering costs. Such
contracts are generally bid with the expectation of more profitable follow-on
satellite contracts as to which there is generally no contractual assurance in
advance. To the extent that actual costs exceed the projected costs on which
bids or contract prices were based, SS/L's profitability could be materially
adversely affected.
Launch Vehicle Access. SS/L's ability to perform its on-orbit delivery
contracts depends on the timely availability of appropriate launch vehicles and
the availability of the requisite launch insurance. In the past, launch slots
have been in limited supply, and the launch insurance market has been subject to
considerable fluctuation. Moreover, the availability and pricing of launch
vehicles from the former Soviet Union and the People's Republic of China are
effected by U.S. government policies and international agreements. To the extent
appropriate launch services and insurance become unavailable or prohibitively
expensive, SS/L's business would be materially adversely affected.
Technological Developments. The nature of the commercial satellite
industry is such that, with each new generation of satellites, satellite
manufacturers are expected to offer substantial improvements and innovations at
lower effective cost. SS/L's success therefore depends on its ability to design,
manufacture and introduce innovative new products and services on a
cost-effective and timely basis. There can be no assurance that SS/L will be
able to continue to achieve the technological advances necessary to remain
competitive or that its products will not be subject to technological
obsolescence.
ITEM 2. PROPERTIES
The Company sub-leases office space from Lockheed Martin at 600 Third
Avenue, New York, New York 10016 sufficient to allow it to carry on its
operations.
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Globalstar currently leases approximately 56,000 square feet of office
space in San Jose, California from a subsidiary of Lockheed Martin.
SS/L's research production and testing facilities are carried on in
SS/L-owned facilities covering approximately 28.4 acres in Palo Alto,
California. In addition, SS/L leases 371,000 square feet of space from various
third parties.
ITEM 3. LEGAL PROCEEDINGS
CCD Lawsuits. On September 12, 1991, Loral Fairchild Corp. ("Loral
Fairchild"), a subsidiary of Loral, filed suit (the "CCD Lawsuit") against a
number of companies including Sony Corporation ("Sony"), Matsushita Electronics
Corporation ("Matsushita") and NEC Corp. ("NEC") claiming that such companies
had infringed Loral Fairchild's patents for a "charged coupled device" ("CCD"),
commonly used as an optical sensor in video cameras and fax machines. Although
the CCD patents have expired, Loral Fairchild is seeking reasonable royalties
through the expiration date from a number of defendants. On February 22, 1996, a
jury in the United States District Court for the Eastern District of New York
found unanimously that Sony had infringed the CCD patents. After a trial on
certain equitable defenses, the case will be certified for interlocutory appeal
and, thereafter, a jury trial will be held on the issue of damages. Loral
Fairchild's claims against other defendants remain pending. Matsushita has been
granted a declaratory judgment that it has a valid and enforceable license under
the CCD patents. In addition, a trial on Matsushita's claim against Loral
Fairchild for tortious interference is expected to begin on July 22, 1996.
Lockheed Martin has agreed in connection with the Merger to grant to the
Company the right to all proceeds or awards resulting from the CCD Lawsuit as
well as complete and exclusive control and management thereof. The Company has
agreed to pay all fees and expenses relating to the CCD Lawsuit and to indemnify
Lockheed Martin and Loral from any losses relating thereto.
None of the Operating Affiliates is a party to any pending legal
proceedings material to its financial condition or results of operation.
Environmental Regulation. Manufacturing operations managed by corporations
in which the Company has an interest are subject to regulation by various
federal, state and local agencies concerned with environmental control. The
Company believes that these facilities are in substantial compliance with all
existing federal, state and local environmental regulations. With regard to
certain sites, environmental remediation is being performed by prior owners who
retained liability for such remediation arising from occurrences during their
period of ownership. To date, these prior owners have been fulfilling such
obligations and the size and current financial condition of the prior owners
make it probable that they will be able to complete their remediation
obligations without cost to the Company or its Operating Affiliates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
(A) MARKET PRICE AND DIVIDEND INFORMATION
The Company's common stock is listed on the NYSE under the symbol LOR and
began trading on April 15, 1996 on a when-issued basis.
The Company does not currently anticipate paying any dividends or
distributions prior to the time that Globalstar commences operations and
achieves positive cash flow. To date, neither Globalstar nor SS/L has paid any
dividends or distributions since their respective dates of inception. Globalstar
intends to distribute to its partners its net cash received from operations,
less amounts required to repay outstanding indebtedness, pay
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distributions on its Redeemable Preferred Partnership Interests, satisfy other
liabilities and fund capital expenditures. The Globalstar Credit Agreement and
the SS/L credit facility impose restrictions on Globalstar's and SS/L's
respective ability to pay distributions or dividends to its partners and
stockholders, including to the Company.
(B) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At May 31, 1996, there were approximately 5,950 holders of record of the
Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from, and should be
read in conjunction with, the related financial statements. Historical
information for Loral Space & Communications Ltd. represents the space and
communications operations of Loral Corporation.
LORAL SPACE & COMMUNICATIONS LTD.
(IN THOUSANDS)
AS OF AND FOR THE YEARS ENDED MARCH 31,
-----------------------------------------------------------------
ACTUAL
PRO FORMA ----------------------------------------------------
1996(1) 1996 1995 1994 1993 1992
---------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Management fee from affiliate.... $ 5,608 $ 5,608 $ 3,169 $ 2,981 $ 2,576 $ 1,953
Equity in net income (loss) of
affiliates(2).................. (16,936) (8,628) (8,988) 1,174 663 (1,319)
Loss before cumulative effect of
accounting change(3)........... (32,349) (13,785) (7,873) (3,694) (5,242) (4,992)
Net loss......................... (32,349) (13,785) (7,873) (3,694) (12,001) (4,992)
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 612,286 $ -- $ -- $ -- $ -- $ --
Investment in Globalstar(2)...... 197,646 195,221 110,970 25,288 -- --
Investment in SS/L............... 144,051 144,051 140,007 138,191 137,017 133,669
Total assets..................... 1,001,638 354,384 251,819 163,479 137,017 133,669
Long-term debt................... -- -- -- -- -- --
Invested equity.................. -- 354,384 251,819 159,198 137,017 133,669
Shareholders' equity............. 988,638
- ---------------
(1) The pro forma information includes certain adjustments to the historical
information of the space and communications operations of Loral Corporation
reflecting the Merger (see Note 1 to Loral Space & Communications Ltd.
Balance Sheet).
(2) Globalstar commenced operations on March 23, 1994.
(3) Before the effect of adopting Statement of Financial Accounting Standards
No. 106 "Accounting for Postretirement Benefits Other than Pensions," in
fiscal 1993 net of related income taxes.
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SELECTED FINANCIAL DATA (CONTINUED)
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
(IN THOUSANDS)
THREE MONTHS CUMULATIVE
ENDED MARCH 23 MARCH 23, 1994
MARCH 31, (COMMENCEMENT (COMMENCEMENT
----------------- YEAR ENDED OF OPERATIONS) TO OF OPERATIONS) TO
1996 1995 DECEMBER 31, 1995 DECEMBER 31, 1994 MARCH 31, 1996
------- ------- ----------------- ----------------- -----------------
STATEMENT OF OPERATIONS DATA:
Revenues....................... $ -- $ -- $ -- $ -- $ --
Operating expenses............. 15,401 19,395 80,226 28,027 123,654
Interest income................ 1,449 2,159 11,989 1,783 15,221
Net loss....................... 13,952 17,236 68,237 26,244 108,433
Preferred distribution and
related increase on
redeemable preferred
partnership interests........ 1,424 -- -- -- 1,424
Net loss applicable to ordinary
partnership interests........ 15,376 17,236 68,237 26,244 109,857
DECEMBER 31,
MARCH 31, ---------------------
1996 1995 1994
--------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 247,108 $ 71,602 $ 73,560
Working capital............................................ 206,786 17,687 35,423
Globalstar System Under Construction....................... 508,822 400,257 71,996
Total assets............................................... 791,674 505,391 151,271
Vendor financing liability................................. 61,584 42,219 --
Partners' capital.......................................... 662,886 386,838 112,944
SPACE SYSTEMS/LORAL, INC.
(IN THOUSANDS)
AS OF AND FOR THE YEARS ENDED MARCH 31,
------------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues................................... $1,121,619 $633,717 $596,267 $517,242 $390,583
Gross profit............................... 34,406 27,785 24,964 19,855 14,851
Income (loss) before cumulative effect of
change in accounting(1).................. 12,367 5,554 3,591 2,594 (2,586)
Net income (loss).......................... 12,367 5,554 3,591 (18,076) (2,586)
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 126,863 $ 52,222 $ 26,578 $ 10,121 $ 8,420
Total assets............................... 908,677 766,475 743,016 640,499 579,647
Long-term debt............................. 65,052 34,040 92,249 73,000 141,000
Shareholders' equity....................... 447,868 435,501 429,947 426,356 327,765
- ---------------
(1) Before the effect of adopting Statement of Financial Accounting Standards
No. 106 "Accounting for Postretirement Benefits Other than Pensions" in
fiscal 1993 net of related income taxes.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company, Globalstar and SS/L, and
elsewhere in this Form 10-K, are forward-looking statements that involve risks
and uncertainties, many of which may be beyond the companies' control. The
actual results that the companies achieve may differ materially from any
forward-looking projections due to such risks and uncertainties.
LORAL SPACE & COMMUNICATIONS LTD.
Loral SpaceCom manages and is the largest equity owner of both Globalstar
and SS/L. The Company will also act as a Globalstar service provider in Canada,
Brazil and Mexico, and is evaluating additional satellite-based service
opportunities. Loral SpaceCom was formed to effectuate the distribution of
Loral's space and telecommunications businesses to shareholders of Loral and
holders of options to purchase Loral common stock pursuant to a merger agreement
(the "Merger") dated January 7, 1996 between Loral and Lockheed Martin. The
Distribution of approximately 183.6 million shares of Loral SpaceCom common
stock was made on April 23, 1996. In connection with the Distribution, Lockheed
Martin contributed $612 million in cash to the Company. Of the amount
contributed, $344 million represented the purchase of a 20% fully-diluted equity
interest in the Company in the form of Loral SpaceCom Series A Convertible
Preferred Stock. Such stock is subject to certain voting limitations,
restrictions on transfer and standstill provisions.
Loral SpaceCom records its investments in Globalstar and SS/L using the
equity method of accounting. Accordingly, Loral SpaceCom's results of operations
reflects its proportionate share of the results of operations of its affiliates
on an equity accounting basis. References to Loral SpaceCom or the Company prior
to the Distribution refer to the space and communications operations of Loral
Corporation. Included separately are the Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") for Globalstar and SS/L.
The MD&A for Loral SpaceCom should be read in conjunction with the MD&As of
Globalstar and SS/L.
LIQUIDITY AND CAPITAL RESOURCES
Loral SpaceCom commenced operations on April 23, 1996 with $612 million of
unrestricted cash, investments in affiliates totaling $342 million, $13 million
in liabilities and shareholders' equity of $989 million.
Loral SpaceCom intends to utilize its existing capital base and access to
the capital markets to support the financing requirements of the Operating
Affiliates (principally Globalstar) and to finance new business opportunities in
satellite-based communications either directly or through the Operating
Affiliates. It is also anticipated that the Operating Affiliates will directly
access the capital markets to satisfy their own financing requirements, and may
further seek financial support from their strategic partners, including the
Company. Loral SpaceCom's Operating Affiliates are currently financed without
recourse to Loral SpaceCom other than the $56.3 million indemnification provided
to Lockheed Martin in connection with the Globalstar Credit Agreement.
Loral SpaceCom's Operating Affiliates have no history of paying dividends
and are not expected to pay dividends in the near future. The Globalstar Credit
Agreement and the SS/L credit facility impose restrictions on Globalstar's and
SS/L's respective ability to pay distributions or dividends to its partners and
stockholders. In addition, Globalstar does not expect to make distributions
prior to the time it commences full commercial operations. It is anticipated
that Loral SpaceCom will initially fund its operating requirements (principally
consisting of management compensation and corporate overhead expenses) from
interest income generated from the temporary investment of cash balances and the
receipt of SS/L management fees.
As part of its investment in Globalstar, Loral SpaceCom, as a founding
service provider, acquired exclusive service provider rights to Mexico and
Brazil. Further, in June 1995, Loral SpaceCom paid Globalstar an initial $9.8
million for exclusive service provider rights to Canada. Loral SpaceCom, in
joint
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venture with local telephony service providers and international
telecommunications businesses, intends to establish Globalstar service
operations in such territories.
In September 1994, Loral Corporation exchanged its holdings in K&F's
convertible subordinated debentures for cash and common stock representing a
22.5% equity interest in K&F. (See Note 3 to the Loral Corporation -- Space and
Communications Operations Financial Statements, (the "Financial Statements").
K&F is principally engaged in the manufacture of aircraft braking systems for
commercial and military aircraft.
Cash Provided and Used. Cash used in operating activities for the years
ended March 31, 1996, 1995 and 1994 was $1.3 million, $8.4 million and $.6
million, respectively, primarily due to the items discussed in Results of
Operations, below.
Cash used in investing activities for the years ended March 31, 1996, 1995
and 1994 was $115.0 million, $92.1 million and $25.3 million, respectively,
primarily due to investments in Globalstar. Investments in Globalstar totaled
$105.2 million, $103.6 million and $25.3 million in the years ended March 31,
1996, 1995 and 1994 respectively, and include an aggregate of $10.3 million of
capitalized costs, principally interest.
Net cash provided by financing activities for the years ended March 31,
1996, 1995 and 1994 was $116.3 million, $100.5 million and $25.9 million,
respectively, representing the advances from Loral Corporation to fund the
above-mentioned activities.
Investment in Globalstar. At March 31, 1996 Loral SpaceCom's investment in
Globalstar was $195.2 million. (See Note 3 to the Financial Statements.)
Additionally, Loral SpaceCom holds an indirect 1.4% interest in Globalstar
through its ownership of SS/L.
Globalstar is building and preparing to launch and operate a worldwide,
low-earth orbit satellite-based digital telecommunications system. The
Globalstar System has an estimated total cost of $2.2 billion for capital
expenditures, development costs and operating costs through the end of 1998,
when full commercial service is scheduled to commence. Globalstar has raised a
total of $1.4 billion of financing consisting of $480 million of equity, $310
million of vendor financing, a $250 million bank credit facility, commitments
for $33 million of service provider advance payments, net proceeds of $300
million from the sale of GTL 6 1/2% Convertible Preferred Equivalent
Obligations. (See Note 3 to the Financial Statements.) Globalstar estimates that
it will require an additional $414 million to complete its external financing
requirements and that its remaining financing requirement will come from a
combination of sources, including advance payments from service providers,
anticipated payments associated with the sale of Globalstar Phones and gateways,
placements of limited partnership interests with new and existing strategic
investors and from net service revenues from initial operations.
Commencing on the In-Service Date, as defined, Globalstar will allocate to
its managing general partner an amount equal to 2.5% of Globalstar's revenues up
to $500 million plus 3.5% of revenues in excess of $500 million. Loral SpaceCom
and Qualcomm will receive 80% and 20% of such allocation, respectively.
Globalstar has not made any cash distributions to date, and none are anticipated
prior to 1999.
On December 15, 1995, Globalstar entered into a $250 million credit
agreement with a group of banks (the "Globalstar Credit Agreement"). The
Globalstar Credit Agreement provides that Globalstar may select loans at varying
interest rates, including the Eurodollar rate plus 5/8%. Globalstar pays a
commitment fee on the unused portion. The Globalstar Credit Agreement contains
covenants requiring Globalstar to meet certain financial ratios including
minimum net worth of $200 million and limits additional indebtedness and the
payment of cash distributions. The Globalstar Credit Agreement expires on
December 15, 2000.
Following the consummation of the Merger, Lockheed Martin guaranteed $206.3
million of Globalstar's obligation under the Globalstar Credit Agreement, and
SS/L and certain other Globalstar strategic partners guaranteed $11.7 million
and $32 million, respectively, of Globalstar's obligation. In addition, Loral
SpaceCom has agreed to indemnify Lockheed Martin for liability in excess of $150
million under Lockheed Martin's guarantee.
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In connection with such guarantees and indemnity of the Globalstar Credit
Agreement, GTL issued to Loral SpaceCom, Lockheed Martin, SS/L and the other
strategic partners participating in such guarantee or indemnity, warrants (the
"GTL Guarantee Warrants") to purchase 4,185,318 shares of GTL common stock. The
GTL Guarantee Warrants have an exercise price of $26.50, are subject to certain
vesting requirements, expire on April 19, 2003, are not exercisable until six
months after Globalstar commences initial operations unless accelerated at the
sole discretion of the managing general partner of Globalstar and may not be
transferred to third parties prior to such exercise date. In connection with the
issuance of GTL Guarantee Warrants, GTL received (i) warrants to acquire
4,185,318 ordinary partnership interests in Globalstar plus (ii) additional
warrants (the "Additional Warrants") to purchase an additional 1,131,168
ordinary partnership interests, on terms and conditions generally similar to
those of the GTL Guarantee Warrants. In addition, Globalstar has also agreed to
pay to Loral SpaceCom and the other guaranteeing partners a fee equal to 1.5%
per annum of the average quarterly amount outstanding under the Globalstar
Credit Agreement.
Investment in SS/L. The Company currently holds 32.7% of the economic
interest in SS/L. (See Note 3 to the Financial Statements.) SS/L is engaged in
the design, manufacture and systems integration for telecommunications, weather
and direct broadcast television satellites. A subsidiary of Loral SpaceCom is
paid a management fee from SS/L based on SS/L's total adjusted revenues.
SS/L is the prime contractor for the design and construction of
Globalstar's 56 satellites. In connection therewith, SS/L and its subcontractors
have committed $310 million of vendor financing to Globalstar, of which $121
million of such vendor financing is effectively borne by the subcontractors. As
of March 31, 1996, $62 million of such vendor financing has been utilized by
Globalstar.
In 1991 and 1992, Loral Corporation sold 49% of SS/L's equity to four
European companies involved in aerospace, telecommunications and space
communications (the "Alliance Partners"). Under a stockholders agreement, a
change of control of Loral Corporation within the meaning of such agreement
would provide each of the Alliance Partners with the right to (i) put their
equity interests back to SS/L at fair market value, or (ii) purchase a pro rata
share of Loral's equity interest in SS/L for fair market value (subject to
receiving certain authorizations including U.S. government approval). While it
is not certain that the change of control provisions are applicable, the Company
and SS/L are seeking an amendment to the stockholders agreement acknowledging
the transfer of Loral's interests in SS/L to Loral SpaceCom and a waiver of any
applicable put and purchase option rights. In the event that any of SS/L's
Alliance Partners put their interests back to SS/L, Loral SpaceCom will acquire
such interests. The Company does not expect all the Alliance Partners to
exercise their put rights in connection with the Distribution, but, if all such
put rights, if any, were exercised, the Company believes its obligations
pursuant to these rights would be less than $250 million.
Certain partnerships affiliated with Lehman Brothers Inc. (the "Lehman
Partnerships") hold Series S Preferred Stock of a Loral SpaceCom subsidiary.
Each share of Series S Preferred Stock represents a beneficial interest in one
share of common stock of SS/L. As a result of the issuance of the Series S
Preferred Stock, the Lehman Partnerships have no economic interest in the
subsidiary other than with respect to the SS/L operations. If the Lehman
Partnerships continue to hold the Series S Preferred Stock after January 1, 1998
or after a change in control of the Company, they will have the right to request
that the Company purchase their Series S Preferred Stock at fair market value.
In such event, the Company may elect to purchase such Series S Preferred Stock
at fair market value, or if the Company elects not to purchase the stock, the
Lehman Partnerships may require the combined interests of the Company and the
Lehman Partnerships in SS/L to be sold to a third party. (See Notes 3 and 7 to
the Financial Statements.) The Lehman Partnerships have advised the Company that
they do not intend to request that the Company purchase their Series S Preferred
Stock. The Company currently has no intention of selling its interest in SS/L.
Other Business Opportunities. Loral SpaceCom is currently evaluating
several new business initiatives including joint ventures to provide
"direct-to-home" ("DTH") television service in certain regions of the world, a
proposed digital communications service using a high-speed, satellite-delivered
communications system called CyberStar and a proposed hybrid communications
satellite. These ventures are in formative
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stages and there can be no assurance that they will be further developed or
licensed, or that the necessary capital to complete such ventures will be
available.
RESULTS OF OPERATIONS
The results of operations include the proportionate share of net income
(loss) of Globalstar and SS/L using the equity method of accounting. Such
results also include certain allocated costs and expenses representing an
allocation of Loral Corporation corporate office expenses based primarily on the
allocation methodology prescribed by government regulations pertaining to
government contractors. Allocated interest expense has been based on Loral
Corporation's actual weighted average debt rate applied to the average
investment in affiliate balance during the period. Accordingly, such results of
operations are not necessarily representative of all revenues and expenses that
would have occurred had the Space and Communications Operations been an
independent entity. Additionally, such results of operations exclude certain
revenues and expenses anticipated when Loral SpaceCom commences operations such
as interest income from the temporary investment of $612 million of cash
balances and other additional operating expenses.
Future operating results of Loral SpaceCom will be dependent on a number of
factors including the results of operations of the Operating Affiliates, the
level of corporate operating expenses, the utilization of the available cash
balances and the extent of interest income or other investment income. Loral
SpaceCom currently anticipates generating net income during the balance of
calendar year 1996; however, this result may be adversely impacted by the
outcome of these factors.
Taxation. Loral SpaceCom will be subject to U.S. federal, state and local
income taxation at regular corporate rates on any income from sources within the
United States that is effectively connected with the conduct of its U.S. trade
or business. When such income is deemed removed from the U.S. business, it will
be subject to an additional 30 percent "branch profits" tax. While, Loral
SpaceCom expects that most of its income from Globalstar will be from sources
outside the United States, some portion of such foreign source income will be
subject to taxation by certain foreign countries.
Also, any U.S. subsidiary formed to conduct Loral SpaceCom's U.S.
activities will be subject to U.S. taxation at regular corporate rates. In
addition, a 30% U.S. withholding tax will apply to dividends received from K&F,
SS/L, or any other U.S. corporation.
Furthermore, Loral SpaceCom has obtained an assurance from the Minister of
Finance under the Exempted Undertakings Tax Protection Act of 1996 that Bermuda
will not subject the company to any tax computed on profits or income, or
computed on any capital asset, gain or appreciation, or any tax in the nature of
estate duty or inheritance tax until at least March 28, 2016 except insofar as
such tax applies to persons ordinarily resident in Bermuda and holding such
shares, debentures or other obligations of the Company or any land leased or let
to the Company. As an exempted company, the Company is liable to pay in Bermuda
a registration fee based upon its authorized share capital and the premium on
its issued shares. Based upon the authorized share capital of the Company, the
annual registration fee payable by the Company will be $15,000.
Comparison of Results for the Years Ended March 31, 1996 and March 31, 1995
The results of operations reflect a net loss of $13.8 million for the year
ended March 31, 1996 as compared to a net loss of $7.9 million for 1995. The
increase in the 1996 loss is primarily due to the 1995 non-recurring gain of
$6.9 million net of taxes resulting from the exchange of K&F debentures for cash
and equity (see Note 3 to the Financial Statements).
Management fees earned from SS/L are based on a percentage of SS/L's
revenues, as defined. During fiscal 1996, management fees totaled $5.6 million
as compared to $3.2 million in 1995 reflecting an increase in SS/L's revenues to
$1.1 billion in 1996 from $633.7 million in 1995.
Allocated costs and expenses decreased to $3.0 million in 1996 from $3.2
million in 1995 due to changes in both the level of Loral Corporation corporate
office expenses and changes in the proportional factors within the allocation
formula. Allocated interest expense increased to $10.5 million in 1996 from $9.5
million in 1995,
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primarily as a result of Loral Corporation's increased effective borrowing rate
applied to its investment in SS/L.
For the year ended March 31, 1996, the effective income tax rate was
(35.0)% compared to 44.9% in 1995. The change in the effective rate for 1996 as
compared to 1995 is primarily a result of the proportionate impact of taxes on
undistributed earnings of affiliates (SS/L) for the year.
The equity in net loss of affiliates in 1996 of $8.6 million as compared to
$9.0 million in 1995 reflects Loral SpaceCom's proportionate share of higher
Globalstar costs for the design, development and construction of the Globalstar
System offset by the proportionate share of higher SS/L income.
Comparison of Results for the Fiscal Years Ended March 31, 1995 and March 31,
1994
The results of operations reflect a net loss of $7.9 million for the year
ended March 31, 1995 as compared to a net loss of $3.7 million for 1994. The
increase in the 1995 loss is primarily due to the equity in net loss of
Globalstar of $10.8 million offset by the non-recurring gain of $6.9 million net
of taxes resulting from the exchange of K&F debentures for cash and equity. (See
Note 3 to the Financial Statements.)
Management fees during the fiscal years ended March 31, 1995 and 1994 of
$3.2 million and $3.0 million, respectively, represent management fees earned
from SS/L reflecting SS/L's total revenues which increased to $633.7 million in
1995 from $596.3 million in 1994.
Allocated costs and expenses increased to $3.2 million in 1995 from $2.6
million in 1994 due to changes in both the level of Loral Corporation corporate
office expenses and changes in the proportional factors within the allocation
formula. Allocated interest expense increased to $9.5 million in 1995 from $8.3
million in 1994, primarily as a result of Loral Corporation's increased
effective borrowing rate applied to its investment in SS/L.
For the year ended March 31, 1995, the effective income tax rate was 44.9%
compared to 38% in 1994. The increase in the 1995 effective rate resulted from
the increase in the proportionate impact of taxes on undistributed earnings of
affiliates (SS/L) for the year.
The equity in net loss of affiliates in 1995 of $9.0 million as compared to
equity in net income of $1.2 million in 1994 reflects Loral SpaceCom's
proportionate share of Globalstar's costs for the design, development and
construction of the Globalstar System.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF GLOBALSTAR
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, cash and cash equivalents increased to $247.1 million
from $71.6 million at December 31, 1995. The net increase is a result of the
receipt of $290.0 million from the sale of 4,615,385 Redeemable Preferred
Partnership Interests, advance payments received for option territories of $1.7
million and interest on outstanding cash balances of $1.4 million, offset by the
expenditures for operations and the Globalstar System Under Construction.
Payables to affiliates and accrued expenses decreased by $10.8 million from
$54.4 million to $43.6 million during the three months ended March 31, 1996, as
a result of the timing of payments to Globalstar contractors.
Globalstar anticipates that the cost for the design, construction and
deployment of the Globalstar System, excluding working capital, cash interest on
anticipated borrowings and operating expenses to be approximately $1.8 billion.
Actual amounts may vary from this estimate and additional funds would be
required in the event of unforeseen delays, cost overruns, launch failures or
other technological risks or adverse regulatory developments, or to meet
unanticipated expenses.
Through March 31, 1996, Globalstar incurred costs of approximately $612
million for the design and construction of the satellite constellation, launch
vehicle payments and portions of the two SOCCs, two GOCCs, Globalstar Phones and
four gateways that make up part of the Globalstar ground segment. Costs incurred
during the first quarter 1996 were approximately $121 million (including $19.4
million accrued under vendor financing arrangements) as satellite production
activities continued, including pre-production model construction and test,
parts procurement and subassembly construction of the satellites. Expenditures
for the GOCCs and SOCCs included costs for software integration and test. Total
1996 system costs are expected to approximate $566 million and include an
estimated $90.1 million of accrued costs under vendor financing arrangements.
Satellite production, integration and testing will continue during the year.
Ground Segment activities in 1996 will include the development of laboratory
prototypes of the Globalstar Phones and the completion of SOCC installation and
checkout.
In addition to the above capital requirements, Globalstar will require
funds for its working capital, interest and preferred distributions on the
Redeemable Preferred Partnership Interests and future financings, repayment of a
portion of vendor financing and operating expenses through the Full
Constellation Date, currently estimated to be approximately $293 million.
Globalstar and its strategic service providers intend to jointly finance
the procurement of 25 gateways and long-lead-time parts for 25 additional
gateways for resale to service providers, thereby accelerating the deployment of
gateways around the world prior to the In-Service Date. The cost of this program
before financing costs is expected to be approximately $160 million, of which
Globalstar has agreed to finance approximately $80 million. Globalstar expects
to recover its investment in this gateway financing program from the resale of
these gateways to service providers. Globalstar is presently evaluating a plan
to purchase long-lead-time component parts for possible use in constructing 6 to
12 additional satellites. The current estimated additional cost for these
components is approximately $75 to $120 million, depending upon the quantity
purchased. The plan has two purposes: (i) to enable Globalstar to have on-orbit
at least 38 to 44 satellites during 1999, even in the event of launch failures
of up to two launches of 12 satellites each, and (ii) to provide ground spares
that would be readily available to replenish the satellite constellation in the
event of satellite attrition during the first generation or if there are
opportunities for increasing capacity. If Globalstar were to experience a launch
failure, the long-lead-time components would be used to build replacement
satellites and the cost associated with the construction and launch of such
satellites would be reimbursed through insurance.
This information represents Globalstar's current anticipated cash
requirements. Actual amounts may vary from these estimates and additional funds
would be required in the event of unforeseen delays, cost overruns,
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launch failures or other technological risks or adverse regulatory developments,
or to meet unanticipated expenses.
Through March 31, 1996, Globalstar has obtained a total of $1.4 billion of
financing consisting of $480 million of equity, $310 million of vendor
financing, a $250 million credit facility (the "Globalstar Credit Agreement"),
guaranteed by certain parties, commitments for approximately $33 million of
advance payments associated with certain Globalstar service territories, net
proceeds of $290 million from the sale of Redeemable Preferred Partnership
Interests to GTL, which was purchased by GTL with the proceeds from the sale of
its 6 1/2% Convertible Preferred Equivalent Obligations (the "Securities") and
on April 3, 1996, an additional $9.7 million from the sale of Redeemable
Preferred Partnership Interests to GTL from the proceeds from an additional sale
of the Securities.
Globalstar believes that its current capital, vendor financing commitments
and the availability of the Globalstar Credit Agreement are sufficient to fund
its requirements into the first quarter of 1997. Of such financing commitments,
a substantial portion of the vendor financing will not be utilized until 1997
and 1998. Additional funds to complete the Globalstar System are expected to be
obtained through a combination of debt issuance (which may include an equity
component), projected service provider payments, projected net service revenues
from initial operations, anticipated payments received from the sale of gateways
and Globalstar Phones and placement of limited partnership interests with new
and existing strategic investors. Although Globalstar believes it will be able
to obtain this additional financing, there can be no assurance that the
financing will be available on favorable terms or on a timely basis, if at all.
RESULTS OF OPERATIONS
Comparison of Results for the Three Months Ended March 31, 1996 and 1995
Globalstar is a development stage partnership and has not commenced
commercial service operations. For the period March 23, 1994 (commencement of
operations) to March 31, 1996, Globalstar has recorded cumulative net losses of
$108.4 million. The net loss for the quarter ended March 31, 1996 decreased to
$14.0 million from $17.2 million in the quarter ended March 31, 1995 as a result
of timing of work performed by Globalstar contractors. Globalstar is expending
significant funds for the design, construction, testing and deployment of the
Globalstar System and expects such losses to continue until commencement of
service operations.
Globalstar has earned interest income of $15.2 million since commencement
of operations on cash balances and short term investments. Interest income for
the quarter ended March 31, 1996 was $1.4 million as compared to $2.2 million
earned during the quarter ended March 31, 1995. Interest income has decreased
from the quarter ended March 31, 1995 as a result of lower cash balances within
the quarter ended March 31, 1996.
Operating Expenses. Development costs of $11.4 million for the quarter
ended March 31, 1996, represent the development of certain technologies under a
cost sharing arrangement in Globalstar's contract with Qualcomm, the development
of Globalstar Phones and Globalstar's continuing in-house engineering. This
compares with $16.2 million of development costs incurred during the quarter
ended March 31, 1995.
Marketing, general and administrative expenses were $4.0 million for the
quarter ended March 31, 1996 as compared to $3.2 million incurred during the
quarter ended March 31, 1995. The increase from the quarter ended March 31, 1995
is a result of both increased marketing and personnel costs, consistent with the
higher level of activity at Globalstar.
Depreciation. Globalstar intends to capitalize all costs, including
interest as applicable, associated with the design, construction and deployment
of the Globalstar System, except costs associated with the development of the
Globalstar Phones and certain technologies under a cost sharing arrangement with
Qualcomm. Globalstar will not record depreciation expense on the Globalstar
System Under Construction until the commencement of initial service operations,
as assets are placed into service.
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Income Taxes. Globalstar was organized as a limited partnership. As such,
no income tax provision (benefit) is included in the accompanying financial
statements since U.S. income taxes are the responsibility of its partners.
Generally, taxable income (loss), deductions and credits of Globalstar will be
passed through to its partners.
Comparison of Results for the Year Ended December 31, 1995 to the Period March
23, 1994 (commencement of operations) to December 31, 1994
For the period March 23, 1994 (commencement of operations) to December 31,
1995, Globalstar has recorded cumulative net losses of $94.5 million. The net
loss for the year ended December 31, 1995 increased to $68.2 million from $26.2
million in the prior period March 23, 1994 (commencement of operations) to
December 31, 1994 (the "Prior Period"). Globalstar is expending significant
funds for the design, construction, testing and deployment of the Globalstar
System and expects such losses to continue until commencement of service
operations.
Globalstar has earned interest income amounting to $13.8 million since
commencement of operations on cash balances and short term investments. Interest
income for the year ended December 31, 1995 was $12.0 million as compared to
$1.8 million earned during the Prior Period. Interest income has increased
significantly from the Prior Period as a result of higher cash balances invested
due to the sale of 10,000,000 partnership interests to GTL for $185.8 million
during the first quarter and the receipt of payments against capital
subscriptions of $133.8 million.
Operating Expenses. Development costs of $62.9 million for the year ended
December 31, 1995, represent the development of certain technologies under a
cost sharing arrangement in Globalstar's contract with Qualcomm, the development
of Globalstar Phones and Globalstar's continuing in-house engineering. This
compares with $21.3 million of development costs incurred during the Prior
Period. The increase as compared to the Prior Period is primarily related to the
technologies being developed under the cost sharing arrangement with Qualcomm.
Marketing, general and administrative expenses were $17.4 million for the
year ended December 31, 1995 as compared to $6.7 million incurred during the
Prior Period. The increase from the Prior Period is a result of both increased
marketing and personnel costs consistent with the higher level of activity at
Globalstar.
Depreciation. Globalstar intends to capitalize all costs, including
interest as applicable, associated with the design, construction and deployment
of the Globalstar System, except costs associated with the development of
certain technologies under a cost sharing arrangement with Qualcomm and costs of
the Globalstar Phones. Globalstar will not record depreciation expense on the
Globalstar System under construction until the commencement of initial service
operations, as assets are placed into service.
Income Taxes. Globalstar was organized as a limited partnership. As such,
no income tax provision (benefit) is included in the accompanying financial
statements since U.S. income taxes are the responsibility of its partners.
Generally, taxable income (loss), deductions and credits of Globalstar will be
passed through to its partners.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SS/L
LIQUIDITY AND CAPITAL RESOURCES
For the years ended March 31, 1996, 1995 and 1994, SS/L's operations
provided cash of $67.8 million, $115.8 million and $19.3 million, respectively.
For these same periods, income before depreciation, amortization, taxes,
minority interest and equity in loss of affiliates was $58.4 million, $48.7
million and $42.2 million, respectively. The significant fluctuations between
such amounts arise primarily from the timing of payments and advances received
and costs incurred on contracts in process including long-term receivables; such
changes increased (decreased) cash by $(47.7) million, $42.0 million and $(18.3)
million in the respective periods. It is common in the satellite industry that
certain contracts have terms deferring payment of a portion of the contract
price until delivery, or in some cases until after delivery, in the form of
orbitals. Contracts in process, net increased by $47.9 million in the year ended
March 31, 1996, primarily due to working capital requirements of various
commercial programs, offset by milestone payments received from customers.
Contracts in process, net decreased $44.0 million in the year ended March 31,
1995, primarily due to milestone payments received from customers and the
reallocation of long-term receivables related to orbitals, offset by working
capital requirements of various commercial programs. Long-term receivables
increased $10.2 million and $41.7 million in the years ended March 31, 1996 and
1995, respectively, due to increases in long-term receivables related to
orbitals primarily for the Intelsat VII series of satellites. Accounts payable,
accrued payroll and other current liabilities increased $76.0 million and $27.5
million in the years ended March 31, 1996 and 1995, respectively, primarily due
to increased payables to subcontractors for Globalstar and other commercial
programs. Customer advances increased by $10.4 million and $39.7 million in the
years ended March 31, 1996 and 1995, respectively, due to advances on new
program awards during the periods.
In the years ended March 31, 1996, 1995 and 1994, SS/L expended $24.2
million, $23.4 million and $22.6 million for capital equipment and facilities
expansion. In fiscal 1995 and 1994, SS/L contributed a total of $6.0 million for
an 11% limited partnership interest in LQSS, a general partner of Globalstar. In
fiscal 1995, SS/L also purchased a 5% interest in Orion Network Systems, Inc.
for $5.0 million.
Cash provided by (used in) financing activities for the years ended March
31, 1996, 1995 and 1994 was $31.0 million, $(58.2) million and $22.1 million,
respectively, primarily due to debt borrowings and repayment activities in each
of the periods.
At March 31, 1996, SS/L had cash and cash equivalents of $126.9 million and
had $65.1 million of long-term debt outstanding, with $171.6 million available
under its credit facilities. Under a revolving credit agreement with a group of
banks, interest is charged at various rates based on the lead bank's prime rate,
or margins over the Federal Funds rate or LIBOR, at SS/L's option. The LIBOR
interest rate is subject to a reduction of 1/10% on SS/L's achievement of a
certain financial covenant which has been achieved by SS/L.
SS/L believes its revolving credit agreement, which expires in December
1997, and other credit facilities are adequate to meet its financing needs for
the next twelve months. Subsequent to March 31, 1996, SS/L received
authorization under its credit facilities to permit the transaction under the
Distribution Agreement, described below.
In 1991 and 1992, Loral Corporation sold 49% of SS/L's equity to the
Alliance Partners. Under a stockholders agreement, a change of control of Loral
Corporation within the meaning of such agreement would provide each of the
Alliance Partners with the right to (i) put their equity interests back to SS/L
at fair market value, or (ii) purchase a pro rata share of Loral's equity
interest in SS/L for fair market value (subject to receiving certain
authorizations including U.S. government approval). While it is not certain that
the change of control provisions are applicable, the Company and SS/L are
seeking an amendment to the stockholders agreement acknowledging the transfer of
Loral's interests in SS/L to Loral SpaceCom. In the event that any of SS/L's
Alliance Partners put their interests back to SS/L, Loral SpaceCom will acquire
such interests. The Company does not expect all the Alliance Partners to
exercise their put rights, if any, in connection with the Distribution, but, if
all such put rights were exercised, the Company believes its obligations
pursuant to these rights would be less than $250 million.
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BACKLOG
Funded backlog at March 31, 1996 and 1995 was $1.2 billion. Approximately
74% of the total backlog was for six commercial contracts. Foreign customers
accounted for 29% and 43% of the total backlog in 1996 and 1995, respectively.
Awards for the year ended March 31, 1996 were $1.1 billion, primarily consisting
of bookings, including the design, fabrication, test and delivery of satellites
for the MCI/News Corp., PanAmSat 7 & 8 and Apstar IIR programs and specific
payload equipment for the Yamal, Sirius and Eutelsat programs. Awards also
include additional funding for the Globalstar, GOES and Space Station programs.
RESULTS OF OPERATIONS
Comparison of Results for the Fiscal Years Ended March 31, 1996 and March 31,
1995
During the year ended March 31, 1996, revenues from contracts increased to
$1.1 billion from $633.7 million for the year ended March 31, 1995. Gross profit
increased to $34.4 million from $27.8 million in the prior year. The changes in
sales and gross profit primarily result from a change in the current program mix
and increased sales volume for launch vehicles and risk management on programs
requiring in-orbit satellite delivery; such sales typically have
lower-than-average fee rates.
The increases in revenues are attributable to higher volume on commercial
satellite programs of $521.4 million, including the Globalstar program of $239.7
million, offset by lower volume on both the GOES weather satellite program of
$18.9 million and the Space Station program of $14.6 million.
Interest income net of interest expense increased $5.0 million to $6.3
million from $1.3 million for the same period in the prior year, primarily
attributable to increased investment income of $2.6 million resulting from
increased invested cash balances and $2.4 million of interest income associated
with orbital receipts.
Equity in net loss of affiliate represents SS/L's proportionate share of
Globalstar's net loss; SS/L made this investment in March 1994.
As a result of the above, net income increased to $12.4 million from $5.6
million in the comparable period of the prior year.
SS/L's effective tax rate decreased to 53.4% in fiscal 1996 from 62.2% in
the prior year. Income before income taxes increased in the same period from
$19.2 million to $28.4 million resulting in a decreased impact on the effective
tax rate of the non-deductible goodwill amortization and the losses of ISTI (see
Note 5 to the SS/L Financial Statements).
Comparison of Results for the Fiscal Years Ended March 31, 1995 and March 31,
1994.
During fiscal 1995, revenues from contracts increased to $633.7 million
from $596.3 million in the prior year. Net income increased to $5.6 million
compared with $3.6 million in the prior year.
The increase in revenues of $37.4 million is attributable to higher volume
on commercial satellite programs of $29.2 million, the Space Station program of
$4.6 million and the GOES weather satellite program of $3.6 million.
Gross profit increased to $27.8 million from $25.0 million in the prior
year. Gross profit as a percentage of sales increased to 4.4% from 4.2%,
resulting primarily from both the increase in sales volume and an increase in
gross margins on newly awarded programs.
Interest income, net of interest expense increased $2.7 million to $1.3
million from net expense of $1.4 million in the prior year, primarily resulting
from increased interest income from orbital receipts for newly launched
satellites of $1.5 million, and increased investment income resulting from
cashflow of $1.2 million.
Equity in net loss of affiliate represents SS/L's proportionate share of
Globalstar's net loss; SS/L made this investment in March 1994.
SS/L's effective tax rate decreased to 62.2% in fiscal 1995 from 75.8% in
the prior year. On August 10, 1993, the Omnibus Budget Reconciliation Act of
1993 was signed into law, including a provision that
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increased the Federal corporate rate by 1% to 35% effective January 1, 1993. In
fiscal 1994, the net deferred tax liabilities were revalued at the higher rate,
resulting in an increase to the effective tax rate. In fiscal 1995, such
revaluation was not required. Additionally, the impact on the effective tax rate
of the non-deductible goodwill amortization and the losses of ISTI decreased
resulting from an increase in income before income taxes (see Note 5 to the SS/L
Financial Statements).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons, all of whom, previously served as directors of
Loral, have been elected to serve as the directors of the Company. As provided
in the Company's Bye-laws, the holders of the Company's common stock elect the
directors. Approximately one-third of the Company's Board is elected each year
to serve for a three-year period. Initially, however, members of all three
classes were elected by Loral as sole shareholder of the Company prior to the
Distribution. The directors were elected to three classes as follows: three
directors, constituting the "Class I Directors," were elected for a term
expiring at the 1997 Annual Meeting, three directors, constituting the "Class II
Directors," were elected for a term expiring at the 1998 Annual Meeting, and
four directors, constituting the "Class III Directors," were elected for a term
expiring at the 1999 Annual Meeting. At each Annual Meeting beginning in 1997,
directors will be elected to succeed those whose terms expire, with each newly
elected director to serve a three-year term. The Series A Preferred Stock issued
to Lockheed Martin may be voted without restriction on all matters submitted to
shareholders for approval, except that it may not vote for the election of
directors. After the conversion of the Series A Preferred Stock into common
stock, the common stock may vote without restriction on all matters, including
the election of directors, except that in the event of an election contest,
Lockheed Martin and its affiliates have agreed, pursuant to a shareholders
agreement, that they will, subject to certain exceptions, vote any of the common
stock, at their option, either (i) as recommended by the Board of Directors or
management of the Company, or (ii) in the same proportions as the holders of the
Company's equity securities vote their securities.
The following table sets forth the directors and executive officers of the
Company as of June, 1996:
NAME AGE POSITION
- ----------------------------------------- --- -----------------------------------------
Bernard L. Schwartz (Class III).......... 70 Chairman of the Board of Directors and
Chief Executive Officer
Michael B. Targoff....................... 51 President and Chief Operating Officer
Howard Gittis (Class I).................. 61 Director
Robert B. Hodes (Class II)............... 70 Director
Gershon Kekst (Class I).................. 60 Director
Charles Lazarus (Class II)............... 71 Director
Malvin A. Ruderman (Class III)........... 68 Director
E. Donald Shapiro (Class III)............ 63 Director
Arthur L. Simon (Class I)................ 63 Director
Thomas J. Stanton, Jr. (Class III)....... 67 Director
Daniel Yankelovich (Class II)............ 70 Director
Michael P. DeBlasio...................... 59 Senior Vice President and Chief Financial
Officer
Nicholas C. Moren........................ 49 Vice President and Treasurer
Harvey B. Rein........................... 42 Vice President and Controller
Eric J. Zahler........................... 45 Vice President, General Counsel and
Secretary
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Mr. Schwartz has been the Chairman and Chief Executive Officer of the
Company since January of 1996 and had been Chairman and Chief Executive Officer
of Loral since 1972. Mr. Schwartz has been Chairman of the Board of Directors of
SS/L since February 1991. He is also Chairman and Chief Executive Officer of
Globalstar, GTL and K&F, and serves as a director of Reliance Group Holdings,
Inc. and certain of its subsidiaries, Sorema International Holding N.V. and
First Data Corporation. Mr. Schwartz is also a Trustee of New York University
Medical Center. Mr. Schwartz has been a director and Vice Chairman of Lockheed
Martin Corporation since April 1996.
Mr. Targoff has been President and Chief Operating Officer of the Company
since March of 1996 and had been Senior Vice President and Secretary of Loral
since 1992 and prior thereto held other executive officer positions with Loral.
Mr. Targoff is also a director of SS/L and GTL.
Mr. Gittis has been Vice Chairman and Chief Administrative Officer of
MacAndrews & Forbes Holdings Inc. since 1984. He is also a director of Andrews
Group Incorporated, Consolidated Cigar Corporation, First Nationwide Holdings,
Inc., First Nationwide Bank, Jones Apparel Group, Inc., Mafco Worldwide
Corporation, National Health Laboratories Holdings, Inc., NWCG Holdings
Corporation, New World Communications Group Incorporated, New World Television
Incorporated, Revlon Consumer Products Corporation and Revlon Worldwide
Corporation.
Mr. Hodes became Counsel to Willkie Farr & Gallagher in 1995. He was a
partner in Willkie Farr & Gallagher since 1956. He is also a director of
Aerointernational, Inc., W.R. Berkeley Corporation, Crystal Oil Company, GTL,
R.V.I. Guaranty, Ltd., LCH Investments N.V., Mueller Industries, SS/L, Inc. and
Restructured Capital Holdings, Ltd.
Mr. Kekst is President of Kekst and Company Incorporated, a corporate and
financial communications consulting company which was established in 1970.
Mr. Lazarus has been Chairman of Toys "R" Us, Inc. since 1974. He is also a
director of Automatic Data Processing, Inc.
Mr. Ruderman has been Professor of Physics, Columbia University since 1969.
Mr. Shapiro is the Joseph Solomon Distinguished Professor of Law (since
1983) and Dean/Professor of Law (1973-1983) of New York Law School. He is also a
director of Bank Leumi Trust Co., Eyecare Products PLC, Vasomedical, Inc.,
Kranzco Realty Trust, MacroChem Corporation and Premier Laser Systems.
Mr. Simon is an independent consultant and was a partner of Coopers &
Lybrand, L.L.P. from 1968 to 1994.
Mr. Stanton has been Chairman Emeritus of National Westminster Bancorp NJ
since 1990. He is also a director of Reliance Group Holdings, Inc. and Reliance
Insurance Co.
Mr. Yankelovich is Chairman of DYG, Inc., a market, consumer and opinion
research firm. He is also Director Emeritus of U.S. West Inc., Meredith
Corporations and Arkla, Inc.
Mr. DeBlasio has been Senior Vice President and Chief Financial Officer of
the Company since March of 1996 and had been Senior Vice President-Finance of
Loral since 1979. Mr. DeBlasio is also a director of SS/L and GTL.
Mr. Moren has been Vice President and Treasurer of the Company since March
of 1996 and had been Vice President and Treasurer of Loral since 1991.
Mr. Rein has been Vice President and Controller of the Company since June
of 1996, and had been Assistant Controller of Loral since 1985.
Mr. Zahler has been Vice President, General Counsel and Secretary of the
Company since March of 1996 and had been Vice President and General Counsel of
Loral since 1992. From 1984 to 1992, Mr. Zahler was a partner in the law firm of
Fried, Frank, Harris, Shriver & Jacobson.
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Directors of the Company will be paid a fixed annual retainer fee of
$25,000 per year. Non-employee directors will also be paid a per meeting
attendance fee of $6,000. The Company expects to provide life insurance and
medical benefits to non-employee directors on substantially the same basis that
such benefits were provided by Loral. Non-employee directors will also have the
opportunity to elect to defer their annual fees and have them credited toward
the purchase of Common Stock, which will be delivered after termination of
directorship.
ITEM 11. EXECUTIVE COMPENSATION
Because the Company is newly formed, historical information on executive
compensation paid by the Company is not available. Compensation for the
Company's Chief Executive Officer has been established by the Board of Directors
and the Compensation Committee, and compensation for the other principal
executive officers has been maintained at their prior levels pending review by
the Board of Directors and the Compensation Committee.
Set forth below are the names and titles of the Company's five most highly
compensated executive officers and the annual base salary as of May 31, 1996,
for each such executive officer:
CURRENT
NAME AND TITLE ANNUAL SALARY
----------------------------------------------------------------------- -------------
Bernard L. Schwartz, Chairman and Chief Executive Officer.............. $ 956,300
Michael B. Targoff, President and Chief Operating Officer.............. 400,000
Michael P. DeBlasio, Senior Vice President and Chief Financial
Officer.............................................................. 434,000
Nicholas C. Moren, Vice President and Treasurer........................ 214,000
Eric J. Zahler, Vice President, General Counsel and Secretary.......... 240,000
BONUS ARRANGEMENTS
Pursuant to the Merger Agreement, the Company has paid to employees of
Loral who become employees of the Company and its subsidiaries all bonus
compensation payable for the fiscal year of Loral ended March 31, 1996, under
any bonus program of Loral or its subsidiaries in which the employee
participated prior to the merger, or under any employment agreement applicable
to such employee. Lockheed Martin has agreed to reimburse the Company for the
amount of such bonuses paid to all employees.
The Company intends to adopt an annual bonus plan for executive officers
and other key employees. The bonus program will be adopted by the Board of
Directors and approved by the Company's Compensation Committee. Executive
officers will also participate in the Company's 1996 Stock Option Plan, which is
described below. The level of participation of each executive officer in the
1996 Stock Option Plan will be determined by the Compensation Committee of the
Board of Directors (the "Compensation Committee").
1996 STOCK OPTION PLAN
Prior to the Distribution, the 1996 Stock Option Plan (the "SOP") was
adopted by the Board of Directors. The SOP provides for the grant of
non-qualified stock options ("NQSOs") and incentive stock options as defined in
Section 422 of the Code ("ISOs"). The SOP is administered by the Compensation
Committee of the Company, which consists of at least two directors of the
Company, each of whom must be a "disinterested person" within the meaning of
Rule 16b-3 promulgated under the Exchange Act. Key employees and officers of the
Company are eligible to participate in the SOP. Management of the Company
believe that the SOP is important to provide an inducement to obtain and retain
the services of qualified employees and officers. At present, all the officers
and approximately 800 other key employees of the Company and its Operating
Affiliates are eligible to participate in the SOP. The SOP (but not outstanding
options) will terminate on the tenth anniversary of its adoption. The Company
has reserved 12,000,000 shares of Common Stock for issuance upon the exercise of
options under the SOP.
Recipients of options under the SOP ("Optionees") are selected by the
Compensation Committee. The Compensation Committee determines the terms of each
option grant including (1) the purchase price of shares subject to options, (2)
the dates on which options become exercisable, and (3) the expiration date of
each option (which may not exceed ten years from the date of grant). The
Compensation Committee has the
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power to accelerate the exercisability of outstanding options at any time. The
number of shares for which options may be granted under the SOP to any single
Optionee during any partial or full calendar year that the SOP is in effect may
not exceed 2,000,000 (subject to adjustment for capital changes).
The purchase price of the shares of Common Stock subject to options will be
fixed by the Compensation Committee, in its discretion, at the time options are
granted; provided, that (i) in no event shall the per share purchase price of an
ISO be less than the Fair Market Value (as defined in the SOP) of a share of
Common Stock on the date of grant; (ii) in no event shall the per share purchase
price of a NQSO be less than the lower of (A) 50% of the Fair Market Value of a
share of a Common Stock on the date of grant, and (B) $20 below the aforesaid
Fair Market Value; and (iii) in no event shall the per share purchase price of
any option be less than the par value per share of the Common Stock.
Optionees will have no voting, dividend, or other rights as shareholders
with respect to shares of Common Stock covered by options prior to becoming the
holders of record of such shares. All option grants will permit the purchase
price to be paid in cash, by tendering stock, or by brokered or "cashless"
exercise. The number of shares covered by options will be appropriately adjusted
in the event of any merger, recapitalization or similar corporate event.
The Board of Directors of the Company may at any time terminate the SOP or
from time to time make such modifications or amendments to the SOP as it may
deem advisable; provided that the Board may not, without the approval of the
Company's shareholders, (i) increase the maximum number of shares of Common
Stock for which options may be granted under the SOP or (ii) reduce the minimum
purchase price at which options may be granted under the SOP.
Options granted under the SOP will be evidenced by a written option
agreement between the Optionee and the Company. Subject to limitations set forth
in the SOP, the terms of option agreements will be determined by the
Compensation Committee, and need not be uniform among Optionees.
The Compensation Committee made the following stock option grants to the
Company's named executive officers at an exercise price of $10.50 per share:
Bernard L. Schwartz 1,200,000 shares, Michael B. Targoff 800,000 shares, Michael
P. DeBlasio 800,000 shares, Nicholas C. Moren 500,000 shares and Eric J. Zahler
500,000 shares.
The following is a brief discussion of the Federal income tax consequences
of transactions under the SOP based on the Code. The SOP is not qualified under
Section 401(a) of the Code.
No taxable income is realized by an Optionee upon the grant or exercise of
an ISO. If Common Stock is issued to an Optionee pursuant to the exercise of an
ISO, and if no disqualifying disposition of such shares is made by such Optionee
within two years after the date of grant or within one year after the transfer
of such shares to such Optionee, then (i) upon sale of such shares, any amount
realized in excess of the option price will be taxed to such Optionee as a
long-term capital gain and any loss sustained will be a long-term capital loss,
and (ii) no deduction will be allowed to the Optionee's employer for Federal
income tax purposes.
If the Common Stock acquired upon the exercise of an ISO is disposed of
prior to the expiration of either holding period described above, generally (i)
the Optionee will realize ordinary income in the year of disposition in an
amount equal to the excess (if any) of the fair market value of such shares at
exercise (or, if less, the amount realized on the disposition of such shares)
over the option price paid for such shares, and (ii) the Optionee's employer
will be entitled to deduct such amount for Federal income tax purposes if the
amount represents an ordinary and necessary business expense. Any further gain
(or loss) realized by the Optionee will be taxed as short-term or long-term
capital gain (or loss), as the case may be, and will not result in any deduction
by the employer.
With respect to NQSOs, (i) no income is realized by an Optionee at the time
the Option is granted; (ii) generally, at exercise, ordinary income is realized
by the Optionee in an amount equal to the difference between the option price
paid for the shares and the fair market value of the shares, if unrestricted, on
the date of exercise, and the Optionee's employer is generally entitled to a tax
deduction in the same amount subject to applicable tax withholding requirements;
and (iii) at sale, appreciation (or depreciation) after the date of
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exercise is treated as either short-term or long-term capital gain (or loss)
depending on how long the shares have been held. Deductions for compensation
attributable to NQSOs (or disqualified ISOs) granted to the Company's named
executive officers may be subject to the deduction limits of Section 162(m) of
the Code, unless such compensation qualifies as "performance-based" as defined
therein.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Mr. Schwartz,
which will expire on April 23, 2001. Beginning April 23, 1996, Mr. Schwartz'
initial annual base salary is $956,300, and will be increased annually by the
percentage change in a specified consumer price index.
Pursuant to the agreement, if Mr. Schwartz is removed as Chairman of the
Board of Directors or as Chief Executive Officer other than for cause, or if his
duties, authorities or responsibilities are diminished, or if there is a change
of control (as defined to encompass the Company becoming a subsidiary of another
company, the acquisition of 35% or more of the voting securities of the Company
by a particular stockholder or group, or a change in 35% of the Company's
directors at the insistence of the shareholder group), Mr. Schwartz may elect to
terminate the agreement. In any such event, or upon his death or disability, Mr.
Schwartz will be entitled to receive a lump sum payment discounted at 9% per
annum, in an amount equal to his base salary as adjusted for defined consumer
price index changes for the remainder of the term, an amount of incentive bonus
equal to the highest received by Mr. Schwartz in any of the prior three years,
times the number of years (including partial fiscal years) remaining during the
term, and an amount calculated to approximate the annual compensation element
reflected in the difference between fair market value and exercise price of
stock options granted to Mr. Schwartz. All such sums are further increased to
offset any tax due by Mr. Schwartz under the excise tax and related provisions
of Section 4999 of the Internal Revenue Code.
GTL OPTIONS
On September 12, 1995, Loral granted to each of Mr. Schwartz and six other
executives of Loral an option to purchase 20,000 shares of GTL common stock
owned by Loral (the "GTL Options"). The GTL Options were granted at an exercise
price of $20 per share. The closing price of GTL common stock on the Nasdaq
National Market System on September 12, 1995 was $19 per share. The GTL Options
were immediately exercisable as of the date of grant, and have a maximum term of
12 years from the date of grant. In the event of the option holder's death, the
GTL Options are exercisable by the option holder's estate or beneficiary for a
period of one year from the date of death. Loral's obligations under the GTL
Options have been assumed by Loral SpaceCom in connection with the Distribution.
On December 12, 1995, Loral granted to each outside director of Loral an
option to purchase 20,000 shares of GTL Common Stock owned by Loral at an
exercise price of $33.375 per share and otherwise on terms substantially
identical to that of the GTL Options described above.
COMPANY PENSION PLAN
The Company adopted a defined benefit pension plan and trust (the "Pension
Plan") that is qualified under Section 401(a) of the Code. The Pension Plan will
provide retirement benefits for eligible employees of the Company and the
Operating Affiliates, including executive officers. The benefit formula for
executive officers for the period ending December 31, 1995 will generally
provide an annual benefit equal to the greater of (A) or (B), where (A) equals
(i) 1.2% of compensation up to the Social Security Wage Base and 1.45% of
compensation in excess of the Social Security Wage Base for each year of
participation up to 15 years of employment, plus (ii) 1.5% of compensation up to
the Social Security Wage Base and 1.75% of compensation in excess of the Social
Security Wage Base for each year of participation in excess of 15 years of
employment; and (B) equals (i) 1.2% of average annual compensation paid during
1991-1995 up to the 1995 Social Security Wage Base and 1.45% of average annual
compensation paid during 1991-1995 in excess of the 1995 Social Security Wage
Base for each year of participation up to 15 years of employment, plus (ii) 1.5%
of average annual compensation paid during 1991-1995 up to the 1995 Social
Security Wage Base and 1.75% of average annual compensation paid during
1991-1995 in excess of the 1995 Social Security Wage Base for each
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year of participation in excess of 15 years of employment. The benefit for
periods subsequent to December 31, 1995 will be based on (A) above. Executive
officers will also participate in a supplemental executive retirement plan (the
"SERP") which provides supplemental retirement benefits due to certain
reductions in retirement benefits under the Pension Plan that are caused by
various limitations imposed by the Code. Compensation used in determining
benefits under the Pension Plan and SERP primarily includes salary and bonus.
The estimated annual benefit upon retirement under the Pension Plan and
SERP is $2,421,000 for Mr. Schwartz, $413,000 for Mr. Targoff, $401,000 for Mr.
DeBlasio, $177,000 for Mr. Moren and $221,000 for Mr. Zahler. This retirement
benefit has been computed assuming that (i) employment with the Company will be
continued until normal retirement, or until the expiration of any current
employment agreement, if later and (ii) current levels of creditable
compensation and the Social Security Wage Base will continue without increases
or adjustments throughout the remainder of the computation period.
SUPPLEMENTAL LIFE INSURANCE PROGRAM
The Company maintains a contributory supplemental life insurance program
for certain key employees, including Messrs. Schwartz, Targoff, DeBlasio, Moren
and Zahler. The program is funded with "split-dollar" or "universal" life
insurance policies which were transferred to the Company following the
Distribution Date with respect to the Loral employees who became employed by the
Company after the Distribution Date. The face amounts of the policies for
Messrs. Schwartz, Targoff, DeBlasio, Moren and Zahler are $20,500,000,
$1,450,000, $1,060,000, $500,000 and $500,000, respectively.
COMMON STOCK PURCHASE PLAN FOR NON-EMPLOYEE DIRECTORS
The Company's Board of Directors adopted the Common Stock Purchase Plan for
Non-Employee Directors (the "Director Plan").
The Director Plan is designed to encourage stock ownership by the Company's
nonemployee directors. As of the date of this Information Statement, nine
non-employee directors were eligible to participate in the Director Plan.
Under the terms of the Director Plan, each non-employee director of the
Company is entitled to make an election to defer up to 100% of his annual fees
and have such amounts credited to a deferral account maintained under the plan.
Participation in the Director Plan is voluntary and all amounts deferred are
fully vested. For purposes of the Director Plan, a "non-employee director" is
defined as a member of the Company's Board of Directors who is not an employee
of the Company or any affiliate thereof.
The Director Plan will be administered by a committee selected by the Board
(the "Committee"). The Committee will interpret the terms and conditions of the
Director Plan and shall have all powers necessary to do so. The Committee will
furnish to each director participating in the Director Plan, promptly after the
end of each calendar year, a statement indicating the amounts credited to the
director's deferral account and the status of his account.
The portion of a director's annual fees that he elects to defer will be
credited to his deferral account as of the date such fees would otherwise have
been paid. The remaining portion of the fee, if any, will be paid to the
director in cash in accordance with his election. Amounts so credited during
each calendar quarter will be converted on the last day of each calendar quarter
(each, a "Director Purchase Date") into a number of "Stock Equivalents"
calculated by dividing the amounts so credited by 95% of the fair market value
of one share of Common Stock on such date. Upon payment, a non-employee director
will receive one share of Common Stock for each Stock Equivalent so credited.
With respect to each Stock Equivalent so credited, an amount equal to any
dividends declared in respect of a share of Common Stock will be credited to the
director's deferral account as of the date such dividends are paid.
A participant in the Director Plan may elect that payments from his
deferral account be made in the form of a lump sum or in up to five annual
installments commencing on any specific day selected by the participant which is
not earlier than six months following the last Director Purchase Date which
occurred prior to the
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termination of his position as a non-employee director of the Company, and not
later than two years following such termination.
Each participant may designate one or more beneficiaries to receive amounts
to be distributed from the participant's deferral account. If a participant in
the Director Plan dies before payment of his deferral account is completed, the
balance remaining in such account will be paid to his beneficiary as soon as
practicable following the participant's death.
The Director Plan is not scheduled to expire on any particular date. The
Board of Directors may amend, modify, suspend or terminate the Director Plan
without the consent of any participants provided that such action may not
materially and adversely affect a participant's rights with respect to amounts
already credited to his deferral account.
The rights and interests of a participant in the Director Plan may not be
transferred, encumbered or alienated other than by the laws of descent and
distribution, provided that a participant may designate a beneficiary.
No participant has any of the rights or privileges of a stockholder as a
result of his participation in the Director Plan until Common Stock is actually
distributed under the plan. Moreover, nothing in the Director Plan confers any
right upon any participant in the plan to continue as a member of the Board of
Directors. All expenses and costs incurred in connection with the Director Plan
will be borne by the Company.
Participants in the Director Plan will generally recognize ordinary income
at the time payments are made from their deferral accounts, based on the fair
market value of Common Stock and the amount of cash (if any) so paid, and the
Company will generally be entitled to a corresponding deduction for tax purposes
at such time.
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ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents the number of shares of the Company's common
stock beneficially owned by the directors, the named executive officers, and all
directors and officers as a group as of May 31, 1996. Individuals have sole
voting and investment power over the stock unless otherwise indicated in the
footnotes.
AMOUNT AND NATURE OF PERCENT
NAME OF INDIVIDUAL BENEFICIAL OWNERSHIP(1)(2) OF CLASS
- -------------------------------------------------------- -------------------------- ---------
Bernard L. Schwartz..................................... 3,448,015(3) 1.9%
Michael B. Targoff...................................... 199,027(4) *
Howard Gittis........................................... 6,000 *
Robert B. Hodes......................................... 20,200(5) *
Gershon Kekst........................................... 20,000 *
Charles Lazarus......................................... 10,000 *
Malvin A. Ruderman...................................... 32,000(6) *
E. Donald Shapiro....................................... 20,000 *
Arthur L. Simon......................................... 7,000 *
Thomas J. Stanton, Jr. ................................. 24,000 *
Daniel Yankelovich...................................... 30,000 *
Michael P. DeBlasio..................................... 107,462(7) *
Nicholas C. Moren....................................... 81,710(8) *
Eric J. Zahler.......................................... 82,542(9) *
All Directors and Executive Officers
as a Group (15 persons)............................... 4,131,117(10) 2.3%
- ---------------
* Represents holdings of less than one percent.
(1) Includes shares which, as of May 31, 1996, may be acquired within sixty
days upon the exercise of options (which shares are treated as outstanding
for the purposes of determining beneficial ownership and computing the
percentage set forth); shares held by trusts of which Directors and their
wives are trustees; shares held by a trust in which an officer or Director
is a trustee; and shares held for the benefit of officers as of April 22,
1996 in the Loral Master Savings Plan (the "Savings Plan").
(2) Except as noted, all shares are owned directly with sole investment and
voting power.
(3) Includes 160,000 shares held by Mr. Schwartz' wife and 12,512 shares held
in the Savings Plan.
(4) Includes 135 shares held in the Savings Plan.
(5) Includes 200 shares held by a trustee.
(6) Includes 12,000 shares owned jointly with Mr. Ruderman's wife.
(7) Includes 7,462 shares held in the Savings Plan.
(8) Includes 1,310 shares held in the Savings Plan.
(9) Includes 942 shares held in the Savings Plan.
(10) Includes 24,922 shares held in the Savings Plan.
PRINCIPAL SHAREHOLDERS OF THE COMPANY, GTL, SS/L AND K&F
AND PRINCIPAL PARTNERS OF GLOBALSTAR
COMPANY
Loral SpaceCom was formed to effectuate the Distribution. After the
Distribution, Lockheed Martin holds Series A Preferred Stock representing a 20%
fully-diluted equity interest in the Company.
On April 23, 1996 the Company and an affiliate of Lockheed Martin entered
into a Shareholders Agreement which establishes, among other things, certain
conditions with respect to the relationship between the Company, on the one
hand, and Lockheed Martin and its affiliates (the "Subject Shareholders"), on
the other hand. The Shareholders Agreement limits the ability of the Subject
Shareholders, during the term of the Shareholders Agreement to acquire any
voting securities or assets of, or solicit proxies or make a public announcement
of a proposal of any extraordinary transaction with respect to, the Company. The
Series A Preferred Stock issued to Lockheed Martin may be voted without
restriction on all matters submitted to shareholders for approval, except that
it may not vote for the election of directors. Subject Shareholders may vote
their shares of common stock on all matters, including the election of
directors, except that in the event of
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an election contest, the Subject Shareholders have agreed, pursuant to the
Shareholders Agreement, that they will, subject to certain exceptions, vote any
of the Company's equity securities, at the option of the Subject Shareholders,
either (i) as recommended by the Board of Directors or management of the
Company, or (ii) in the same proportions as the holders of the Company's equity
securities vote their securities. The Shareholders Agreement also limits the
ability of the Subject Shareholders to transfer the equity securities of the
Company held by the Subject Shareholders except pursuant to a registered public
offering. The Shareholders Agreement provides that if, within one year following
the date thereof, the Subject Shareholders vote against any transaction
involving (i) a merger, consolidation, corporate reorganization or similar
transaction or (ii) a sale, lease, exchange, transfer or other disposition of
all or substantially all of the assets of the Company or any of its affiliates,
in either case between the Company, on the one hand, and SS/L, K&F, GTL,
Globalstar and certain other subsidiaries and affiliates of the Company, on the
other hand, the Company shall have the right to purchase from the Subject
Shareholders all of the equity securities of the Company held by the Subject
Shareholders for a price equal to $344 million plus all amounts expended by the
Subject Shareholders following the date of the Shareholders Agreement in
connection with the acquisition of equity securities (other than acquisitions
from another Subject Shareholder) following the date of the Shareholders
Agreement minus any net sales proceeds received by the Subject Shareholders
following the date of the Shareholders Agreement in connection with the sale of
equity securities (other than sales to another Subject Shareholder) following
the date of the Shareholders Agreement. The agreement also provides that if,
within five years following the date thereof, any transaction occurs involving
(i) a merger, consolidation, corporate reorganization or similar transaction,
(ii) a sale, lease, exchange, transfer or other disposition of all or
substantially all of the assets of the Company, Globalstar or any of their
respective affiliates or (iii) the liquidation or dissolution of the Company
(each of the transactions set forth in clauses (i) through (iii) referred to as
a "Triggering Transaction"), in each case, involving as parties, the Company or
any of its affiliates, on the one hand, and either GTL or Globalstar or any of
their respective subsidiaries on the other hand, Lockheed Martin shall have the
right to purchase from the Company (including any successor to the rights and
obligations of the Company) a sufficient number of shares of the Company (or
such successor) to prevent dilution at a per share price equal to (x) if the
Triggering Transaction shall occur on a date prior to the first anniversary
thereof, $6.00, subject to antidilution adjustments and (y) if the Triggering
Transaction shall occur after the first anniversary, but prior to the fifth
anniversary thereof, 80% of the per share price of the Company implicit in the
Triggering Transaction. The Shareholders Agreement also provides that in the
event of certain transactions, the Subject Shareholders shall have the right to
require the Company to purchase the GTL Guarantee Warrants issued to Lockheed
Martin at fair market value. The Shareholders Agreement also provides that under
certain circumstances involving the repurchase by the Company of its equity
securities, the Subject Shareholders will sell to the Company such number of
Company equity securities held by them sufficient to reduce the Subject
Shareholders' ownership of Company equity securities to 20%, at a price equal to
the repurchase price offered by the Company. If the repurchase price is less
than the purchase price initially paid by the Subject Shareholders for the
Series A Preferred Stock, compounded at 10% per annum, then the Subject
Shareholders may, in lieu of selling the securities to the Company, sell them to
third parties in the market. The Shareholders Agreement further provides that
under certain circumstances and subject to certain conditions the Subject
Shareholders may require the Company to register under the Securities Act any
Company securities held by the Subject Shareholders. The Company Shareholders
Agreement provides, subject to certain exceptions, that, in the event of a
tender offer, if Subject Shareholders wish to sell or transfer any Company
securities pursuant to the tender offer the Subject Shareholders must first
offer the shares for sale to the Company. The term of the Company Shareholders
Agreement will continue until the earlier of (x) the date on which the voting
power of the equity securities owned by the Subject Shareholders represents, on
a fully-diluted basis, less than five percent (5%) of the total voting power,
(y) the tenth anniversary of the date of the agreement, or (z) a change of
control the Company.
After the seventh anniversary of the date of the Shareholders Agreement,
the Subject Shareholders shall have the right to propose for election to the
Board of Directors in opposition to management's nominees the number of
directors that is proportionate to the percentage of voting securities of the
Company then held by the Subject Shareholders and to vote in favor of their
election to the Board.
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The Company and Lockheed Martin entered into an Exchange Agreement
providing that, in the event that the Company is required to purchase additional
shares of SS/L common stock held by the Alliance Partners or the Lehman
Partnerships (a "Put Transaction"), and such Put Transaction requires a filing
with, or the approval of, any antitrust authorities having jurisdiction over the
matter, the parties will cooperate to comply with informational requirements and
jointly attempt to resolve any objections raised without any change in Lockheed
Martin's ownership interest in the Company. If such a change is nonetheless
required to obtain antitrust approval of the Put Transaction, Lockheed Martin
will be required to transfer to the Company some or all of the shares of the
Company securities beneficially owned by it in exchange for shares of GTL Common
Stock or, if the use of GTL Common Stock as consideration is inconsistent with
obtaining antitrust approval for the Put Transaction, in exchange for cash. The
shares of Company securities so transferred will be valued at the greater of
fair market value or the original purchase price thereof in connection with the
Distribution, increased at the rate of 10% per annum, compounded annually, from
the date of the consummation of the tender offer.
GLOBALSTAR AND GTL
GTL's authorized capital stock consists of 60,000,000 shares of Common
Stock. As of May 31, 1996, there were 10,000,000 shares of Common Stock
outstanding. Except as set forth below, there are no other persons known to GTL,
based upon SEC filings received by the Company, who are beneficial owners of 5%
or more of the Common Stock.
SHARES OF
COMMON STOCK PERCENT OF
NAME AND ADDRESS BENEFICIALLY OWNED COMMON STOCK
- ---------------------------------------------------------------- ------------------ ------------
Loral Space & Communications Ltd................................ 1,674,400(1) 16.74%
600 Third Avenue
New York, New York 10016
Cumberland Associates........................................... 621,400(2) 6.21%
1114 Avenue of the Americas
New York, New York 10036
- ---------------
(1) Of such amount, 340,000 represent shares of Common Stock subject to options
granted by Loral to certain of its executive officers and directors.
(2) As stated in filing with the SEC.
The following table presents the number of shares of GTL common stock
beneficially owned by GTL's directors, GTL's named executive officers, and all
directors and officers of GTL as a group as of May 31, 1996. Individuals have
sole voting and investment power over the stock unless otherwise indicated in
the footnotes.
AMOUNT AND NATURE OF PERCENT
NAME OF INDIVIDUAL BENEFICIAL OWNERSHIP(1) OF CLASS
- ---------------------------------------------------------------- ----------------------- --------
Bernard L. Schwartz............................................. 37,600 *%
Michael B. Targoff.............................................. 24,000 *
Michael P. DeBlasio............................................. 24,000 *
Robert B. Hodes................................................. 21,000 *
A. Robert Towbin................................................ 5,600(2) *
Douglas G. Dwyre................................................ 100 *
Edward Hirshfield............................................... 800(3) *
Anthony J. Navarra.............................................. 1,000 *
Robert A. Wiedeman.............................................. 850 *
All Directors and Executive Officers
as a Group (16 persons)....................................... 160,950 1.6%
- ---------------
* Represents holdings of less than one percent.
(1) Includes shares which, as of May 31, 1996, may be acquired within 60 days
upon the exercise of options granted by Loral: 20,000 each to Messrs.
Schwartz, Targoff and DeBlasio and Hodes and 120,000 to all Directors and
Executive Officers as a group. Mr. Targoff's options are held by a trust to
which he disclaims beneficial ownership.
(2) Includes 2,100 shares held in a trust, as to which he disclaims beneficial
ownership.
(3) Includes 100 shares owned by Mr. Hirshfield's wife, as to which he disclaims
beneficial ownership.
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The following table sets forth, as of May 31, 1996, certain information
regarding the beneficial ownership of ordinary partnership interests in
Globalstar. Globalstar has been involved in ongoing discussions with certain
potential strategic partners and other strategic investors regarding
transactions involving, among other things, possible investments in Globalstar
Ordinary Partnership Interests.
GLOBALSTAR, L.P.(1)
INTEREST PARTNERSHIP INTERESTS PERCENTAGE
-------------------------------------------------------- --------------------- ----------
Loral SpaceCom.......................................... 17,412,783(2) 35.8%
Public Stockholders of GTL.............................. 11,517,907(3) 22.9
Qualcomm................................................ 3,726,000 7.9
Vodafone................................................ 3,540,000 7.5
AirTouch................................................ 3,000,000 6.4
Finmeccanica............................................ 2,800,000 6.0
Hyundai................................................. 2,400,000(4) 5.1
Alcatel................................................. 2,190,000(5) 4.7
DASA.................................................... 1,720,000(6) 3.7
France Telecom.......................................... 1,530,000(7) 3.2
SS/L.................................................... 1,332,540(8) 2.8
Dacom................................................... 600,000(9) 1.3
- ---------------
(1) Includes impact of the conversion of the Securities and Preferred
Partnership Interests issuable in connection therewith and excludes the
issuance of the GTL Guarantee Warrants and the Additional Warrants, as such
warrants are not exercisable within 60 days. Beneficial ownership of
partnership interests has been calculated pursuant to Regulation 13d-3 under
the Securities Exchange Act of 1934, as amended, which provides that: "Any
securities not outstanding which are subject to such options, warrants,
rights or conversion privileges shall be deemed to be outstanding for the
purpose of computing the percentage of outstanding securities of the class
owned by such person but shall not be deemed to be outstanding for the
purpose of computing the percentage of the class by any other person."
(2) Of the amount held by Loral SpaceCom (i) 2,000,000 partnership interests
represent Loral SpaceCom's allocable share of the 3,000,000 partnership
interests held by Loral/DASA Globalstar, L.P., a joint venture between Loral
SpaceCom and DASA which is 66.7% owned by Loral SpaceCom and 33.3% owned by
DASA, (ii) 647,460 partnership interests represent Loral SpaceCom's indirect
interest in 1,980,000 partnership interests held by SS/L, (iii) 1,674,400
partnership interests represent Loral SpaceCom's holdings of Common Stock of
the Company, without giving effect to the grant by Loral SpaceCom to certain
of its executive officers and directors of options to acquire an aggregate
of 340,000 shares of Common Stock (none of such options have yet been
exercised) and (iv) 1,576,923 partnership interests represent the conversion
of $102.5 million principal amount Convertible Preferred Equivalent
Obligations.
(3) Includes 3,192,307 partnership interests which represent the conversion of
the $207.5 million principal amount of Convertible Preferred Equivalent
Obligations. Does not include partnership interests attributed to Loral
SpaceCom described in note (2)(iii) and (iv) above.
(4) Represents Hyundai's allocable share of the 3,000,000 partnership interests
held by Hyundai/Dacom, a joint venture which is 80% owned by Hyundai and 20%
owned by Dacom.
(5) Of the amount held by Alcatel, 1,470,000 partnership interests represent
Alcatel's allocable share of the 3,000,000 partnership interests held by
TESAM, which is 51% owned by France Telecom and 49% owned by Alcatel.
(6) Of the amount held by DASA, 1,000,000 partnership interests represent DASA's
allocable share of the 3,000,000 partnership interests held by Loral/DASA
Globalstar, L.P.
(7) Represents France Telecom's allocable share of the 3,000,000 partnership
interests held by TESAM.
(8) Excludes 647,460 partnership interests attributable to Loral's 32.7%
interest in SS/L.
(9) Represents Dacom's allocable share of the 3,000,000 partnership interest
held by Hyundai/Dacom.
SS/L
Each of Aerospatiale, Alcatel, Finmeccanica and DASA owns 12.25% of the
outstanding common stock of SS/L. While the Company holds, through SS/L Bermuda
Ltd., the remaining 51% of the outstanding common stock of SS/L, its effective
economic interest in SS/L is 32.7%. 18.3% is effectively held by the Lehman
Partnerships which hold tracking stock representing 18.3% of the outstanding
capital stock of SS/L Bermuda.
K&F INDUSTRIES
Bernard L. Schwartz owns 27.12% of the capital stock of K&F in the form of
Class A common stock. Loral SpaceCom owns 22.5% of K&F's capital stock in the
form of Class B common stock. The Lehman Partnerships own 48.17% of K&F's
capital stock in the form of preferred stock.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SS/L Agreement and Subcontracts. Globalstar has entered into an agreement
with SS/L to design, manufacture, test and launch its satellite constellation.
The price of the contract consists of three parts, the first for non-recurring
work at a price not to exceed $115.7 million, the second for recurring work at a
fixed price of approximately $15.6 million per satellite (including certain
performance incentives of up to approximately $1.9 million per satellite) and
the third for launch and insurance. SS/L will design, build and launch the 56
satellites in Globalstar's constellation, which are designed to have a minimum
life-span of 7 1/2 years. SS/L has agreed to obtain insurance on Globalstar's
behalf for the cost of replacing satellites lost in hot failures and any
relaunch costs not covered by the applicable launch contract for an estimated
premium of $92 million, in certain circumstances subject to an equitable
adjustment in light of future market conditions. SS/L has also agreed pursuant
to the agreement to obtain launch vehicles and arrange for the launch of
Globalstar's satellites on Globalstar's behalf at an estimated total cost of
$302 million for all 56 satellites, subject to an equitable adjustment in light
of future market conditions, which may, in turn, be influenced by international
political developments. Termination by Globalstar of this agreement will result
in termination fees, which may be substantial. Such termination fees are
generally limited to SS/L's cost incurred and uncancellable obligations under
subcontracts and outstanding orders for satellite materials at the time of
termination plus a reasonable fee.
Globalstar has granted to SS/L an irrevocable, royalty-free, non-exclusive
license to use certain intellectual property expressly developed in connection
with the SS/L agreement provided that SS/L will not use, or permit others to
use, such license for the purpose of engaging in any business activity that
would be in material competition with Globalstar. Globalstar has similarly
agreed that it will not license such intellectual property if it will be used
for the purpose of designing or building satellites that would be in competition
with SS/L.
SS/L has subcontracted the design and integration of the payload modules to
Alcatel who will manufacture Globalstar's satellite communication equipment at a
fixed price of approximately $208 million, subject to certain adjustments.
Subcontracts have also been awarded to Alenia ($202 million) for final assembly,
integration and testing of the Globalstar satellites, DASA ($178 million) for
providing Globalstar's satellite power propulsion elements and solar arrays, and
Aerospatiale ($41 million) for designing and manufacturing the satellite bus
structure and communication support panels. Globalstar, SS/L and Hyundai have
also entered into a subcontract ($44 million) under which Hyundai will provide
certain electronic components for the Globalstar satellites. Globalstar and SS/L
have further agreed to support Hyundai in its efforts as a satellite vendor,
including providing training and transferring certain technological know-how to
Hyundai at a compensation to be agreed upon among the parties.
The agreement provides for liquidated damages to Globalstar in the event
SS/L fails to supply the satellites at the times specified in the contract.
Liquidated damages of approximately $45,000 are payable by SS/L for each day of
delay, subject to an overall cap of approximately $33 million. Such liquidated
damages are Globalstar's exclusive remedies in the face of any delay by SS/L in
the delivery of the satellites or for any events of default specified in the
agreement.
SS/L and its subcontractors have committed $310 million of vendor financing
to Globalstar, of which $220 million will be non-interest bearing. Globalstar
will repay the non-interest bearing portions as follows: $49 million following
the launch and acceptance of 24 or more satellites, $61 million upon the launch
and acceptance of 48 or more satellites, and the remainder in equal installments
over the five-year period following acceptance of the preliminary and final
Globalstar constellations. The remaining $90 million will bear interest, the
payment of which will be deferred until the Full Constellation Date or December
31, 1998, whichever is earlier. Thereafter, interest and principal will be
repaid in equal quarterly installments during the next five years.
Qualcomm Agreement. Globalstar and Qualcomm have entered into an agreement
providing for the design, development, manufacture, installation, testing and
maintenance by Qualcomm of four gateways, two ground operations control centers
and 100 pre-production Globalstar Phones (the "Qualcomm Segment"). A portion of
the GOCC is being developed and manufactured by Globalstar. The contract is a
cost-plus-fee
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contract that provides for payment to Qualcomm of a 12% fee, along with
reimbursement for costs incurred in performing such contract, such as labor,
material, travel, license fees, royalties and general administrative expenses.
The contract also includes a cost sharing arrangement for certain technologies
being developed by Qualcomm. Globalstar estimates the eventual total contract
payments to be $350 million. As manager of Globalstar, Loral SpaceCom is
bringing its management's substantial experience in the oversight of cost-type
contracts to insure that the costs incurred under the Qualcomm agreement are
reasonable.
Except for the intellectual property contained in certain software relating
to the public switched networks and the GOCCs (excluding any software or
technical data contained in Qualcomm's CDMA technology) which will be owned by
Globalstar, Qualcomm retains all intellectual property in the Qualcomm Segment.
However, Qualcomm has granted Globalstar an exclusive license to use its CDMA
technology for MSS commercial applications.
Globalstar has granted to Qualcomm an irrevocable, non-exclusive, worldwide
perpetual license to intellectual property owned by Globalstar in the Qualcomm
Segment and developed pursuant to the Qualcomm agreement. Qualcomm may, pursuant
to such grant, use the intellectual property for applications other than the
Globalstar System provided that Qualcomm may not for a period of three years
after its withdrawal as a strategic partner or prior to the third anniversary of
the Full Constellation Date, whichever is earlier, engage in any business
activity that would be in competition with the Globalstar System. The grant of
intellectual property to Qualcomm described above is generally royalty free.
Under certain specified circumstances, however, Qualcomm will be required to pay
a 3% royalty fee on such intellectual property.
Qualcomm has agreed to grant at least one vendor a nonexclusive worldwide
license to use Qualcomm's intellectual property to manufacture and sell gateways
to Globalstar's service providers. The foregoing licenses will be granted by
Qualcomm to one or more such vendors on reasonable terms and conditions, which
will in any event not provide for royalty fees in excess of 7% of a gateway's
sales price (not including the approximately $400,000 in recoupment expenses
payable to Globalstar). Qualcomm has granted a license to manufacture Globalstar
Phones to Orbitel and has also agreed to grant similar licenses to at least two
additional qualified manufacturers to enable them to manufacture and sell the
Globalstar Phones to service providers. On March 23, 1994, a letter agreement
was entered into among Qualcomm, Globalstar and Hyundai pursuant to which
Hyundai may elect to become a licensee authorized to manufacture and sell
Globalstar Phones to service providers. Should Hyundai so elect, it would, for a
five year period following Globalstar's In-Service Date, be the exclusive
licensee authorized to manufacture and sell such units in South and North Korea.
Globalstar will receive a payment of approximately $400,000 on each
installed gateway sold to a Globalstar service provider. Globalstar will also
receive up to $10 on each Globalstar Phone, which will be payable until
Globalstar's funding of that design has been recovered.
The agreement provides for liquidated damages to Globalstar in the event
Qualcomm fails to supply the Qualcomm Segment at the times specified in the
contract. Liquidated damages of approximately $29,000 are payable by Qualcomm
for each day of delay, subject to an overall cap of approximately $11 million.
Such liquidated damages are Globalstar's exclusive remedies in the face of any
delay by Qualcomm in the delivery of the Qualcomm Segment or for any other
events of default specified in the agreement. Qualcomm's obligation to license
the intellectual property necessary to manufacture gateways and Globalstar
Phones to Globalstar or a third-party manufacturer will continue even upon a
default or breach by Qualcomm under the agreement. Termination by Globalstar of
this agreement will result in termination fees, which may be substantial.
Gateway Program. Globalstar and its service provider partners intend to
jointly finance the procurement of 25 gateways and long-lead parts for 25
additional gateways for resale to service providers, thereby accelerating the
deployment of gateways around the world prior to the In-Service Date. The cost
of this program before financing costs is expected to be approximately $160
million, of which Globalstar has agreed to finance approximately $80 million.
Globalstar expects to recover its investment in this gateway financing program
from such resales.
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Qualcomm Support Agreement. A support agreement was entered into among
Qualcomm, Loral and Globalstar pursuant to which Qualcomm agreed to (i) assist
Globalstar and SS/L with Globalstar's system design, (ii) support Globalstar and
Loral with respect to various regulatory matters, including the FCC application
and (iii) assist Globalstar and Loral in their marketing efforts with respect to
Globalstar. As compensation for its efforts, Qualcomm would be paid an amount
equal to the costs incurred in rendering such support and assistance.
Contract for the Development of Satellite Operations Control
Centers. Globalstar has entered into an agreement with a subsidiary of Loral
(which following the Merger, became a Lockheed Martin subsidiary) for the
development and delivery of two SOCCs and 33 Telemetry and Command units for the
Globalstar System. This contract is a cost-plus-fee contract with a maximum
price of $25.1 million which includes a fee of 12% under the contract, 6% of
which would be payable at the time the costs are incurred with the remainder
payable upon achievement of certain milestones. Globalstar will own any
intellectual property produced under the contract.
Contract for S-Band Beam Forming Network Engineering Model. Globalstar
entered into an agreement with a subsidiary of Loral (which, following the
Merger, became a Lockheed Martin subsidiary) for an S-Band Beam Forming Network
Engineering Model. The contract is a firm fixed-price contract for approximately
$463,000.
Consulting Contracts. Globalstar has entered into consulting agreements
with Vodafone for approximately $650,000 under which Vodafone will develop
Globalstar's security architecture design and billing system requirements. Under
a consulting contract estimated at $845,000, a joint venture formed by France
Telecom and Alcatel is providing Globalstar with various services including
engineering support at WRC '95, quality of services studies and European
regulatory support services.
OmniTRACS Services Agreement. Globalstar has granted Qualcomm the
worldwide exclusive right to utilize the Globalstar System to provide
OmniTRACS-like services, including certain data-messaging and
position-determination services offered by Qualcomm, primarily to fleets of
motor vehicles and rail cars and/or vessels and supervisory control and data
acquisition services. Qualcomm will utilize the Globalstar System in particular
territories to provide its OmniTRACS-like services if the Globalstar service
provider in such region or country offers pricing that is the most favorable
rate charged by it for a comparable service and that is at least as favorable as
the pricing then charged to Qualcomm for geostationary satellite capacity in the
United States. In the event Qualcomm and the service provider fail to reach an
agreement with respect to such access, Globalstar has agreed to provide Qualcomm
with access to the Globalstar System at Globalstar's most favorable rates. To
the extent consistent with Qualcomm's prior commitments, Qualcomm has also
agreed to offer each Globalstar service provider certain rights of first refusal
to participate with Qualcomm in the provision of OmniTRACS-like services using
the Globalstar System in the service provider's territory.
Office Leases. Globalstar currently leases approximately 56,000 square
feet of office space from a subsidiary of Lockheed Martin at a cost of
approximately $72,000 per month. This space is leased pursuant to an agreement
that expires in August 2000 (with an option to extend for two additional five
year periods). Globalstar paid a total of $650,000 and $275,000, for the
calendar years 1995 and 1994, respectively, under such lease.
Conflicts of Interest. The Globalstar partnership agreement provides that
Globalstar cannot enter into any agreement involving amounts in excess of
$1,000,000 with any partner, any strategic partner (including any direct or
indirect corporate parent of such partner or strategic partner), any Alliance
Partner or any of their respective affiliates unless the terms and conditions of
such transaction have been first approved by a vote of the disinterested
partners.
Guarantee Fee and Warrants. On December 15, 1995, Globalstar entered into
the Globalstar Credit Agreement providing for a $250 million credit facility.
Following the consummation of the Merger, Lockheed Martin guaranteed $206.3
million of Globalstar's obligation under the Globalstar Credit Agreement, and
SS/L and certain other Globalstar strategic partners guaranteed $11.7 million
and $32 million, respectively, of
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Globalstar's obligation. In addition, Loral SpaceCom has agreed to indemnify
Lockheed Martin for liability in excess of $150 million under Lockheed Martin's
guarantee of the Globalstar Credit Agreement.
In connection with such guarantees and indemnity of the Globalstar Credit
Agreement, GTL issued to Loral SpaceCom, Lockheed Martin, SS/L and the other
strategic partners participating in such guarantee or indemnity, warrants (the
"GTL Guarantee Warrants") to purchase 4,185,318 shares of GTL common stock. The
GTL Guarantee Warrants have an exercise price of $26.50, are subject to certain
vesting requirements, expire on April 19, 2003, are not exercisable until six
months after Globalstar commences initial operations unless accelerated at the
sole discretion of the managing general partner of Globalstar and may not be
transferred to third parties prior to such exercise date. In connection with the
issuance of GTL Guarantee Warrants, GTL received (i) warrants to acquire
4,185,318 ordinary partnership interests in Globalstar plus (ii) additional
warrants (the "Additional Warrants") to purchase an additional 1,131,168
ordinary partnership interests, on terms and conditions generally similar to
those of the GTL Guarantee Warrants. In addition, Globalstar has also agreed to
pay to Loral SpaceCom and the other guaranteeing partners a fee equal to 1.5%
per annum of the average quarterly amount outstanding under the Globalstar
Credit Agreement (the "Guarantee Fee").
Globalstar Managing Partner's Allocation and Distribution. Commencing on
the In-Service Date, Globalstar will make distributions to LQSS equal to 2.5% of
Globalstar's revenues up to $500 million plus 3.5% of revenues in excess of $500
million. Loral SpaceCom and Qualcomm ultimately will receive 80% and 20% of such
distribution, respectively. Should Globalstar incur a net loss in any year
following commencement of operations, the distribution for that year will be
reduced by 50% and Globalstar will be reimbursed for Managing Partner's
Allocations, if any, made in any prior quarter of such year, sufficient to
reduce the Managing Partner's Allocation for such year by 50%. Any Managing
Partner's Allocation may be deferred (with interest at 4% per annum) in any
quarter in which Globalstar would report negative cash flow from operations if
the Managing Partner's Allocation were made.
LQSS has a right to a preferred allocation of gross operating revenue until
such allocated revenue cumulatively equals LQSS's distributions payable (whether
or not deferred for a shortfall in cash flow from operations). To the extent
that distributions exceed such allocated profit, they will be charged against
LQSS's capital account and will not be allocated among the Globalstar partners
as a Globalstar expense.
Relationship with SS/L's Alliance Partners. In 1991 and 1992, Loral sold
49% of SS/L's equity to the Alliance Partners and in connection therewith
entered into a stockholders agreement (the "SS/L Stockholders Agreement")
governing the relationship among the parties thereto. Under the SS/L
Stockholders Agreement, a change of control of Loral Corporation within the
meaning of such agreement would provide each of the Alliance Partners with the
right to (i) put their equity interests back to SS/L at fair market value, or
(ii) purchase a pro rata share of Loral's equity interest in SS/L for fair
market value (subject to receiving certain authorizations including U.S.
government approval) and would terminate SS/L's obligations to pay the
management fees described below. While it is not certain that the change of
control provisions are applicable, the Company and SS/L are seeking an amendment
to the stockholders agreement acknowledging the transfer of Loral's interests in
SS/L to Loral SpaceCom that occurred in connection with the Distribution, a
waiver of any applicable put and purchase option rights and certain changes
relating to management fees and reimbursement of expenses. In the event that any
of SS/L's Alliance Partners put their interests back to SS/L, SS/L would thereby
have the right to put such interests to Loral SpaceCom. The Company does not
expect all the Alliance Partners to exercise their put rights in connection with
the Distribution, but, if all such put rights were exercised, the Company
believes its obligations pursuant to these rights would be less than $250
million.
In return for managing and operating SS/L, the Company is entitled to
receive an annual management fee consisting of (i) a basic management fee equal
to (a) 0.5% of SS/L's total sales for the fiscal year minus SS/L's total
purchases of certain non-standard equipment and (b) 1.5% of the aggregate
purchases by SS/L from the Alliance Partners of products or services for such
fiscal year (such basic management fee not to exceed 0.5% of SS/L's gross sales
for such fiscal year) and (ii) an incentive management fee equal to (x) 0.5% of
SS/L's gross sales if SS/L's profit margin equals or exceeds 10.5% or (y) 0.25%
of SS/L's gross sales if SS/L's profit margin equals 7% or (z) a percentage
determined by linear interpolation between 0.25%
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and 0.5% of SS/L's gross sales if the profit margin is between 7% and 10.5%. In
addition to the management fee, SS/L is obligated to pay to the Company, subject
to certain limitations, the amount of corporate overhead which the Company
allocates to SS/L as required by applicable United States government accounting
regulations.
SS/L and the Alliance Partners have agreed to enter into teaming
arrangements with respect to proposals or bids submitted either by SS/L or the
Alliance Partners to certain customers. Subject to commercial practicability,
such arrangements are intended to provide for a certain level of subcontractor
participation by the Alliance Partners in programs for which SS/L serves as
prime contractor and a certain level of subcontractor participation by SS/L in
programs for which one of the Alliance Partners serves as prime contractor.
Through these teaming arrangements, SS/L expects to achieve a greater presence
in new markets in Europe and other regions and to significantly increase the
volume of its participation in the construction of commercial satellites.
Relationship with Lehman Partnerships. The Lehman Partnerships exchanged
their Series S preferred stock in the holding company that held 51% of SS/L for
Series S Preferred Stock (the "Series S Preferred Stock") of SS/L Bermuda
pursuant to a stockholders agreement (the "SS/L Bermuda Stockholders Agreement")
among the Company, SS/L Bermuda and the Lehman Partnerships. The SS/L Bermuda
Stockholders Agreement restricts transfers of the Series S Preferred Stock and
SS/L Bermuda's common stock of SS/L (the "SS/L Common Stock"), and provides
rights to purchase and requires the purchase of the Series S Preferred Stock in
certain events. SS/L Bermuda is a holding company whose assets consist of 51% of
the outstanding shares of SS/L Common Stock and a 22.5% equity interest in K&F.
The shares of Series S Preferred Stock held by the Lehman Partnerships represent
an effective 18.3% interest in SS/L.
The terms of the Series S Preferred Stock provide that each share of Series
S Preferred Stock issued by SS/L Bermuda is entitled to receive all cash
dividends and other distributions of property as are received by SS/L Bermuda
with respect to SS/L on a pro rata basis. The Series S Preferred Stock will not
have any voting right with respect to SS/L. The Series S Preferred Stock will
vote together with the common stock of SS/L Bermuda, with each share being
entitled to one vote.
The SS/L Bermuda Stockholders Agreement requires the Company to provide
written notice to the Lehman Partnerships of certain actions taken by SS/L. Such
actions include mergers, material acquisitions or divestitures, certain changes
in the capital stock of SS/L, incurrence of material indebtedness or liens,
certain transactions with affiliates, appointment of any successor to the
Chairman of the Board of Directors or Chief Executive Officer of SS/L and
settlement of material claims. If SS/L takes one of these actions, the Lehman
Partnerships may require the Company to purchase the Series S Preferred Stock
then held by the Lehman Partnerships at a per share purchase price equal to at
least the appraised fair market value of the common stock of SS/L Bermuda.
Commencing on the earlier of a change of control and January 1, 1998, the
Lehman Partnerships will have the option to require the Company to purchase all
of the Series S Preferred Stock then held by the Lehman Partnerships at a fair
market value. In addition, the Lehman Partnerships will be entitled to require
the Company to purchase all other securities and assets (other than cash)
distributed to the Lehman Partnerships in respect of the Series S Preferred
Stock. The Lehman Partnerships also have a special put option with respect to
their Series S Preferred Stock upon the failure by SS/L to maintain its security
clearance.
K&F Convertible Debentures. In September, 1994, the Company exchanged the
$30 million 14.75% pay-in-kind Subordinated Convertible Debenture due 2004 (the
"Debenture") issued in 1989 by K&F in connection with the purchase by K&F of
certain divisions of Loral. The Debenture was exchanged for $11.5 million in
cash, net of expenses, and 458,994 shares of Class B common stock of the company
representing 22.5% of the outstanding capital stock of the company. Bernard L.
Schwartz, Chairman and Chief Executive Officer of the Company, holds 27.12% of
the outstanding shares of capital stock of K&F.
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
PAGE
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Index to Financial Statements........................................................ F-1
Loral Space & Communications Ltd.
Independent Auditors' Report......................................................... F-2
Balance Sheet as of March 31, 1996................................................... F-3
Notes to Balance Sheet............................................................... F-4
Loral Corporation -- Space & Communications Operations
Annual Financial Statements:
Independent Auditors' Report....................................................... F-6
Combined Balance Sheets as of March 31, 1996 and 1995.............................. F-7
Combined Statements of Operations and Invested Equity for the years ended March 31,
1996, 1995 and 1994............................................................... F-8
Combined Statements of Cash Flows for the years ended March 31, 1996, 1995 and
1994.............................................................................. F-9
Notes to Combined Financial Statements............................................. F-10
Globalstar, L.P. (A development stage limited partnership)
Annual Financial Statements:
Independent Auditors' Report....................................................... F-17
Balance Sheets as of December 31, 1995 and 1994.................................... F-18
Statements of Operations for the year ended December 31, 1993 and the period from
January 1, 1994 to March 22, 1994 (pre-capital subscription periods); for the
period March 23, 1994 (commencement of operations) to December 31, 1994, for the
year ended December 31, 1995 and cumulative....................................... F-19
Statements of Partners' Capital and Subscriptions Receivable for the period March
23, 1994 (commencement of operations) to December 31, 1995........................ F-20
Statements of Cash Flows for the period March 23, 1994 (commencement of operations)
to December 31, 1994, for the year ended December 31, 1995 and cumulative......... F-21
Notes to Financial Statements...................................................... F-22
Interim Financial Statements:
Condensed Balance Sheets as of March 31, 1996 and December 31, 1995................ F-32
Condensed Statements of Operations for the three months ended March 31, 1996 and
1995.............................................................................. F-33
Condensed Statements of Cash Flows for the three months ended March 31, 1996 and
1995.............................................................................. F-34
Notes to Condensed Financial Statements............................................ F-35
Space Systems/Loral, Inc.
Annual Financial Statements:
Independent Auditors' Report....................................................... F-38
Consolidated Balance Sheets as of March 31, 1996 and 1995.......................... F-39
Consolidated Statements of Income for the years ended March 31, 1996, 1995 and
1994.............................................................................. F-40
Consolidated Statements of Shareholders' Equity for the years ended March 31, 1996,
1995 and 1994..................................................................... F-41
Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1995 and
1994.............................................................................. F-42
Notes to Consolidated Financial Statements......................................... F-43
(a) 3. Exhibits
Exhibits 10.11 through 10.13 are management compensation plans.
EXHIBIT NUMBER DESCRIPTION
- -------------- ---------------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of January 7, 1996, among Loral Corporation,
Lockheed Martin Corporation and LAC Acquisition Corporation+
2.2 Restructuring, Financing and Distribution Agreement, dated as of January 7, 1996, among
Loral Corporation, Loral Aerospace Holdings, Inc., Loral Aerospace Corp., Loral General
partner, Inc., Loral Globalstar L.P., Loral Globalstar Limited, the Registrant and
Lockheed Martin Corporation+
2.3 Amendment to Merger Agreement***
2.4 Amendment to Distribution Agreement***
3.1 Memorandum of Association of Registrant+
3.2 Form of Memorandum of Increase of Share Capital+
3.3 Amended and Restated Bye-laws of Registrant***
4 Rights Agreement+
49
51
EXHIBIT NUMBER DESCRIPTION
- -------------- ---------------------------------------------------------------------------------------
10.1 Tax Sharing Agreement***
10.2 Shareholders Agreement between the Registrant and Loral Corporation***
10.3 SS/L Stockholders Agreement+
10.4 Lehman Stockholders Agreement***
10.5 Amended and Restated Agreement of Limited Partnership of Globalstar, L.P.*
10.6 Subscription Agreements by and between Globalstar, L.P. and each of Globalstar
Telecommunications Limited, AirTouch Communications, Alcatel Spacecom, Loral General
Partner, Inc., Hyundai/Dacom, Vodastar Limited, Loral/Qualcomm Satellite Services, L.P.
and Finmeccanica S.p.A.*
10.7 Service provider agreements by and between Globalstar, L.P. and each of AirTouch
Satellite Services, Finmeccanica S.p.A., Loral General Partner, Inc., Loral/DASA
Globalstar, L.P., Hyundai/Dacom, TE.SA.M and Vodastar Limited*
10.8 Development Agreement by and between QUALCOMM Incorporated and Globalstar, L.P.*
10.9 Contract between Globalstar, L.P. and Space Systems/Loral, Inc.*
10.10 Credit Agreement among Globalstar, L.P. and various banks and Loral Guarantee+
10.11 Registrant's 1996 Stock Option Plan+
10.12 Registrant's Common Stock Purchase Plan for Non-Employee Directors+
10.13 Employment Agreement between the Registrant and Bernard L. Schwartz+
10.14 Exchange Agreement among the Registrant, Lockheed Martin Corporation and Loral
Corporation***
10.15 Amendment to Partnership Agreement of Globalstar, dated March 6, 1996***
10.16 Amendment of Globalstar Credit Agreement***
10.17 Lockheed Martin Guarantee***
20 Documents or Statements to Shareholders**
21 List of Subsidiaries of the Registrant***
27 Financial Data Schedule***
- ---------------
*Incorporated by reference to the Registration Statement on Form S-1 filed by
Globalstar Telecommunications Limited (File No. 33-86808).
**Incorporated by reference to Loral's Solicitation/Recommendation Statement on
Schedule 14D-9 dated January 12, 1996.
***Filed herewith.
+Incorporated by reference to the Registration Statement on Form 10 filed by
the Company. (1-14180)
(b) Reports on Form 8-K
None
50
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LORAL SPACE & COMMUNICATIONS LTD.
By: BERNARD L. SCHWARTZ
------------------------------------
Bernard L. Schwartz
(Chairman of the Board and
Chief Executive Officer)
Date: June 28, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ------------------------------------------ --------------------------------------- --------------
BERNARD L. SCHWARTZ Chairman of the Board, Chief Executive June 28, 1996
- ------------------------------------------ Officer and Director
Bernard L. Schwartz
HOWARD GITTIS Director June 28, 1996
- ------------------------------------------
Howard Gittis
Director
- ------------------------------------------
Robert B. Hodes
Director
- ------------------------------------------
Gershon Kekst
CHARLES LAZARUS Director June 28, 1996
- ------------------------------------------
Charles Lazarus
Director
- ------------------------------------------
Malvin A. Ruderman
E. DONALD SHAPIRO Director June 28, 1996
- ------------------------------------------
E. Donald Shapiro
ARTHUR L. SIMON Director June 28, 1996
- ------------------------------------------
Arthur L. Simon
THOMAS J. STANTON JR. Director June 28, 1996
- ------------------------------------------
Thomas J. Stanton Jr.
DANIEL YANKELOVICH Director June 28, 1996
- ------------------------------------------
Daniel Yankelovich
MICHAEL P. DEBLASIO Principal Financial Officer June 28, 1996
- ------------------------------------------
Michael P. DeBlasio
HARVEY B. REIN Principal Accounting Officer June 27, 1996
- ------------------------------------------
Harvey B. Rein
51
53
INDEX TO FINANCIAL STATEMENTS
Loral Space & Communications Ltd.
Independent Auditors' Report........................................................ F-2
Balance Sheet as of March 31, 1996.................................................. F-3
Notes to Balance Sheet.............................................................. F-4
Loral Corporation -- Space & Communications Operations
Annual Financial Statements:
Independent Auditors' Report..................................................... F-6
Combined Balance Sheets as of March 31, 1996 and 1995............................ F-7
Combined Statements of Operations and Invested Equity for the years ended March
31, 1996, 1995 and 1994......................................................... F-8
Combined Statements of Cash Flows for the years ended March 31, 1996, 1995 and
1994............................................................................ F-9
Notes to Combined Financial Statements........................................... F-10
Globalstar, L.P. (A development stage limited partnership)
Annual Financial Statements:
Independent Auditors' Report..................................................... F-17
Balance Sheets as of December 31, 1995 and 1994.................................. F-18
Statements of Operations for the year ended December 31, 1993 and the period from
January 1, 1994 to March 22, 1994 (pre-capital subscription periods); for the
period March 23, 1994 (commencement of operations) to December 31, 1994, the
year ended December 31, 1995 and cumulative..................................... F-19
Statements of Partners' Capital and Subscriptions Receivable for the period March
23, 1994 (commencement of operations) to December 31, 1995...................... F-20
Statements of Cash Flows for the period March 23, 1994 (commencement of
operations) to December 31, 1994, the year ended December 31, 1995 and
cumulative...................................................................... F-21
Notes to Financial Statements.................................................... F-22
Interim Financial Statements:
Condensed Balance Sheets as of March 31, 1996 and December 31, 1995.............. F-32
Condensed Statements of Operations for the three months ended March 31, 1996 and
1995............................................................................ F-33
Condensed Statements of Cash Flows for the three months ended March 31, 1996
and 1995....................................................................... F-34
Notes to Condensed Financial Statements.......................................... F-35
Space Systems/Loral, Inc.
Annual Financial Statements:
Independent Auditors' Report..................................................... F-38
Consolidated Balance Sheets as of March 31, 1996 and 1995........................ F-39
Consolidated Statements of Income for the years ended March 31, 1996, 1995 and
1994............................................................................ F-40
Consolidated Statements of Shareholders' Equity for the years ended March 31,
1996, 1995 and 1994............................................................. F-41
Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1995
and 1994........................................................................ F-42
Notes to Consolidated Financial Statements....................................... F-43
F-1
54
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Loral Space & Communications Ltd.:
We have audited the accompanying balance sheet of Loral Space &
Communications Ltd. (a Bermuda company) as of March 31, 1996. This balance sheet
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of Loral Space & Communications Ltd. as of
March 31, 1996, in conformity with accounting principles generally accepted in
the United States of America.
DELOITTE & TOUCHE LLP
New York, New York
June 27, 1996
F-2
55
LORAL SPACE & COMMUNICATIONS LTD.
BALANCE SHEET
MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
Cash................................................................................... $12
---
Total assets................................................................. $12
===
SHAREHOLDER'S EQUITY
Commitments and contingencies (Note 3)
Shareholders' equity (Note 2):
Series A convertible preferred stock, $.01 par value; 150,000,000 shares authorized
and unissued...................................................................... $--
Series B preferred Stock, $.01 par value; 750,000 shares authorized and unissued..... --
Common stock, $.01 par value; 750,000,000 shares authorized, 12,000 shares issued and
outstanding....................................................................... --
Paid-in capital...................................................................... 12
Retained earnings.................................................................... --
---
Total shareholder's equity................................................... $12
===
See notes to balance sheet.
F-3
56
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO BALANCE SHEET
1. FORMATION OF LORAL SPACE & COMMUNICATIONS LTD.
Loral Space & Communications Ltd. ("Loral SpaceCom" or the "Company")
manages and is the largest equity owner of both Globalstar, L.P. ("Globalstar")
and Space Systems/Loral, Inc. ("SS/L") (together, the "Operating Affiliates").
The Company will also act as a Globalstar service provider in Canada, Brazil and
Mexico, and is evaluating additional satellite-based service opportunities.
Loral SpaceCom was formed to effectuate the distribution of Loral Corporation's
("Loral") space and telecommunications businesses (the "Distribution") to
shareholders of Loral and holders of options to purchase Loral common stock
pursuant to a merger agreement (the "Merger") dated January 7, 1996 between
Loral and Lockheed Martin Corporation ("Lockheed Martin").
The Distribution of approximately 183.6 million shares of Loral SpaceCom
common stock was made on April 23, 1996 (the "Distribution Date"). In connection
with the Distribution, Lockheed Martin contributed $612 million in cash to the
Company. Of the amount contributed, $344 million represented the purchase of a
20% fully-diluted equity interest in the Company in the form of Loral SpaceCom
Series A Convertible Preferred Stock. Such stock is subject to certain voting
limitations, restrictions on transfer and standstill provisions. The Company has
invested its $612 million in marketable securities pending investment in the
Company's satellite telecommunications programs and opportunities. The Company
also holds $102.5 million principal amount of Globalstar Telecommunications
Limited ("GTL") 6 1/2% Convertible Preferred Equivalent Obligations and a
minority non-controlling equity investment in K&F Industries, Inc. ("K&F").
On January 12, 1996 Loral SpaceCom was incorporated as an exempted company
under the Companies Act 1981 of Bermuda. As of March 31, 1996, the only
transaction of Loral SpaceCom was the sale of 12,000 shares of common stock to
Loral. Accordingly, no statement of operations or of cash flows have been
presented. As a result of the Distribution, the financial statements of the
space and communications operations of Loral (presented herein) will become the
historical financial statements of the Company.
The following unaudited pro forma condensed balance sheet information gives
effect to the Distribution and the purchase of GTL's Convertible Preferred
Obligations as if they had occurred as of March 31, 1996, and includes both the
Space and Communications Operations of Loral as well as the transfer of other
assets of Loral to Loral SpaceCom (in thousands):
Cash and equivalents............................................. $ 612,286
Investment in affiliates......................................... 341,697
Total assets..................................................... 1,001,638
Shareholders' equity............................................. 988,638
The following unaudited pro forma statement of operations information gives
effect to the Distribution as if it had occurred at the beginning of fiscal
1996, and includes both the Space and Communications Operations of Loral and
estimated additional corporate expenses which would have been incurred on a
stand-alone basis, however, in accordance with SEC regulations, no interest
income has been reflected on the anticipated cash balances of the Company (in
thousands):
Management fee from affiliate..................................... $ 5,608
Loss before income taxes and equity in net loss of affiliates..... 15,413
Equity in net loss of affiliates.................................. 16,936
Net loss.......................................................... 32,349
The pro forma financial information has been prepared in accordance with
SEC regulations and may not be indicative of the results of operations that
actually would have occurred if the Distribution had been in effect on the dates
indicated or results that may be obtained in the future.
F-4
57
2. SHAREHOLDERS' EQUITY
Loral SpaceCom has authorized 150,000,000 shares of Series A Convertible
Preferred Stock and 750,000 shares of Series B Preferred Stock. Significant
terms of the Series A include voting rights restricted to only selected matters
such as merger, liquidation or sale of the company; a liquidation preference of
$.01 per share prior to pro rata participation with the Common Stock; and the
ability to convert to Common Stock upon the receipt of certain antitrust
clearance or upon sales to an unaffiliated third party. The Series B Preferred
Stock will, if issued, be junior to any other series of Preferred Stock which
may be authorized and issued.
Loral SpaceCom has reserved 12,000,000 shares of Common Stock for future
grants of options to purchase shares of stock at fair market value as of the
grant date.
3. CREDIT GUARANTEE AND OTHER COMMITMENTS
Under the Merger Agreement, Loral SpaceCom assumed certain commitments and
contingencies associated with the Loral Corporation -- Space & Communications
Operations, as described below.
On December 15, 1995, Globalstar entered into a $250,000,000 credit
agreement (the "Credit Agreement") with a group of banks. Following the
consummation of the Merger, Lockheed Martin guaranteed $206.3 million of
Globalstar's obligation under the Globalstar Credit Agreement, and SS/L and
certain other Globalstar strategic partners guaranteed $11.7 million and $32
million, respectively, of Globalstar's obligation. In addition, Loral SpaceCom
has agreed to indemnify Lockheed Martin for liability in excess of $150 million
under Lockheed Martin's guarantee of the Globalstar Credit Agreement.
In connection with such guarantees and indemnity of the Globalstar Credit
Agreement, GTL issued to Loral SpaceCom, Lockheed Martin, SS/L and the other
strategic partners participating in such guarantee or indemnity, warrants (the
"GTL Guarantee Warrants") to purchase an aggregate of 4,185,318 shares of GTL
common stock, of which Loral SpaceCom received a warrant to purchase 942,428
shares. The GTL Guarantee Warrants have an exercise price of $26.50, are subject
to certain vesting requirements, expire on April 19, 2003, are not exercisable
until six months after Globalstar commences initial operations unless
accelerated at the sole discretion of the managing general partner of Globalstar
and may not be transferred to third parties prior to such exercise date. In
connection with the issuance of GTL Guarantee Warrants, GTL received (i)
warrants to acquire 4,185,318 ordinary partnership interests in Globalstar plus
(ii) additional warrants (the "Additional Warrants") to purchase an additional
1,131,168 ordinary partnership interests, on terms and conditions generally
similar to those of the GTL Guarantee Warrants. In addition, Globalstar has also
agreed to pay Loral SpaceCom and the other guaranteeing partners a fee equal to
1.5% per annum of the average quarterly amount outstanding under the Globalstar
Credit Agreement.
Under a shareholders agreement among SS/L's equity investors, a change of
control of Loral SpaceCom within the meaning of such agreement would provide
each of SS/L's equity investors other than Loral SpaceCom (the "Alliance
Partners") with the right to (i) put their equity interests back to SS/L at fair
market value, or (ii) purchase a pro rata share of Loral SpaceCom's equity
interest in SS/L for fair market value (subject to receiving certain
authorizations including U.S. government approval). In the event that any of
SS/L's Alliance Partners put their interests back to SS/L, Loral SpaceCom will
acquire such interests.
Certain partnerships affiliated with Lehman Brothers Inc. (the "Lehman
Partnerships") hold Series S Preferred Stock of a Loral SpaceCom subsidiary.
Each share of Series S Preferred Stock represents a beneficial interest in one
share of common stock of SS/L. If the Lehman Partnerships continue to hold the
Series S Preferred Stock after January 1, 1998, or after a change in control of
Loral SpaceCom, they will have the right to request that the Company purchase
their Series S Preferred Stock at fair market value. In such event, the Company
may elect to purchase such Series S Preferred Stock at fair market value, or if
the Company elects not to purchase the stock, the Lehman Partnerships may
require the combined interests of the Company and the Lehman Partnerships in
SS/L to be sold to a third party.
The Company adopted a defined benefit pension plan to provide retirement
benefits to eligible employees of the Company and its Operating Affiliates. The
plan will receive the assets and assume the obligations of such employees
currently held by other benefit plans of Loral.
F-5
58
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of
Directors of Loral Corporation:
We have audited the accompanying combined balance sheets of the Space &
Communications Operations of Loral Corporation as of March 31, 1996 and 1995,
and the related combined statements of operations and invested equity and of
cash flows for each of the three years in the period ended March 31, 1996. These
financial statements are the responsibility of Loral Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the Space & Communications
Operations of Loral Corporation at March 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
June 27, 1996
F-6
59
LORAL CORPORATION -- SPACE & COMMUNICATIONS OPERATIONS
COMBINED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31,
-------------------
1996 1995
-------- --------
ASSETS
Investment in affiliates................................................. $339,272 $250,977
Other assets............................................................. 9,800 --
Deferred income taxes.................................................... 5,312 842
-------- --------
Total assets................................................... $354,384 $251,819
======== ========
LIABILITIES AND INVESTED EQUITY
Commitments and contingencies (Note 7)
Invested equity.......................................................... $354,384 $251,819
-------- --------
Total liabilities and invested equity.......................... $354,384 $251,819
======== ========
See notes to combined financial statements.
F-7
60
LORAL CORPORATION -- SPACE & COMMUNICATIONS OPERATIONS
COMBINED STATEMENTS OF OPERATIONS AND INVESTED EQUITY
(IN THOUSANDS)
FOR THE YEARS ENDED MARCH 31,
------------------------------
1996 1995 1994
-------- -------- --------
Management fee from affiliate.................................. $ 5,608 $ 3,169 $ 2,981
Allocated costs and expenses, net.............................. (3,021) (3,202) (2,583)
Gain on exchange of affiliate's debentures..................... 11,514
Allocated interest expense..................................... (10,524) (9,456) (8,253)
-------- -------- --------
Income (loss) before income taxes and equity in net income
(loss)
of affiliates................................................ (7,937) 2,025 (7,855)
Provision (benefit) for income taxes........................... (2,780) 910 (2,987)
-------- -------- --------
Income (loss) before equity in net income (loss) of
affiliates................................................... (5,157) 1,115 (4,868)
Equity in net income (loss) of affiliates...................... (8,628) (8,988) 1,174
-------- -------- --------
Net loss....................................................... (13,785) (7,873) (3,694)
Invested equity -- beginning of year........................... 251,819 159,198 137,017
Advances from Loral Corporation................................ 116,350 100,494 25,875
-------- -------- --------
Invested equity -- end of year................................. $354,384 $251,819 $159,198
======== ======== ========
See notes to combined financial statements.
F-8
61
LORAL CORPORATION -- SPACE & COMMUNICATIONS OPERATIONS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED MARCH 31,
-----------------------------------
1996 1995 1994
--------- -------- --------
Cash flows from operating activities:
Net loss................................................ $ (13,785) $ (7,873) $ (3,694)
Equity in net loss (income) of affiliates............... 8,628 8,988 (1,174)
Tax benefit of Globalstar partnership losses............ 8,308 7,083
Deferred income taxes................................... (4,470) (5,123) 4,281
Gain on exchange of affiliate's debentures.............. (11,514)
--------- -------- --------
Net cash used in operating activities..................... (1,319) (8,439) (587)
--------- -------- --------
Investing activities:
Payment for Globalstar option territory................. (9,800)
Cash received on exchange of affiliate's debentures..... 11,514
Investment in affiliates................................ (105,231) (103,569) (25,288)
--------- -------- --------
Net cash (used in) provided by investing activities....... (115,031) (92,055) (25,288)
--------- -------- --------
Financing activities:
Advances from Loral Corporation......................... 116,350 100,494 25,875
--------- -------- --------
Net cash provided by financing activities................. 116,350 100,494 25,875
--------- -------- --------
Net change in cash........................................ $ -- $ -- $ --
========= ======== ========
See notes to combined financial statements.
F-9
62
LORAL CORPORATION -- SPACE & COMMUNICATIONS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. FORMATION OF LORAL SPACE & COMMUNICATIONS LTD.
Loral Space & Communications Ltd. ("Loral SpaceCom" or the "Company")
manages and is the largest equity owner of both Globalstar, L.P. ("Globalstar")
and Space Systems/Loral, Inc. ("SS/L") (together the "Operating Affiliates").
The Company will also act as a Globalstar service provider in Canada, Brazil and
Mexico, and is evaluating additional satellite-based service opportunities.
Loral SpaceCom was formed to effectuate the distribution of Loral Corporation's
("Loral") space and telecommunications businesses (the "Distribution") to
shareholders of Loral and holders of options to purchase Loral common stock
pursuant to a merger agreement (the "Merger") dated January 7, 1996 between
Loral and Lockheed Martin Corporation ("Lockheed Martin").
The Distribution of approximately 183.6 million shares of Loral SpaceCom
common stock was made on April 23, 1996 (the "Distribution Date"). In connection
with the Distribution, Lockheed Martin contributed $612 million in cash to the
Company. Of the amount contributed, $344 million represented the purchase of a
20% fully-diluted equity interest in the Company in the form of Loral SpaceCom
Series A Convertible Preferred Stock. Such stock is subject to certain voting
limitations, restrictions on transfer and standstill provisions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined financial statements reflect that portion of the
space and communications assets and operations (the "Space & Communications
Operations") included in Loral's historical financial statements that will be
spun-off to Loral SpaceCom.
Certain other non-operating assets of Loral were distributed to Loral
SpaceCom on the Distribution Date. However, those assets, consisting of certain
fixed assets and other miscellaneous assets, have not been included in the
accompanying financial statements since those assets have been principally used
in the Loral operations acquired by Lockheed Martin.
Investment in Affiliates
Investment in affiliates are accounted for using the equity method. Income
and losses of the affiliates are recorded based on Loral's beneficial ownership
interests. Intercompany profits arising from transactions between affiliates are
eliminated to the extent of the Company's beneficial interests. Equity in losses
of affiliates is not recognized after the carrying value has been reduced to
zero, unless guarantees or other obligations exist.
Allocation of Certain Expenses
The Space & Communications Operations as presented herein, include
allocations and estimates of certain expenses of Loral based upon estimates of
actual services performed by Loral. The amount of corporate office expenses
reflected in these financial statements have been estimated based primarily on
the allocation methodology prescribed by government regulations pertaining to
government contractors, which management of Loral believes to be a reasonable
allocation method. However, the financial position and results of operations, as
presented herein may not be the same as would have occurred had the Space &
Communications Operations been an independent entity.
Interest Expense
Interest has been allocated to the Space & Communications Operations based
upon Loral's historical weighted average debt cost applied to the average
investment in affiliates for each period, which management
F-10
63
LORAL CORPORATION -- SPACE & COMMUNICATIONS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of Loral believes to be a reasonable allocation method. Interest related to the
investment in Globalstar prior to the commencement of operations has been
capitalized.
Income Taxes
The Space & Communications Operations are included in the consolidated U.S.
Federal income tax return and certain combined and separate state and local
income tax returns of Loral. However, for purposes of these financial
statements, the provision (benefit) for income taxes is computed as if the Space
and Communications Operations were a separate taxpayer; accordingly, the
provision (benefit) for income taxes is based upon reported income (loss) before
income taxes. Current income tax liabilities (benefits) are considered to have
been paid (received) by Loral and are recorded through the invested equity
account with Loral. Deferred income taxes reflect the tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
and income tax reporting and are measured by applying tax rates in effect at the
end of each year.
3. INVESTMENT IN AFFILIATES
Investment in affiliates is summarized as follows (in thousands):
MARCH 31,
-------------------
1996 1995
-------- --------
SS/L............................................................. $144,051 $140,007
Globalstar....................................................... 195,221 110,970
K&F.............................................................. 22,937 24,290
Deferred K&F gain................................................ (22,937) (24,290)
-------- --------
$339,272 $250,977
======== ========
Equity in net income (loss) of affiliates consists of (in thousands):
YEARS ENDED MARCH 31,
----------------------------
1996 1995 1994
-------- -------- ------
SS/L..................................................... $ 4,044 $ 1,816 $1,174
Globalstar............................................... (20,980) (17,887)
Tax benefit of Globalstar partnership losses............. 8,308 7,083
-------- -------- ------
$ (8,628) $ (8,988) $1,174
======== ======== ======
GLOBALSTAR
In March 1994, Loral and seven other partners made capital commitments
totaling $275,000,000 to Globalstar, a limited partnership of which Loral is the
managing general partner, which plans to design and
F-11
64
LORAL CORPORATION -- SPACE & COMMUNICATIONS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENT IN AFFILIATES (CONTINUED)
operate a worldwide satellite-based telecommunications system (the "Globalstar
System"). On January 31, 1995, the U.S. Federal Communications Commission issued
a license to construct, launch and operate the Globalstar System. The Globalstar
System, consisting of 48 low-earth-orbit satellites and 8 in-orbit spares, will
offer voice, data, paging and geolocation services to both handheld and fixed
terminals. Loral as the managing general partner of Globalstar is entitled to
receive a managing partner's allocation, upon commencement of commercial
operations, determined in accordance with the partnership agreement.
At March 31, 1994, Loral had an effective 42% equity interest in Globalstar
and had a total capital commitment of $107,000,000, of which $25,288,000 had
been funded. The remaining commitment was funded in two installments, in
November 1994 and March 1995.
At March 31, 1996 and 1995, Loral has a 32.3% interest in Globalstar. In
fiscal 1995, Globalstar received $479,500,000 in equity from Loral and
Globalstar's other partners including GTL, a public company that acts as a
general partner of Globalstar. Loral has contributed $126,816,000 to Globalstar,
including $32,316,000 for 1,674,400 shares of common stock of GTL. At March 31,
1996, the market value, based on the last reported sales price of Loral's GTL
common shares was $88,743,200. As a result Loral has an effective ownership of
15,188,400 ordinary partnership interests of the total 47,000,000 Globalstar
ordinary partnership interests outstanding. In March 1996, Loral purchased
$100,000,000 principal amount of GTL 6 1/2% Convertible Preferred Equivalent
Obligations for $97,000,000. The GTL Convertible Preferred Equivalent
Obligations must be redeemed by GTL on March 1, 2006 and may be converted, at
Loral's option, at any time into 1,538,461 shares of GTL common stock. At March
31, 1996, Loral's investment in Globalstar of $195,221,000 includes $10,272,000
of capitalized costs, principally interest, and is net of Loral's share of
Globalstar's cumulative pre-tax losses of $38,867,000.
In September 1995, Loral, in its capacity as managing general partner,
granted certain directors and officers options to purchase 340,000 shares of the
GTL Common Stock owned by Loral at a weighted average exercise price of $27.87
(such prices were greater than or equal to the market price at grant date). Such
options are immediately exercisable, and expire 12 years from date of grant: no
options were exercised or cancelled during the year.
Globalstar has awarded SS/L the prime contract to design, construct and
launch the satellite constellation. SS/L has awarded and expects to award
subcontracts to third parties, including other investors in Globalstar, for
substantial portions of its obligations under the contract. Through SS/L, Loral
has an additional 1.4% indirect interest in Globalstar.
The Globalstar System has an estimated total cost of $2.2 billion for
capital expenditures, development costs and operating costs through the end of
1998, when full commercial service is scheduled to commence. Globalstar has
obtained a total of $1.4 billion of financing through March 31, 1996, consisting
of $480 million of equity, $310 million of vendor financing, a $250 million bank
credit facility, commitments for $33 million of service provider advance
payments, net proceeds of $290 million from the sale of GTL 6 1/2% Convertible
Preferred Equivalent Obligations (the "Securities") and on April 3, 1996, an
additional $9.7 million net proceeds from the additional sale of the Securities.
Globalstar estimates that it will require an additional $414 million to complete
its external financing requirements and that its remaining financing requirement
will come from a combination of sources, including advance payments from service
providers, anticipated payments associated with the sale of Globalstar Phones
and gateways, placements of limited partnership interests with new and existing
strategic investors and from net service revenues from initial operations.
F-12
65
LORAL CORPORATION -- SPACE & COMMUNICATIONS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENT IN AFFILIATES (CONTINUED)
SS/L
SS/L, a company owned by Loral and four international aerospace and
communications companies (the "Alliance Partners"), designs and produces
geosynchronous and low-earth orbit satellites and subsystems for communications,
remote earth sensing and direct-to-home broadcast television. Loral, through its
wholly owned subsidiaries Loral Aerospace Holdings, Inc. ("LAH") and Loral
Aerospace Corp. ("Loral Aerospace"), owns 51% of the common stock of SS/L.
Certain partnerships affiliated with Lehman Brothers Holdings Inc. (the "Lehman
Partnerships") own 627.3 shares of LAH Series S Preferred Stock. Each share of
Series S Preferred Stock represents a beneficial interest in one share of common
stock of SS/L.
Due to the LAH Series S Preferred Stock held by the Lehman Partnerships,
Loral has an effective 32.7% economic interest in SS/L. Further, LAH and Loral
Aerospace have agreed not to cause SS/L to take certain actions without the
concurrence of three, or in some cases all, of the SS/L directors appointed by
the four other equity investors. Accordingly, Loral accounts for its investment
in SS/L under the equity method.
K&F
In 1989, Loral sold certain of its divisions to K&F for cash of
$430,000,000 and a $30,000,000 14.75% pay-in-kind Subordinated Debenture due
2004 (the "Debenture"). K&F was formed specifically to effect the purchase of
these divisions through the issuance of approximately $400,000,000 of debt,
including the Debenture, and $65,000,000 of equity. Because K&F was
highly-leveraged, uncertainties existed at the time regarding the ultimate
collectibility of the Debenture and, accordingly, Loral deferred any gain
recognition from the sale relating to the Debenture, as well as any pay-in-kind
interest earned on the Debenture. In September 1994, the Debenture was exchanged
for $11,514,000 in cash, net of expenses, and a 22.5% voting equity interest in
K&F. The cash proceeds were recorded as a non-recurring gain representing the
receipt of sale proceeds deferred in the 1989 transaction. The 22.5% voting
equity interest was recorded at estimated fair value, determined by independent
investment bankers engaged by the Loral Board of Directors. Based on the
financial position of K&F at the time of the exchange, Loral has continued to
record a deferred gain for the $25,000,000 estimated fair value of the stock
received. Loral is using the equity method of accounting for its investment in
K&F and accordingly, both the investment in K&F and the related deferred gain
have been adjusted by Loral's share of net loss and amortization, over a 35 year
period, of goodwill inherent in the fair value recorded. However, no equity
income will be recognized until K&F has positive net worth. The Chairman of
Loral is a principal shareholder of K&F and after the exchange owns
approximately 27% of K&F. In addition, certain executive officers of Loral own
rights to purchase approximately 4% of K&F's capital stock. Summarized financial
information for K&F as of March 31, 1996 and 1995 and for the years then ended
is as follows, respectively: Current assets $101,804,000 and $104,914,000;
Noncurrent assets $313,233,000 and $324,160,000; Current liabilities $65,477,000
and $56,889,000; Long-term debt $294,000,000 and $310,000,000; Postretirement
benefits other than pensions $75,390,000 and $77,717,000; Other noncurrent
liabilities $20,871,000 and $19,216,000; Sales $264,736,000 and $238,756,000;
Cost of sales $180,435,000 and $164,697,000; and Net loss $1,406,000 and
$10,173,000.
4. MANAGEMENT FEES AND ALLOCATION OF CORPORATE EXPENSES
Pursuant to stockholder and partnership agreements, Loral is responsible
for managing the operations of SS/L and Globalstar. Such agreements indicate the
amounts that can be charged to Globalstar and SS/L in return for such services.
In the case of Globalstar, Loral is entitled to receive a management fee upon
commencement of commercial operations. In the case of SS/L, Loral can charge a
management fee based on a formula related to sales and an allocation of certain
overhead costs. The Chairman of Loral and certain of its executive officers
receive compensation from K&F for rendering advisory services to K&F.
F-13
66
LORAL CORPORATION -- SPACE & COMMUNICATIONS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. MANAGEMENT FEES AND ALLOCATION OF CORPORATE EXPENSES (CONTINUED)
The following summarizes the management fee and allocated costs and
expenses, net reflected in the statement of operations (in thousands):
YEARS ENDED MARCH 31,
---------------------------
1996 1995 1994
------- ------- -------
Management fee from affiliate............................. $ 5,608 $ 3,169 $ 2,981
======= ======= =======
Allocated costs and expenses.............................. $ 6,448 $ 6,489 $ 6,095
Allocated costs and expenses charged to affiliates........ (3,427) (3,287) (3,512)
------- ------- -------
Allocated costs and expenses, net......................... $ 3,021 $ 3,202 $ 2,583
======= ======= =======
5. RELATED PARTY TRANSACTIONS
In addition to the transactions described in Note 4, Loral has a number of
other transactions with its affiliates. Loral believes that the arrangements are
as favorable to Loral as could be obtained from unaffiliated parties. The
following describes the related-party transactions included in the financial
statements of the affiliates.
Two of Loral's divisions have entered into contracts, totaling $28,744,000,
to construct a portion of the Globalstar System. Sales to Globalstar for the
years ended March 31, 1996 and 1995 were $8,182,000 and $7,429,000,
respectively.
LAH bills certain operational, executive, administrative, financial, legal
and other services to SS/L and SS/L charges LAH certain overhead costs. Net
costs billed to SS/L were $7,066,000, $8,518,000 and $5,934,000 in 1996, 1995
and 1994, respectively. In addition, Loral Corporation sells products to SS/L;
net sales to SS/L were $27,132,000, $26,528,000 and $15,769,000 in 1996, 1995
and 1994, respectively. LAH and SS/L have a tax sharing agreement whereby
certain tax liabilities and benefits are shared equitably.
Loral and K&F have agreements covering various real property occupancy
arrangements and agreements under which Loral and K&F provide certain services,
such as benefits administration, treasury, accounting and legal services to each
other. The charges for these services, as agreed to by Loral and K&F, are based
upon the actual cost incurred in providing the services without a profit. These
transactions between Loral and K&F were not significant.
6. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
YEARS ENDED MARCH 31,
---------------------------
1996 1995 1994
------- ------- -------
Current:
U.S. Federal............................................ $(5,772) $ 3,730 $(6,490)
State and local......................................... (660) 426 (778)
------- ------- -------
(6,432) 4,156 (7,268)
------- ------- -------
Deferred, principally U.S. Federal........................ 3,652 (3,246) 4,281
------- ------- -------
Total provision (benefit) for income taxes...... $(2,780) $ 910 $(2,987)
======= ======= =======
The provision for income taxes excludes a current tax benefit of $186,000
and $5,206,000 for 1996 and 1995, respectively, and a deferred tax benefit of
$8,122,000 and $1,877,000 for 1996 and 1995, respectively related to the
Globalstar partnership loss which is included in equity in loss of affiliates.
F-14
67
LORAL CORPORATION -- SPACE & COMMUNICATIONS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES (CONTINUED)
A reconciliation from the statutory U.S. Federal income tax rate to Loral
SpaceCom's effective income tax rate follows (in thousands):
YEARS ENDED MARCH 31,
-------------------------
1996 1995 1994
----- ----- -----
Statutory U.S. Federal income tax rate...................... (35.0)% 35.0% (35.0)%
State and local income taxes, net of Federal income tax..... (4.0) 4.0 (4.2)
Undistributed income of affiliates.......................... 4.0 7.0 1.2
Other, net.................................................. (1.1)
----- ----- -----
Effective income tax rate................................... (35.0)% 44.9% (38.0)%
===== ===== =====
The deferred tax (asset) liability on the accompanying balance sheet arises
from the tax effect of the temporary differences between the carrying amount of
investment in affiliates for financial and income tax reporting.
7. COMMITMENTS AND CONTINGENCIES
Under a shareholders agreement among SS/L's equity investors (see Note 3),
a change of control of Loral SpaceCom within the meaning of such agreement would
provide each of SS/L's Alliance Partners with the right to (i) put their equity
interests back to SS/L at fair market value, or (ii) purchase a pro rata share
of Loral SpaceCom's equity interest in SS/L for fair market value (subject to
receiving certain authorizations including U.S. government approval). While it
is not certain that the change of control provisions are applicable, Loral and
SS/L are seeking an amendment to the shareholders agreement to acknowledge the
proposed transfer of Loral's interest in SS/L to Loral SpaceCom as contemplated
by the Distribution Agreement and a waiver of such put and purchase option
rights. In the event that any of SS/L's Alliance Partners put their interests
back to SS/L, Loral SpaceCom will acquire such interests.
In addition, if the Lehman Partnerships continue to hold LAH Series S
Preferred Stock (see Note 3) after January 1, 1998, or after a change in control
of Loral, they will have the right to request that Loral purchase their Series S
Preferred Stock at fair market value. In such event, Loral may elect to purchase
such Series S Preferred Stock at fair market value, or if Loral elects not to
purchase the stock, the Lehman Partnerships may require the combined interests
of Loral and the Lehman Partnerships in SS/L to be sold to a third party.
Globalstar Credit Agreement
On December 15, 1995, Globalstar entered into a $250,000,000 credit
agreement (the "Credit Agreement") with a group of banks. Following the
consummation of the Merger, Lockheed Martin guaranteed $206.3 million of
Globalstar's obligation under the Globalstar Credit Agreement, and SS/L and
certain other Globalstar strategic partners guaranteed $11.7 million and $32
million, respectively, of Globalstar's obligation. In addition, Loral SpaceCom
has agreed to indemnify Lockheed Martin for liability in excess of $150 million
under Lockheed Martin's guarantee of the Globalstar Credit Agreement.
In connection with such guarantees and indemnity of the Globalstar Credit
Agreement, GTL issued to Loral SpaceCom, Lockheed Martin, SS/L and the other
strategic partners participating in such guarantee or indemnity, warrants (the
"GTL Guarantee Warrants") to purchase an aggregate of 4,185,318 shares of GTL
common stock, of which Loral SpaceCom received a warrant to purchase 942,428
shares. The GTL Guarantee Warrants have an exercise price of $26.50, are subject
to certain vesting requirements, expire on April 19, 2003, are not exercisable
until six months after Globalstar commences initial operations unless
F-15
68
LORAL CORPORATION -- SPACE & COMMUNICATIONS OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
accelerated at the sole discretion of the managing general partner of Globalstar
and may not be transferred to third parties prior to such exercise date. In
connection with the issuance of the GTL Guarantee Warrants, GTL received (i)
warrants to acquire 4,185,318 ordinary partnership interests in Globalstar plus
(ii) additional warrants (the "Additional Warrants") to purchase an additional
1,131,168 ordinary partnership interests, on terms and conditions generally
similar to those of the GTL Guarantee Warrants. In addition, Globalstar has also
agreed to pay to Loral SpaceCom and the other guaranteeing partners a fee equal
to 1.5% per annum of the average quarterly amount outstanding under the
Globalstar Credit Agreement.
F-16
69
INDEPENDENT AUDITORS' REPORT
To the Partners of Globalstar, L.P.:
We have audited the accompanying balance sheets of Globalstar, L.P. (a
development stage limited partnership) as of December 31, 1995 and 1994, and the
related statements of operations, partners' capital and subscriptions receivable
and cash flows for the period from March 23, 1994 (commencement of operations)
to December 31, 1994, the year ended December 31, 1995 and cumulative. We have
also audited the accompanying statements of operations for the year ended
December 31, 1993 and the period from January 1, 1994 to March 22, 1994
(pre-capital subscription period). These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Globalstar, L.P. at December 31, 1995 and
1994, and the results of its operations and its cash flows for the periods
stated above in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 26, 1996
(March 6, 1996 as to Note 11)
F-17
70
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
----------------------
1995 1994
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 71,602 $ 73,560
Other current assets................................................ 506 190
------- --------
Total current assets........................................... 72,108 73,750
Property and equipment, net........................................... 1,509 1,004
Globalstar System Under Construction:
Space segment....................................................... 348,434 59,335
Ground segment...................................................... 51,823 12,661
------- --------
400,257 71,996
Deferred FCC license costs............................................ 7,056 4,521
Deferred financing costs.............................................. 24,461 --
------- --------
Total assets................................................... $505,391 $ 151,271
======= ========
LIABILITIES and PARTNERS' CAPITAL
Current liabilities:
Payable to affiliates............................................... $ 49,639 $ 34,987
Accrued expenses.................................................... 4,782 3,340
------- --------
Total current liabilities...................................... 54,421 38,327
Deferred revenues..................................................... 21,913 --
Vendor financing liability............................................ 42,219 --
Commitments and contingencies (Notes 4,5,6,7,9 and 10)
Partners' Capital:
General partners (28,000 interests outstanding at December 31, 1995
and 18,000 interests outstanding at December 31, 1994)........... 173,118 26,487
Limited partners (19,000 interests outstanding)..................... 191,119 220,237
Warrants............................................................ 22,601 --
------- --------
386,838 246,724
Less subscriptions receivable....................................... -- (133,780)
------- --------
Total partners' capital........................................ 386,838 112,944
------- --------
Total liabilities and partners' capital........................ $505,391 $ 151,271
======= ========
See notes to financial statements.
F-18
71
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1994
---------------------------------- CUMULATIVE
MARCH 23 MARCH 23, 1994
PRE-CAPITAL SUBSCRIPTION PERIOD
---------------------------------- (COMMENCEMENT OF (COMMENCEMENT OF
YEAR ENDED JANUARY 1 TO OPERATIONS) TO YEAR ENDED OPERATIONS) TO
DECEMBER 31, 1993 MARCH 22, 1994 DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1995
----------------- -------------- ----------------- ----------------- -----------------
Operating expenses:
Development costs... $ 6,140 $4,057 $21,279 $62,854 $84,133
Marketing, general
and
administrative... 5,370 2,815 6,748 17,372 24,120
------ ------- ------ ------ -------
Total operating
expenses............ 11,510 6,872 28,027 80,226 108,253
Interest income....... -- -- 1,783 11,989 13,772
------ ------- ------ ------ -------
Net loss.............. $11,510 $6,872 $26,244 $68,237 $94,481
====== ======= ====== ====== =======
See notes to financial statements.
F-19
72
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
STATEMENTS OF PARTNERS' CAPITAL AND SUBSCRIPTIONS RECEIVABLE
(IN THOUSANDS)
Partners' Capital
GENERAL LIMITED
PARTNERS PARTNERS WARRANTS TOTAL
-------- -------- -------- --------
Capital subscription, March 23, 1994
(18,000 interests -- general partner, and
18,000 interests -- limited partners)..... $ 50,000 $225,000 $275,000
Cost of raising capital........................ (1,200) (1,200) (2,400)
Net losses -- pre-capital subscription period:
Year ended December 31, 1993................. (5,755) (5,755) (11,510)
January 1, 1994 to March 22, 1994............ (3,436) (3,436) (6,872)
Net loss -- March 23, 1994 (commencement of
operations) to December 31, 1994............. (13,122) (13,122) (26,244)
Capital subscription, December 31, 1994
(1,000 partnership interests -- limited
partner).................................. -- 18,750 18,750
-------- -------- -------- --------
Capital balances, December 31, 1994............ 26,487 220,237 246,724
Sale of interests to GTL, February 22,1995
(10,000 general partnership interests)....... 185,750 -- 185,750
Warrant agreement in connection with debt
guarantee.................................... -- -- $ 22,601 22,601
Net loss -- Year ended December 31, 1995....... (39,119) (29,118) -- (68,237)
-------- -------- -------- --------
Capital balances, December 31, 1995............ $173,118 $191,119 $ 22,601 $386,838
======== ======== ======= ========
Subscriptions Receivable
Capital subscriptions:
March 23, 1994............................... $ 50,000 $225,000 $275,000
December 31, 1994............................ -- 18,750 18,750
-------- -------- --------
Total subscriptions.......................... 50,000 243,750 293,750
-------- -------- --------
Cash received................................ (23,691) (124,970) (148,661)
Credit for pre-capital subscription costs.... (11,309) -- (11,309)
-------- -------- --------
(35,000) (124,970) (159,970)
-------- -------- --------
Subscriptions receivable, December 31, 1994.... 15,000 118,780 133,780
Cash received................................ (15,000) (118,780) (133,780)
-------- -------- --------
Subscriptions receivable, December 31, 1995.... $ -- $ -- $ --
======== ======== ========
See notes to financial statements.
F-20
73
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
MARCH 23, 1994
(COMMENCEMENT OF CUMULATIVE MARCH 23, 1994
OPERATIONS) TO (COMMENCEMENT OF
DECEMBER 31, YEAR ENDED OPERATIONS) TO
1994 DECEMBER 31, 1995 DECEMBER 31, 1995
---------------- ----------------- -------------------------
Cash flows from operating activities:
Net loss................................ $(26,244) $ (68,237) $ (94,481)
Deferred revenues....................... -- 21,913 21,913
Depreciation and amortization........... 115 398 513
Changes in operating assets and
liabilities:
Other current assets................. -- (506) (506)
Payable to affiliates................ 637 5,722 6,359
Accrued expenses..................... 2,440 2,342 4,782
-------- --------- ---------
Net cash used in operating activities..... (23,052) (38,368) (61,420)
-------- --------- ---------
Investing activities:
Globalstar system under construction.... (71,996) (328,261) (400,257)
Payable to affiliates for Globalstar
System under construction............ 25,042 8,930 33,972
Vendor financing liability.............. -- 42,219 42,219
-------- --------- ---------
Cash used for Globalstar System.... (46,954) (277,112) (324,066)
Purchases of property and equipment..... (1,119) (888) (2,007)
Deferred FCC license costs.............. (2,286) (2,535) (4,821)
Purchases of investments................ -- (126,923) (126,923)
Maturity of investments................. -- 126,923 126,923
Other current assets.................... (190) 190 --
-------- --------- ---------
Net cash used in investing activities..... (50,549) (280,345) (330,894)
-------- --------- ---------
Financing activities:
Deferred line of credit fees............ -- (1,875) (1,875)
Proceeds from capital subscriptions
receivable........................... 148,661 133,780 282,441
Payment of accrued capital raising
costs................................ (1,500) (900) (2,400)
Sale of partnership interests to
Globalstar Telecommunications
Limited.............................. -- 185,750 185,750
-------- --------- ---------
Net cash provided by financing
activities.............................. 147,161 316,755 463,916
-------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................. 73,560 (1,958) 71,602
Cash and cash equivalents, beginning of
period.................................. -- 73,560 --
-------- --------- ---------
Cash and cash equivalents, end of
period.................................. $ 73,560 $ 71,602 $ 71,602
======== ========= =========
Noncash transactions:
Payable to affiliates................... $ 9,308 $ 9,308
======== =========
Accrual of capital raising costs........ $ 2,400 $ 2,400
======== =========
Deferred FCC license costs.............. $ 2,235 $ 2,235
======== =========
Warrant agreement in connection with
debt guarantee....................... $ 22,601 $ 22,601
========= =========
See notes to financial statements.
F-21
74
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Globalstar, L.P. ("Globalstar" or the "Partnership"), a Delaware limited
partnership with a December 31 fiscal year end, was formed in November 1993. It
had no activities until March 23, 1994, when it received capital subscriptions
for $275 million and commenced operations. The accompanying financial statements
reflect the operations of the Partnership from that date. In addition, the
statements of operations for the year ended December 31, 1993 and the period
January 1, 1994 to March 22, 1994 (the "Pre-Capital Subscription Period")
reflect certain costs incurred by Loral Corporation ("Loral") and QUALCOMM
Incorporated ("Qualcomm") and reimbursed by Globalstar through a capital
subscription credit or agreement for reimbursement, as described in Note 8,
"Partners' Capital".
The managing general partner of Globalstar is Loral/QUALCOMM Satellite
Services, L.P. ("LQSS"). The general partner of LQSS is Loral/QUALCOMM
Partnership, L.P. ("LQP"), a Delaware limited partnership comprised of
subsidiaries of Loral and Qualcomm. The general partner of LQP is Loral General
Partner, Inc. ("LGP"), a subsidiary of Loral (see Note 11 -- Subsequent Events).
Globalstar was founded to design, construct and operate a worldwide,
low-earth orbit ("LEO") satellite-based wireless digital telecommunications
system (the "Globalstar System"). The Globalstar System's world-wide coverage is
designed to enable its service providers to extend modern telecommunications
services to significant numbers of people who currently lack basic telephone
service and to enhance wireless communications in areas underserved or not
served by existing or future cellular systems, providing a telecommunications
solution in parts of the world where the build-out of terrestrial systems cannot
be economically justified. On January 31, 1995, the U.S. Federal Communications
Commission ("FCC") granted the necessary license to LQP to construct, launch and
operate the Globalstar System. LQP has agreed to use such license for the
exclusive benefit of Globalstar.
On November 23, 1994, Globalstar Telecommunications Limited ("GTL") was
incorporated as an exempted company under the Companies Act 1981 of Bermuda.
GTL's sole business is acting as a general partner of Globalstar. On February
14, 1995, GTL completed an initial public offering of 10,000,000 shares of
common stock, of which Loral purchased 1,674,400 shares, resulting in net
proceeds of $185,750,000. Effective February 22, 1995, GTL purchased 10,000,000
partnership interests from Globalstar with the net proceeds of the initial
public offering.
The partners in Globalstar have the right to convert their partnership
interests into shares of GTL on a one-for-one basis following the Full Coverage
Date, as defined, of the Globalstar System and after at least two consecutive
reported fiscal quarters of positive net income, subject to certain annual
limitations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development Stage Company
The Partnership is devoting substantially all of its present efforts to the
design, licensing, construction, and financing of the Globalstar System, and
establishing its business. Its planned principal operations have not commenced.
Accordingly, Globalstar is a development stage company as defined in Statement
of Financial Accounting Standards (SFAS) No. 7 "Accounting and Reporting by
Development Stage Enterprises."
Globalstar may encounter problems, delays and expenses, many of which may
be beyond Globalstar's control. These may include, but are not limited to,
problems related to technical development of the system, testing, regulatory
compliance, manufacturing and assembly, the competitive and regulatory
environment in which Globalstar will operate, marketing problems and costs and
expenses that may exceed current estimates. There can be no assurance that
substantial delays in any of the foregoing matters would not delay Globalstar's
achievement of profitable operations.
F-22
75
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the amounts of expenses reported for the period. Actual results
could differ from estimates.
Net (Loss) Income Allocation
Net losses of the Partnership are allocated among the partners in
proportion to their percentage interests until the adjusted capital account of a
partner is reduced to zero, then in proportion to, and to the extent of,
positive adjusted capital account balances and then to the general partners.
Net income of the Partnership is allocated among the partners in proportion
to, and to the extent of, the distributions made to the partners from
distributable cash flow for the period, as defined, then in proportion to and to
the extent of negative adjusted capital account balances and then in accordance
with percentage interests.
Under the terms of the Partnership Agreement, adjusted partners' capital
accounts are calculated in accordance with the principles of U.S. Treasury
Regulations governing the allocation of taxable income and loss including
adjustments to reflect the fair market value (including intangibles) of
partnership assets upon certain capital transactions including a sale of
partnership interests. Such adjustments are not permitted under generally
accepted accounting principles and, accordingly, are not reflected in the
accompanying financial statements.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and highly liquid
investments with original maturities of three months or less.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets, generally three to eight years. Leasehold improvements are amortized
over the shorter of the lease term or the estimated useful lives of the
improvements.
Globalstar System Under Construction
Globalstar System Under Construction expenditures include and will include
progress payments and costs for the design, manufacture, test, launch and launch
insurance for 48 low-earth orbit satellites, plus eight in-orbit spares (the
"Space Segment"), and ground and satellite operations control centers, gateways
and subscriber terminals (handsets) (the "Ground Segment").
The Partnership intends to depreciate the Space Segment over 7 1/2 years
and to capitalize costs of the Ground Segment over eight years as assets are
placed in service. Service is currently anticipated to commence in 1998.
Costs incurred related to the development of certain technologies, pursuant
to a cost sharing arrangement included in Globalstar's contract with Qualcomm
and for the engineering and development of subscriber terminals, are being
charged to operations as incurred.
F-23
76
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Financing Costs and Interest
Deferred financing costs represent costs incurred in obtaining a long-term
credit facility and the estimated fair value of a warrant agreement in
connection with a guarantee of this facility (see Note 6-Credit Facility). Such
costs are being amortized over the term of the credit facility as interest.
Interest costs incurred during the construction of the Globalstar System
are capitalized. Total interest costs capitalized for the year ended December
31, 1995 was approximately $300,000. No interest was capitalized for the period
ending December 31, 1994.
FCC License Costs
Expenditures, including license fees, legal fees and direct engineering and
other technical support, for obtaining the required FCC licenses are capitalized
and will be amortized over 7 1/2 years, the expected life of the first
generation satellites.
Deferred Revenues
Advance payments from Globalstar strategic partners to secure exclusive
rights to Globalstar service territories are deferred. These advance payments
are recoverable by the service providers through credits against a portion of
the service fees payable to Globalstar after the commencement of services.
Vendor Financing
Globalstar's Space Segment contract with Space Systems/Loral, Inc. ("SS/L")
calls for a portion of the contract price to be deferred as vendor financing and
repaid, over as long as a five-year period, commencing upon the initial service
and full coverage dates of the Globalstar System. Amounts deferred as vendor
financing are capitalized as costs of the Globalstar System Under Construction
as incurred.
Income Taxes
Globalstar was organized as a Delaware limited partnership. As such, no
income tax provision (benefit) is included in the accompanying financial
statements since U.S. income taxes are the responsibility of its partners.
Generally, taxable income (loss), deductions and credits of Globalstar will be
passed proportionately through to its partners.
Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which is
required to be adopted by fiscal 1996. SFAS 123 establishes accounting and
disclosure requirements using a fair value based method of accounting for stock
based employee compensation plans, including stock arrangements by investors for
the benefit of their investees. Under SFAS 123 Globalstar may either adopt the
new fair value based accounting method or continue the intrinsic value based
method and provide pro forma disclosures of net income (loss) as if the
accounting provisions of SFAS 123 had been adopted. Globalstar intends to elect
to continue the intrinsic value method of accounting for stock based employee
compensation plans and provide the required pro-forma disclosures; therefore
such adoption will have no effect on Globalstar's operations. Globalstar
accounts for equity transactions with non-employees under SFAS 123.
F-24
77
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
DECEMBER 31,
-----------------
1995 1994
------ ------
(IN THOUSANDS)
Property and equipment consists of:
Leasehold improvements........................................... $ 401 $ 396
Furniture and office equipment................................... 1,606 723
------ ------
2,007 1,119
Accumulated depreciation and amortization........................ (498) (115)
------ ------
$1,509 $1,004
====== ======
Depreciation and amortization expense for the year ended December 31, 1995,
and for the period March 23 to December 31, 1994, was $383,000 and $115,000,
respectively.
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION
The Space Segment
Globalstar has entered into a contract with SS/L, an affiliate of Loral and
a limited partner of LQSS, to design, manufacture, test and launch its satellite
constellation. The price of the contract consists of three parts, the first for
non-recurring work at a price not to exceed $115.7 million, the second for
recurring work at a fixed price of $15.6 million per satellite (including
certain performance incentives of up to approximately $1.9 million per
satellite) and the third for launch services and insurance. The total contract
price reflects certain scope of work claims negotiated with SS/L during 1995.
Under the contract, SS/L will design, build and launch Globalstar's 56
satellites. SS/L has agreed to obtain launch vehicles and arrange for the launch
of Globalstar's satellites on Globalstar's behalf at an estimated total cost of
$302 million for all 56 satellites, and obtain insurance to cover the
replacement cost of satellites or launch vehicles lost in the event of a launch
failure for an estimated cost of $92 million. In certain circumstances these
amounts are subject to equitable adjustment in light of future market
conditions, which may, in turn, be influenced by international political
developments. Any change in such assumptions may result in an increase in the
costs paid by Globalstar, which may be substantial. Termination by Globalstar of
this contract would result in termination fees, which may be substantial.
SS/L has entered into subcontracts with certain of Globalstar's direct or
indirect limited partners. The design and manufacture of the payload modules
will be performed by Alcatel Espace at a fixed price of approximately $208
million, subject to certain adjustments. Fixed price subcontracts in the amounts
of $202 million, $178 million and $41 million have also been awarded to Alenia
Spazio S.p.A., Daimler-Benz Aerospace AG and Aerospatiale, respectively.
Globalstar, SS/L and Hyundai Electronics Industries Co. Ltd. ("Hyundai") have
entered into a subcontract providing work for Hyundai in an amount of
approximately $44 million. Globalstar and SS/L have further agreed to support
Hyundai in its efforts as a satellite vendor, including providing training and
transferring certain technology know-how to Hyundai for compensation to be
agreed upon among the parties.
The Ground Segment
Globalstar has entered into a contract with Qualcomm providing for the
design, development, manufacture, installation, testing and maintenance of four
gateways, two ground operations control centers and 100 pre-production
subscriber terminals. A portion of the ground operations control center software
is being developed by Globalstar. The contract provides for reimbursement to
Qualcomm for contract costs incurred
F-25
78
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION (CONTINUED)
such as labor, material, travel, license fees, royalties and general and
administrative expenses, plus a 12% fee thereon. The contract also includes a
cost sharing arrangement for certain technologies being developed by Qualcomm.
As of December 31, 1995, Globalstar estimates that payments under the contract
will total approximately $309 million. Termination by Globalstar of its contract
with Qualcomm would result in termination fees, which may be substantial.
A letter agreement among Qualcomm, Globalstar and Hyundai grants to Hyundai
an option to become a licensee authorized to manufacture and sell Globalstar
subscriber terminals to service providers. Should Hyundai choose to exercise
this option, it would, for a five year period following Globalstar's In-Service
date, be the exclusive licensee authorized to manufacture and sell subscriber
terminals in South and North Korea.
Globalstar will receive from Qualcomm or its licensee(s) a payment of
approximately $400,000 for each installed gateway sold to a Globalstar service
provider. In addition, Globalstar will receive a payment of up to $10 on each
Globalstar subscriber terminal sold, until Globalstar's funding of that design
has been recovered.
Globalstar has entered into an agreement with a subsidiary of Loral for the
development and delivery of two satellite operations control centers and 33
telemetry and command units for the Globalstar System. The maximum contract
price is $25.1 million and provides for reimbursement to the Loral subsidiary
for contract costs incurred such as labor, materials, travel, license fees,
royalties and general and administrative expenses. The Loral subsidiary will
receive a 12% fee under the contract, 6% of which is payable at the time the
costs are incurred, with the remainder payable upon achievement of certain
milestones. Globalstar will own any intellectual property produced under the
contract.
Total System Cost
At December 31, 1995, Globalstar has estimated the cost for the design,
construction and deployment of the Globalstar System, excluding working capital,
cash interest on anticipated borrowings and operating expenses to be
approximately $1.8 billion. Actual amounts may vary from this estimate and
additional funds would be required in the event of unforeseen delays, cost
overruns, launch failures or other technological risks or adverse regulatory
developments, or to meet unanticipated expenses.
Additional funds to complete the Globalstar System are expected to be
obtained through a combination of debt issuance, which may include an equity
component, projected service provider payments, projected net service revenues
from initial operations, anticipated payments received from the sale of gateways
and Globalstar subscriber terminals and placements of limited partnership
interests with new and existing strategic investors. Although Globalstar
believes it will be able to obtain this additional financing, there can be no
assurance that the financing will be available on favorable terms or on a timely
basis, if at all.
5. VENDOR FINANCING LIABILITY
Globalstar's space segment contract with SS/L calls for approximately $310
million of the contract price to be deferred as vendor financing. Of the $310
million, $90 million is interest bearing at the 30-day LIBOR rate plus 3% per
annum. The remaining $220 million of vendor financing is non-interest bearing.
Globalstar will repay the non-interest bearing portions as follows: $49 million
following the launch and acceptance of 24 or more satellites (the "Preliminary
Constellation"), $61 million upon the launch and acceptance of 48 or more
satellites (the "Full Constellation"), and the remainder in equal installments
over the five-year period following acceptance of the Preliminary and Full
Constellations. Payment of the $90 million interest bearing vendor financing
will be deferred until December 31, 1998 or the Full Constellation Date,
whichever is earlier. Thereafter, interest and principal will be repaid in
twenty equal quarterly installments over the next five years.
At December 31, 1995, approximately $21.5 million of the vendor financing
liability is interest bearing.
F-26
79
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. CREDIT FACILITY
On December 15, 1995, Globalstar entered into a $250 million credit
agreement (the "Credit Agreement") with a group of banks, which was guaranteed
by Loral (see Note 11 -- Globalstar Credit Agreement). The Credit Agreement
provides that Globalstar may select loan arrangements at varying interest rates,
including the Eurodollar rate plus 5/8%. Globalstar pays a commitment fee on
the unused portion. The Credit Agreement contains covenants requiring Globalstar
to meet certain financial ratios including minimum net worth of $200 million and
limits additional indebtedness and the payment of cash dividends. The Credit
Agreement expires on December 15, 2000.
In exchange for the guarantee, Globalstar and GTL entered into an agreement
to issue warrants to Loral to purchase an effective 8% interest in Globalstar on
a fully diluted basis. Subject to the approval of GTL's shareholders, warrants
to purchase 4,185,318 shares of GTL common stock at $26.50 per share will be
issued to Loral. Proceeds received by GTL for warrants exercised will in turn be
used to purchase Globalstar partnership interests under a one-for-one exchange
arrangement. Upon such shareholder approval, GTL will be issued warrants to
purchase an additional 1,131,168 general partnership interests in Globalstar
(representing an approximate 2% equity interest in Globalstar). If GTL
shareholder approval is not obtained, Globalstar will issue to Loral warrants to
purchase 4,086,957 partnership interests and no Globalstar warrants will be
issued to GTL. The warrants are subject to a vesting schedule, with 50% of the
warrants vesting on the date that loans are first made by the banks pursuant to
the Credit Agreement (the "Funding Date"), an additional 25% vesting on the
first anniversary of the Funding Date and the remaining 25% vesting on the
second anniversary of the Funding Date. Notwithstanding the foregoing, if the
Globalstar Credit Agreement shall not be in effect on any vesting date, the
warrants which would have otherwise vested on such date will be deemed to be
cancelled. The warrants may not be exercised until six months after Globalstar
commences initial operations and may not be transferred to third parties until
such exercise date. The estimated fair value of the warrant agreement with Loral
in exchange for its guarantee has been recorded as a deferred financing cost in
the accompanying financial statements. Globalstar has also agreed to pay Loral a
fee equal to 1.5% per annum of the average amount outstanding guaranteed under
the bank financing. Such fee will be deferred and will be paid with interest
commencing 90 days after the expiration of the bank financing. It is expected
that Globalstar's other strategic partners will assume a portion of the
guarantee; in such case, rights to a proportionate amount of the warrants and
fees will also be transferred. In addition, as a result of the Merger Agreement
(see Note 11 -- Subsequent Events), Globalstar is seeking an amendment to the
Credit Agreement. If such amendment is not obtained and the Credit Agreement is
cancelled, all warrants issued and issuable will be cancelled.
7. COMMITMENTS
The following is a schedule by years of future minimum lease payments (in
thousands) required under an operating lease that has an initial lease term in
excess of one year.
1996................................................ $ 869
1997................................................ 891
1998................................................ 914
1999................................................ 936
2000................................................ 633
------
Total minimum payments required..................... $4,243
======
Rent expense for the year ended December 31, 1995, and the period March 23
to December 31, 1994, was approximately $934,000 (including $650,000 paid to
Loral subsidiaries), and $373,000 (including $275,000 paid to Loral
subsidiaries), respectively.
F-27
80
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. PARTNERS' CAPITAL
Initial Capital Subscriptions
Prior to the commencement of Globalstar's operations on March 23, 1994,
Loral and Qualcomm undertook independent efforts at their own risk to explore
the feasibility of a Globalstar-type system. Efforts to develop the Globalstar
System were formalized with the initial funding of Globalstar on March 23, 1994
through capital subscriptions of $50,000,000 for 18,000,000 general partner
interests and $225,000,000 for an aggregate of 18,000,000 limited partner
interests. In connection with the initial capital subscriptions, the partners of
Globalstar agreed to reimburse Loral and Qualcomm for certain expenditures
totaling $18,382,000, incurred related to such efforts from January 1, 1993
through March 22, 1994. These expenditures included development costs and
marketing, general and administrative expenses related to the Globalstar System.
The statements of operations include the costs for these periods under the
heading Pre-Capital Subscription Period.
In addition, costs of $2,235,000 were incurred in connection with the FCC
license application. The aggregate expenditures by Loral and Qualcomm of
$20,617,000 were reimbursed through a credit of $11,309,000 issued to the
general partner as a reduction of its required capital subscription payment and
an agreement to repay Qualcomm $9,308,000 over a one-year period ($2,499,000 of
which remained outstanding at December 31, 1994). The reimbursed expenses of
$18,382,000 have been charged to partners' capital as of the date of the capital
subscription agreement and allocated to the partners' capital accounts in
accordance with the partnership agreement. The $2,235,000 of costs relating to
the FCC license application are included in the Partnership's balance sheet.
Stock Option Arrangements
Officers and employees of Globalstar are eligible to participate in GTL's
1994 Stock Option Plan (the "Plan"), which provides for nonqualified and
incentive stock options. The plan is administered by a stock option committee
(the "Committee"), appointed by the Board of Directors of GTL. The Committee
determines the option price (provided that in no event shall such option price
be less than the fair market value of the shares of common stock as of the date
such option is granted), the option's exercise date and the expiration date of
each option (provided no option shall be exercisable after the expiration of ten
years from the date of grant). Proceeds received by GTL for options exercised
will in turn be used to purchase Globalstar partnership interests under a
one-for-one exchange arrangement.
In September 1995, options to purchase 110,400 shares of GTL Common Stock
were granted under the Plan at an exercise price of $16.625. No options were
exercised or cancelled during the year. The options generally expire ten years
from the date of grant and become exercisable over the period stated in each
option, generally ratably over a five-year period. All options granted during
the year were non-qualified stock options. As of December 31, 1995, 139,600
shares of common stock were available for future grant under the Plan.
In September 1995, Loral, in its capacity as managing general partner,
granted certain directors and officers options to purchase 340,000 shares of the
GTL Common Stock owned by Loral at a weighted average exercise price of $27.87
(such prices were greater than or equal to the market price at grant date). Such
options are immediately exercisable, and expire 12 years from date of grant; no
options were exercised or cancelled during the year.
9. RELATED PARTY TRANSACTIONS
In addition to the transactions described in Notes 4, 5, 6, 7 and 8,
Globalstar has a number of other transactions with its affiliates. Globalstar
believes that the arrangements are as favorable to Globalstar as could be
obtained from unaffiliated parties. The following describes these related-party
transactions.
F-28
81
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
Globalstar has granted to SS/L an irrevocable, royalty-free, non-exclusive
license to use certain intellectual property expressly developed in connection
with the SS/L agreement provided that SS/L will not use, or permit others to
use, such license for the purpose of engaging in any business activity that
would be in material competition with Globalstar. Globalstar has similarly
agreed that it will not license such intellectual property if it will be used
for the purpose of designing or building satellites that would be in competition
with SS/L.
Globalstar has granted to Qualcomm an irrevocable, non-exclusive, worldwide
perpetual license to intellectual property owned by Globalstar in the Ground
Segment and developed pursuant to the Qualcomm agreement. Qualcomm may, pursuant
to such grant, use the intellectual property for applications other than the
Globalstar System provided that Qualcomm may not for a period of three years
after its withdrawal as a strategic partner or prior to the third anniversary of
the Full Constellation Date, whichever is earlier, engage in any business
activity that would be in competition with the Globalstar System. The grant of
intellectual property to Qualcomm described above is generally royalty free.
Under certain specified circumstances, however, Qualcomm will be required to pay
a 3% royalty fee on such intellectual property.
A support agreement was entered into among Qualcomm, Loral and Globalstar
pursuant to which Qualcomm agreed to (i) assist Globalstar and SS/L with
Globalstar's system design, (ii) support Globalstar and Loral with respect to
various regulatory matters, including the FCC application and (iii) assist
Globalstar and Loral in their marketing efforts with respect to Globalstar. For
the year ended December 31, 1995, and for the period March 23 through December
31, 1994, Qualcomm has received approximately $2,712,000 and $2,431,000,
respectively, for costs incurred in rendering such support and assistance.
Certain of Globalstar's limited partners have signed agreements granting
them the right to provide Globalstar System services to users in specific
countries on an exclusive basis, as long as specified minimum levels of
subscribers are met. These service providers will receive certain discounts from
Globalstar's expected pricing schedule generally over a five-year period.
Globalstar has entered into consulting agreements with certain limited
partners. Costs incurred under these arrangements for the year ended December
31, 1995, and for the period March 23 through December 31, 1994, were $1,411,000
and $471,000, respectively. Globalstar anticipates that similar agreements may
be entered into with other strategic partners in the future.
DECEMBER 31,
---------------------
1995 1994
------- -------
(IN THOUSANDS)
Current payable to affiliates consisted of:
SS/L................................................... $26,126 $22,046
Qualcomm............................................... 21,443 11,795
Other Loral affiliates................................. 2,070 1,146
------- -------
Total.................................................. $49,639 $34,987
======= =======
Commencing after the initiation of Globalstar services, LQP, the general
partner of LQSS, will be paid an annual management fee equal to 2.5% of
Globalstar's revenues up to $500 million plus 3.5% of revenues in excess of $500
million. Should Globalstar incur a net loss in any year following commencement
of services, the management fee for that year will be reduced by 50% and LQP
will reimburse Globalstar for management fee payments, if any, received in any
prior quarter of such year, sufficient to reduce its management fee for the year
to 50%. No management fees have been paid to date.
F-29
82
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
Globalstar employees are eligible to participate in the employee benefit
plans of a Loral subsidiary. Globalstar is charged for the actual costs of these
benefits which for the period March 23 through December 31, 1994, amounted to
$321,000, including $55,000 relating to pensions and retiree health care and
life insurance benefits. The costs incurred for the year ended December 31, 1995
amounted to $710,000, including $121,000 relating to pensions and retiree health
care and life insurance benefits. Globalstar employees are eligible to
participate in a defined benefit pension plan with voluntary contributions if
they are over 21 years old and have one year of service. Benefits are generally
based on participants' compensation, years of service and voluntary
contributions. Globalstar employees are also eligible for retiree health care
and life insurance benefits upon retirement from active service with at least 10
years of service. These benefits are funded primarily on a pay-as-you-go basis
with the retiree generally paying a portion of the cost through contributions,
deductibles and coinsurance provisions.
Globalstar leases its facility from a Loral subsidiary under an operating
lease requiring monthly payments of approximately $72,000. The lease expires in
August 2000; however Globalstar has the option to renew the lease for two
additional five-year periods.
10. REGULATORY MATTERS
Globalstar and its operations are, and will be, subject to substantial U.S.
and international regulation, including required regulatory approvals in each
country in which Globalstar intends to provide service. Globalstar's business
may be significantly affected by regulatory activities.
11. SUBSEQUENT EVENTS
Merger Agreement
On January 7, 1996, Loral and Lockheed Martin Corporation ("Lockheed
Martin") entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement") among Loral, Lockheed Martin and LAC Acquisition Corporation
("LAC"), a wholly owned subsidiary of Lockheed Martin, providing for the
transactions that will result in the defense electronics and systems integration
businesses of Loral becoming a subsidiary of Lockheed Martin. Concurrently with
the execution of the Merger Agreement, Loral, certain wholly-owned subsidiaries
of Loral and Lockheed Martin, entered into the Restructuring, Financing and
Distribution Agreement (the "Distribution Agreement"), which provides, among
other things, for (i) the transfer of Loral's space and communications
businesses, including its direct and indirect interests in Globalstar, GTL, SS/L
and other affiliated businesses, as well as certain other assets, to Loral Space
& Communications Ltd., a Bermuda company ("Loral SpaceCom"), (ii) the
distribution of all of the shares of Loral SpaceCom common stock to holders of
Loral common stock and persons entitled to acquire shares of Loral common stock
on a one-for-one basis (the "Spin-Off") each as of a record date (the "Spin-Off
Record Date") to be declared by the Board of Directors of Loral and to be a date
on or immediately prior to the consummation of the tender offer, and (iii) the
contribution by Lockheed Martin of $712,400,000, subject to reduction, to Loral
SpaceCom on or before the closing of the Merger, of which $344,000,000
represents payment for preferred stock, convertible into a 20% equity interest
in Loral SpaceCom, to be retained by Lockheed Martin following the Spin-Off and
the Merger. The contribution from Lockheed Martin is subject to reduction for
capital contributions by Loral to its space and communications businesses. On
March 6, 1996, Loral purchased $100,000,000 principal amount of GTL's 6 1/2%
Convertible Preferred Equivalent Obligations for $97,000,000 in cash (see
below).
Under the terms of the Merger Agreement, LAC commenced a cash tender offer
on January 12, 1996 for all outstanding shares of common stock, par value $.25
per share, of Loral at a price of $38.00 per share.
F-30
83
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS (CONTINUED)
Consummation of the tender offer is subject to, among other things, at least
two-thirds of the shares of Loral common stock, determined on a fully-diluted
basis, being validly tendered and not withdrawn prior to the expiration of the
tender offer, applicable regulatory approvals and the occurrence of the Spin-Off
Record Date.
Globalstar Credit Agreement
Under the terms of the Merger Agreement, Lockheed Martin agreed to assume
the obligations of Loral as a guarantor under the Credit Agreement (see Note
6 -- Credit Facility). Loral has agreed to assume approximately $88,600,000 of
this guarantee obligation and SS/L and certain other Globalstar strategic
partners have agreed to assume approximately $11,700,000 and $49,700,000
thereof, respectively. In return for providing the guarantee, the guarantors
will share proportionately in the warrants. Globalstar is seeking an amendment
to the Credit Agreement to permit the transactions contemplated in the Merger
Agreement and Distribution Agreement and believes that it will receive
satisfactory consents from the bank syndicate prior to the Distribution.
However, failure to obtain such consents would result in an event of default at
the time these transactions occur.
Sale of GTL Convertible Preferred Equivalent Obligations
On March 6, 1996, GTL issued Convertible Preferred Equivalent Obligations
(the "Securities") with a face value totaling $300,000,000 in a private
placement of which $100,000,000 principal amount was purchased by Loral at a
cost of $97,000,000. The Securities are subordinated to existing and future debt
obligations of GTL, are convertible into 4,615,385 shares of GTL Common Stock at
a conversion price of $65.00 per share, bear interest at 6 1/2% per annum
payable quarterly, are redeemable (at a premium which declines over time) by GTL
beginning in 2000 (or beginning in 1997 if GTL's stock price exceeds certain
defined price ranges), and, if still outstanding, must be redeemed by GTL on
March 1, 2006. Interest and redemption payments may be made by GTL in cash or
shares of stock (see below). In the event of a change in control of GTL (as
defined in the Securities agreement), holders may elect to convert their
Securities into shares of GTL Common Stock based on the then average market
price of GTL's stock, subject to GTL's option to redeem such obligations. GTL
has agreed to file a Registration Statement with the U.S. Securities and
Exchange Commission covering the Securities within 120 days.
The net proceeds of $290,000,000 from the issuance of the Securities were
used by GTL to purchase 4,615,385 Preferred Partnership Interests in Globalstar.
These Preferred Partnership Interests will convert to ordinary partnership
interests on a one-for-one basis upon any conversion of the Securities, will pay
a quarterly preferred distribution to GTL of 6 1/2% per annum, will be allocated
losses of the partnership only after all adjusted capital accounts of the
ordinary partnership interests have been reduced to zero, and are redeemable on
terms comparable to the Securities. Globalstar may elect to make the quarterly
preferred distribution to GTL in cash or general partnership interests. If such
distribution is made in cash, GTL must make its interest payment on the
Securities in Cash. Globalstar may elect to defer payment of the preferred
distribution; in such case, GTL may also elect to defer interest payment on the
Securities, however, holders of the Securities are entitled to certain
representation rights on the General Partners' Committee of Globalstar in the
event six consecutive interest payments are deferred.
F-31
84
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONDENSED BALANCE SHEETS
(In thousands, except partnership interest data)
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents..................................... $247,108 $ 71,602
Other current assets.......................................... 3,230 506
------------ ------------
Total current assets..................................... 250,338 72,108
Property and equipment, net...................................... 1,597 1,509
Globalstar System Under Construction:
Space segment................................................. 441,345 348,434
Ground segment................................................ 67,477 51,823
------------ ------------
508,822 400,257
Deferred FCC license costs....................................... 7,632 7,056
Deferred financing costs......................................... 23,285 24,461
------------ ------------
Total assets............................................. $791,674 $505,391
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Payable to affiliates......................................... $ 36,961 $ 49,639
Accrued expenses.............................................. 6,591 4,782
------------ ------------
Total current liabilities................................ 43,552 54,421
Deferred revenues................................................ 23,652 21,913
Vendor financing liability....................................... 61,584 42,219
Commitments and contingencies (Note 4)
Partners' capital:
Redeemable preferred partnership interests
(4,615,385 outstanding at March 31, 1996)................... 291,424 --
Ordinary partnership interests (47,000,000 outstanding)....... 348,861 364,237
Warrants...................................................... 22,601 22,601
------------ ------------
Total partners' capital.................................. 662,886 386,838
------------ ------------
Total liabilities and partners' capital.................. $791,674 $505,391
============ ============
Note: The December 31, 1995 balance sheet has been derived from audited
financial statements at that date.
See notes to condensed financial statements.
F-32
85
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONDENSED STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
CUMULATIVE
MARCH 23, 1994
(COMMENCEMENT OF
THREE MONTHS ENDED THREE MONTHS ENDED OPERATIONS) TO
MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996
------------------ ------------------ ----------------
Operating expenses:
Development costs........................ $ 11,377 $ 16,198 $ 95,510
Marketing, general and administrative.... 4,024 3,197 28,144
------- ------- --------
Total operating expenses................... 15,401 19,395 123,654
Interest income............................ 1,449 2,159 15,221
------- ------- --------
Net loss................................... 13,952 17,236 108,433
------- ------- --------
Preferred distribution and related increase
on redeemable preferred partnership
interests................................ 1,424 -- 1,424
------- ------- --------
Net loss applicable to ordinary partnership
interests................................ $ 15,376 $ 17,236 $109,857
======= ======= ========
See notes to condensed financial statements.
F-33
86
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
CUMULATIVE
MARCH 23, 1994
(COMMENCEMENT OF
THREE MONTHS ENDED THREE MONTHS ENDED OPERATIONS) TO
MARCH 31, 1996 MARCH 31, 1995 MARCH 31, 1996
------------------ ------------------ ----------------
Cash flows from operating activities:
Net loss.................................. $ (13,952) $ (17,236) $ (108,433)
Deferred revenues......................... 1,739 -- 23,652
Depreciation and amortization............. 1,568 73 2,081
Changes in operating assets and liabilities:
Other current assets...................... (2,724) (985) (3,230)
Payable to affiliates..................... (4,225) 6,476 2,134
Accrued expenses.......................... 1,809 294 6,591
--------- --------- ---------
Net cash used in operating activities....... (15,785) (11,378) (77,205)
--------- --------- ---------
Investing activities:
Globalstar System Under Construction...... (108,565) (42,511) (508,822)
Payable to affiliates for Globalstar
System Under Construction.............. (8,453) (2,340) 25,519
Vendor financing liability................ 19,365 -- 61,584
--------- --------- ---------
Cash used for Globalstar System........ (97,653) (44,851) (421,719)
Purchases of property and equipment....... (230) (73) (2,237)
Deferred FCC license costs................ (576) (539) (5,397)
Purchases of investments.................. -- (127,734) (126,923)
Maturity of investments................... -- -- 126,923
Other current assets...................... -- 190 --
--------- --------- ---------
Net cash used in investing activities....... (98,459) (173,007) (429,353)
--------- --------- ---------
Financing activities:
Deferred financing costs.................. (250) -- (2,125)
Proceeds of capital subscriptions
receivable............................. -- 131,980 282,441
Payment of accrued capital raising
costs.................................. -- -- (2,400)
Sale of partnership interests to
Globalstar Telecommunications
Limited................................ -- 185,750 185,750
Sale of redeemable preferred partnership
interests.............................. 290,000 -- 290,000
--------- --------- ---------
Net cash provided by financing activities... 289,750 317,730 753,666
--------- --------- ---------
Net increase in cash and cash equivalents... 175,506 133,345 247,108
Cash and cash equivalents, beginning of
period.................................... 71,602 73,560 --
--------- --------- ---------
Cash and cash equivalents, end of period.... $ 247,108 $ 206,905 $ 247,108
========= ========= =========
Noncash transactions:
Payable to affiliates..................... $ 9,308
=========
Accrual of capital raising costs.......... $ 2,400
=========
Deferred FCC license costs................ $ 2,235
=========
Warrants issued in exchange for debt
guarantee.............................. $ 22,601
=========
See notes to condensed financial statements.
F-34
87
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. The accompanying unaudited condensed financial statements have been prepared
by Globalstar, L.P. ("Globalstar") pursuant to the rules of the Securities and
Exchange Commission ("SEC") and, in the opinion of Globalstar, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of financial position, results of operations and cash flows.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such SEC rules. Globalstar believes
that the disclosures made are adequate to keep the information presented from
being misleading. The results of operations for the three months ended March 31,
1996 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 financial statements and notes thereto included in the annual
report of Globalstar Telecommunications Limited (the "Company" or "GTL").
2. ORGANIZATION AND BUSINESS
Globalstar, founded by Loral Corporation ("Loral") and QUALCOMM
Incorporated ("Qualcomm"), is building, and is preparing to launch and operate a
worldwide, low-earth orbit satellite-based wireless digital telecommunications
system (the "Globalstar System").
Globalstar, a Delaware limited partnership with a December 31 fiscal year
end, was formed in November 1993. It had no activities until March 23, 1994,
when it received capital subscriptions for $275 million and commenced
operations. The accompanying financial statements reflect the operations of
Globalstar from that date.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Development Stage Company
Globalstar is devoting substantially all of its present efforts to the
design, licensing, construction, testing and financing of the Globalstar System,
and establishing its business. Its planned principal operations have not
commenced. Accordingly, Globalstar is a development stage company as defined in
Statement of Financial Accounting Standards No. 7 "Accounting and Reporting by
Development Stage Enterprises".
Globalstar may encounter problems, delays and expenses, many of which may
be beyond Globalstar's control. These may include, but are not limited to,
problems related to technical development of the system, testing, regulatory
compliance, manufacturing and assembly, the competitive and regulatory
environment in which Globalstar will operate, marketing problems and costs and
expenses that may exceed current estimates. There can be no assurance that
substantial delays in any of the foregoing matters would not delay Globalstar's
achievement of profitable operations.
Preferred Partnership Distribution
Distributions accrue on the Redeemable Preferred Partnership Interests at
6 1/2% per annum, in addition Globalstar is increasing the carrying value to its
ultimate redeemable value. The distributions are recorded as reductions against
the ordinary partnership capital accounts.
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION
The Space Segment
Globalstar has entered into a contract with Space Systems/Loral, Inc.
("SS/L"), an affiliate of Loral and a limited partner of Loral/Qualcomm
Satellite Services, L.P., the managing general partner of Globalstar, to design,
manufacture, test and launch its 56 satellite constellation. The price of the
contract consists of three parts, the first for non-recurring work at a price
not to exceed $115.7 million, the second for recurring work at a fixed price of
$15.6 million per satellite (including certain performance incentives of up to
approximately
F-35
88
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION -- (CONTINUED)
$1.9 million per satellite) and the third for launch services and insurance. The
total contract price reflects certain scope of work claims negotiated with SS/L
during 1995. Termination by Globalstar of this contract would result in
termination fees, which may be substantial.
SS/L has agreed to obtain launch vehicles and arrange for the launch of
Globalstar's satellites on Globalstar's behalf at an estimated total cost of
$302 million for all 56 satellites, and obtain insurance to cover the
replacement cost of satellites or launch vehicles lost in the event of a launch
failure for an estimated cost of $92 million. In certain circumstances these
amounts are subject to equitable adjustment in light of future market
conditions, which may, in turn, be influenced by international political
developments. Any change in such assumptions may result in an increase in the
costs paid by Globalstar, which may be substantial. SS/L has entered into
subcontracts with certain of Globalstar's limited partners or affiliates
thereof. The design and manufacture of the payload modules will be performed by
Alcatel Espace at a fixed price of approximately $208 million, subject to
certain adjustments. Fixed price subcontracts in the amounts of $202 million,
$178 million and $41 million have also been awarded to Alenia Spazio S.p.A.,
Daimler-Benz Aerospace AG and Aerospatiale, respectively. Globalstar, SS/L and
Hyundai Electronics Industries Co. Ltd. ("Hyundai") have entered into a
subcontract providing work for Hyundai in an amount of approximately $44
million. Globalstar and SS/L have further agreed to support Hyundai in its
efforts as a satellite vendor, including providing training and transferring
certain technology know-how to Hyundai for compensation to be agreed upon among
the parties.
Globalstar's space segment contract with SS/L calls for a portion of the
contract price to be deferred as vendor financing and repaid over as long as a
five-year period, commencing upon the initial service and full coverage dates of
the Globalstar satellite constellations. Globalstar has agreements for
approximately $310 million of vendor financing from SS/L and its subcontractors,
$90 million of which is interest bearing.
The Ground Segment
Globalstar has entered into a contract with Qualcomm providing for the
design, development, manufacture, installation, testing and maintenance of four
gateways, two ground operations control centers and 100 pre-production
subscriber terminals. The contract provides for reimbursement to Qualcomm,
subject to a cap for certain joint development efforts, for contract costs
incurred, plus a 12% fee thereon and is currently estimated to total $350
million. The contract also includes a cost sharing arrangement for certain
technologies being developed by Qualcomm. Termination by Globalstar of its
contract with Qualcomm would result in delays and termination fees, which may be
substantial. A portion of the ground operations control center software is being
developed by Globalstar.
A letter agreement among Qualcomm, Globalstar and Hyundai grants to Hyundai
an option to become a licensee authorized to manufacture and sell Globalstar
subscriber terminals to service providers. Should Hyundai choose to exercise
this option, it would, for a five year period following Globalstar's In-Service
date, be the exclusive licensee authorized to manufacture and sell subscriber
terminals in South and North Korea.
Globalstar will receive from Qualcomm or its licensee(s) a payment of
approximately $400,000 for each installed gateway sold to a Globalstar service
provider. In addition, Globalstar will receive a payment of up to $10 on each
Globalstar subscriber terminal sold, until Globalstar's funding of that design
has been recovered.
Globalstar has entered into an agreement with a subsidiary of Loral for the
development and delivery of two satellite operations control centers and 33
telemetry and command units for the Globalstar System. The maximum contract
price is $25.1 million and provides for reimbursement to the Loral subsidiary
for contract costs incurred such as labor, materials, travel, license fees,
royalties and general and administrative expenses. The Loral subsidiary will
receive a 12% fee under the contract, 6% of which is payable at the time the
costs are
F-36
89
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
4. GLOBALSTAR SYSTEM UNDER CONSTRUCTION -- (CONTINUED)
incurred, with the remainder payable upon achievement of certain milestones.
Globalstar will own any intellectual property produced under the contract.
Total System Cost
At March 31, 1996, Globalstar had estimated the cost for the design,
construction and deployment of the Globalstar System, excluding working capital,
cash interest on anticipated borrowings and operating expenses to be
approximately $1.8 billion. Actual amounts may vary from this estimate and
additional funds would be required in the event of unforeseen delays, cost
overruns, launch failures or other technological risks or adverse regulatory
developments, or to meet unanticipated expenses.
Additional funds to complete the Globalstar System are expected to be
obtained through a combination of debt issuance, which may include an equity
component, projected service provider payments, projected net service revenues
from initial operations, anticipated payments received from the sale of gateways
and Globalstar subscriber terminals and placements of limited partnership
interests with new and existing strategic investors. Although Globalstar
believes it will be able to obtain this additional financing, there can be no
assurance that the financing will be available on favorable terms or on a timely
basis, if at all.
5. PARTNERS' CAPITAL
Sale of Redeemable Preferred Partnership Interests
On March 6, 1996, GTL purchased 4,615,385 Redeemable Preferred Partnership
Interests ("RPPIs") in Globalstar with the net proceeds of GTL's sale of
Convertible Preferred Equivalent Obligations (the "Securities") in the amount of
$290,000,000. The RPPIs will convert to ordinary general partnership interests
on a one-for-one basis upon any conversion of the Securities, will pay a
quarterly preferred distribution to GTL of 6 1/2% per annum, will be allocated
losses of the partnership only after all adjusted capital accounts of the
ordinary partnership interests have been reduced to zero, and are redeemable on
terms comparable to the Securities. If still outstanding, the RPPIs must be
redeemed by Globalstar on March 1, 2006 for the aggregate amount of
$300,000,000, plus all unpaid distributions. Globalstar may elect to make the
quarterly preferred distribution to GTL in cash or general partnership
interests. If such distribution is made in cash, GTL must make its interest
payment on the Securities in cash. Globalstar may elect to defer payment of the
preferred distribution; in such case, GTL may also elect to defer interest
payment on the Securities, however, holders of the Securities are entitled to
certain representation rights on the General Partners' Committee of Globalstar
in the event six consecutive interest payments are deferred.
6. SUBSEQUENT EVENTS
Sale of Redeemable Preferred Partnership Interests
On April 3, 1996, GTL purchased an additional 153,846 RPPIs in Globalstar
with the net proceeds from the additional sale of the Securities in the amount
of $9,700,000. All obligations and rights are consistent with the original
offering, see Note 5 -- Partners' Capital.
Effective Date of the Merger
On April 23, 1996, the merger between Loral and Lockheed Martin Corporation
was completed. In conjunction with the merger, Loral's space and communications
businesses, including its direct and indirect interests in Globalstar, GTL, SS/L
and other affiliated businesses, as well as certain other assets, have been
transferred to Loral Space & Communications Ltd., a Bermuda corporation.
F-37
90
INDEPENDENT AUDITORS' REPORT
Space Systems/Loral, Inc.:
We have audited the accompanying consolidated balance sheets of Space
Systems/Loral, Inc. and its subsidiaries as of March 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended March 31, 1996. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Space Systems/Loral, Inc. and
its subsidiaries at March 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1996 in conformity with generally accepted accounting principles.
San Jose, California
April 29, 1996
F-38
91
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
---------------------
1996 1995
-------- --------
ASSETS
Current assets:
Cash and cash equivalents............................................ $126,863 $ 52,222
Contracts in process, net............................................ 251,271 203,406
Inventories.......................................................... 36,582 9,853
Deposits and other current assets.................................... 11,698 20,129
-------- --------
Total current assets.............................................. 426,414 285,610
Property, plant and equipment.......................................... 269,532 247,851
Less accumulated depreciation and amortization......................... 111,293 90,530
-------- --------
158,239 157,321
Cost in excess of net assets acquired, less amortization............... 232,662 239,406
Long-term receivables.................................................. 63,127 52,900
Investments............................................................ 6,284 7,837
Prepaid pension costs and other assets................................. 21,951 23,401
-------- --------
$908,677 $766,475
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $132,640 $ 63,344
Accrued payroll...................................................... 24,157 17,812
Customer advances.................................................... 126,318 115,950
Income taxes payable................................................. 3,529 87
Deferred income taxes................................................ 45,364 50,280
Other current liabilities............................................ 7,227 6,860
-------- --------
Total current liabilities......................................... 339,235 254,333
Long-term debt......................................................... 65,052 34,040
Deferred income taxes.................................................. 20,944 6,335
Postretirement and other liabilities................................... 33,463 34,000
Minority interest in ISTI.............................................. 2,115 2,266
Commitments and contingencies (Note 8)
Shareholders' equity:
Preferred stock, $.10 par value; 100,000 authorized and unissued
shares............................................................ -- --
Common stock, $.10 par value; 100,000 shares authorized, 4,000 shares
issued and outstanding............................................ 466,668 466,668
Accumulated deficit.................................................. (18,800) (31,167)
-------- --------
Total shareholders' equity........................................ 447,868 435,501
-------- --------
$908,677 $766,475
======== ========
See notes to consolidated financial statements.
F-39
92
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
FOR THE YEARS ENDED MARCH 31,
------------------------------------
1996 1995 1994
---------- -------- --------
Revenues from contracts................................... $1,121,619 $633,717 $596,267
Contract costs............................................ 1,087,213 605,932 571,303
---------- -------- --------
Gross profit.............................................. 34,406 27,785 24,964
Amortization of cost in excess of net assets acquired..... 6,744 6,744 6,744
Management fee............................................ 5,608 3,169 2,981
---------- -------- --------
Operating income.......................................... 22,054 17,872 15,239
Interest income........................................... 9,652 4,538 1,962
Interest expense.......................................... 3,301 3,214 3,396
---------- -------- --------
Income before income taxes, minority interest and equity
in net loss of affiliate................................ 28,405 19,196 13,805
Provision for income taxes................................ 15,180 11,946 10,458
---------- -------- --------
Income before minority interest and equity in net loss of
affiliate............................................... 13,225 7,250 3,347
Minority interest in losses of ISTI....................... 151 360 244
Equity in net loss of affiliate........................... (1,009) (2,056)
---------- -------- --------
Net income................................................ $ 12,367 $ 5,554 $ 3,591
========== ======== ========
See notes to consolidated financial statements.
F-40
93
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
-------------------
SHARES ACCUMULATED
ISSUED AMOUNT DEFICIT TOTAL
------ -------- ----------- --------
Balance March 31, 1993........................... 4,000 $466,668 $ (40,312) $426,356
Net income....................................... 3,591 3,591
----- -------- -------- --------
Balance March 31, 1994........................... 4,000 466,668 (36,721) 429,947
Net income....................................... 5,554 5,554
----- -------- -------- --------
Balance March 31, 1995........................... 4,000 466,668 (31,167) 435,501
Net income....................................... 12,367 12,367
----- -------- -------- --------
Balance March 31, 1996........................... 4,000 $466,668 $ (18,800) $447,868
===== ======== ======== ========
See notes to consolidated financial statements.
F-41
94
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED MARCH 31,
------------------------------------
1996 1995 1994
-------- --------- ---------
Cash flows from operating activities:
Net income............................................. $ 12,367 $ 5,554 $ 3,591
Depreciation and amortization.......................... 29,993 29,468 28,393
Deferred income taxes.................................. 10,237 11,507 9,270
Minority interest in losses of ISTI.................... (151) (360) (244)
Equity in net loss of LQSS............................. 1,009 2,056
Changes in operating assets and liabilities:
Contracts in process, including long-term
receivables....................................... (58,092) 2,293 (84,430)
Inventories......................................... (26,729) 9,919 (48)
Deposits and other current assets................... 8,431 (13,359) (3,846)
Prepaid pension cost and other assets............... 1,450 2,687 (1,160)
Accounts payable and other current liabilities...... 79,450 27,539 2,199
Customer advances................................... 10,368 39,685 66,115
Postretirement and other liabilities................ (537) (1,150) (533)
-------- --------- ---------
Net cash provided by operating activities................ 67,796 115,839 19,307
-------- --------- ---------
Investing activities:
Capital expenditures................................... (24,167) (23,386) (22,569)
Investment in LQSS..................................... (3,600) (2,400)
Investment in Orion.................................... (5,000)
-------- --------- ---------
(24,167) (31,986) (24,969)
-------- --------- ---------
Financing activities:
Proceeds from borrowings............................... 100,740 151,791 364,249
Repayment of debt...................................... (69,728) (210,000) (345,000)
Sale of minority interest in ISTI...................... 2,870
-------- --------- ---------
31,012 (58,209) 22,119
-------- --------- ---------
Net increase in cash and cash equivalents................ 74,641 25,644 16,457
Cash and cash equivalents, beginning of year............. 52,222 26,578 10,121
-------- --------- ---------
Cash and cash equivalents, end of year................... $126,863 $ 52,222 $ 26,578
======== ========= =========
Supplemental information:
Interest paid during the year, net of amounts
capitalized......................................... $ 2,440 $ 2,099 $ 2,813
======== ========= =========
Income taxes paid during the year...................... $ 1,501 439 --
======== ========= =========
See notes to consolidated financial statements.
F-42
95
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation:
Space Systems/Loral, Inc. ("SS/L"), a corporate joint venture owned by
Loral Corporation ("Loral") (see Note 11) and four international aerospace and
communications companies (the "Alliance Partners"), designs and produces
geosynchronous and low-earth orbit satellites and subsystems for communications,
remote earth sensing and direct-to-home broadcast television. Loral, through its
wholly owned subsidiaries Loral Aerospace Holdings, Inc. ("LAH") and Loral
Aerospace Corp. ("Loral Aerospace"), owns 51% of the common stock of SS/L.
Certain partnerships affiliated with Lehman Brothers Holdings Inc. (the "Lehman
Partnerships") own 627.3 shares of LAH Series S Preferred Stock. Each share of
Series S Preferred Stock represents a beneficial interest in one share of common
stock of SS/L. Due to the LAH Series S Preferred Stock held by the Lehman
Partnerships, Loral has an effective 32.7% economic interest in SS/L. SS/L
operates under various agreements which specify actions which can be taken by it
or its equity investors. The consolidated financial statements include the
accounts of SS/L, its wholly owned foreign sales corporation subsidiary, and
International Space Technology, Inc. ("ISTI"), a partially owned, corporate
joint venture. Investments in partnerships are accounted for on the equity
method. All significant intercompany balances and transactions have been
eliminated.
Use of Estimates in Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the amounts of expenses reported for the period. Actual results
could differ from estimates.
Cash and Cash Equivalents:
Cash equivalents consist of money market investments with an original
maturity of less than 90 days.
Financial Instruments:
SS/L's financial instruments consist of cash equivalents, foreign exchange
contracts, contracts-in-process, long-term receivables and long-term debt.
Except as discussed in Note 4, SS/L believes that the carrying value of its
financial instruments approximates fair value.
Concentration of Credit Risk and Major Customers:
Financial instruments which potentially subject SS/L to concentrations of
credit risk consist principally of cash and cash equivalents, foreign exchange
contracts (See Note 4) and contracts in process and long-term receivables
("Contract Receivables"). SS/L's cash and cash equivalents are maintained with
high-credit-quality financial institutions. SS/L's customers are U.S. and
foreign governments and large multinational corporations. The credit worthiness
of such institutions is generally substantial and management believes that its
credit evaluation, approval and monitoring processes mitigate potential credit
risks. SS/L generally obtains insurance to mitigate collection risk associated
with the in-orbit delivery of satellites.
Sales to the U.S. government represented 10%, 23% and 23% of revenues from
contracts for the years ended March 31, 1996, 1995 and 1994, respectively. Sales
to foreign customers, primarily in Asia, represented 27%, 15% and 31% of
revenues from contracts for the years ended March 31, 1996, 1995 and 1994,
respectively. In 1996, two commercial customers represented 30% and 13% of
revenues from contracts. In 1995, four commercial customers represented 23%,
20%, 15% and 13% of revenues from contracts. Two commercial customers
represented 35% and 29% of revenues from contracts in 1994.
F-43
96
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Inventories:
Inventories consist principally of high reliability parts and are valued at
the lower of cost or market. Cost is determined using the first-in-first-out
(FIFO) or average cost method.
Revenue Recognition:
Revenue under long-term fixed-price contracts is recognized using the
cost-to-cost percentage-of-completion method. Contract revenue includes
estimated orbital incentives discounted to present value at the launch date.
Contract costs include the development effort required for the production of
high-technology satellites, non-recurring engineering and design efforts in
early periods of contract performance, as well as the cost of qualification
testing requirements.
Revenue under cost-reimbursable type contracts is recognized as costs are
incurred; incentive fees are estimated and recognized over the contract term.
A significant portion of SS/L's revenue is associated with long-term
contracts in which there are inherent risks. These risks include forecasting
costs and schedules, contract revenue related to contract performance (including
orbital incentives), the potential for component obsolescence in connection with
long-term procurements and other factors characteristic of the industry.
Contracts with the U.S. government are subject to termination by the U.S.
government for convenience or for default. Other government contract risks
include dependence on future appropriations and administrative allotment of
funds and changes in government policies. Costs incurred under U.S. government
contracts are subject to audit. Management believes the results of such audits
will not have a material effect on SS/L's financial position or results of
operations.
Losses on contracts are recognized when determined. Revisions in profit
estimates are reflected in the period in which the conditions that require the
revision become known and are estimable.
In accordance with industry practice, contracts-in-process include unbilled
amounts relating to contracts and programs with long production cycles, a
portion of which may not be billable within one year.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Generally, when assets
are retired or otherwise disposed of, the cost and accumulated depreciation are
eliminated from the accounts and any gain or loss is included in the results of
operations. Depreciation is provided using predominantly accelerated methods
over the estimated useful lives of the related assets (buildings and
improvements 20 to 45 years; all other assets 2 to 10 years). Leasehold
improvements are amortized over the shorter of the lease term or the estimated
useful lives of the improvements.
Foreign Exchange Contracts:
SS/L enters into foreign exchange contracts as hedges against exchange rate
fluctuations of future accounts receivable and accounts payable denominated in
foreign currencies. Realized and unrealized gains and losses on foreign exchange
contracts designated as hedges are deferred and recognized over the lives of the
related contracts in process.
F-44
97
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Cost in Excess of Net Assets Acquired:
Cost in excess of the fair value of net assets acquired is being amortized
over 40 years using the straight-line method. Accumulated amortization was
$36,825,000 and $30,081,000 at March 31, 1996 and 1995, respectively.
The carrying amount of Cost in Excess of Net Assets Acquired is evaluated
on a recurring basis. Current and future profitability as well as current and
future undiscounted cash flows, excluding financing costs, are primary
indicators of recoverability. For the three years ended March 31, 1996, there
was no adjustment to the carrying amount of the Cost in Excess of Net Assets
Acquired resulting from these evaluations.
Accounting Pronouncements:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"),
which is required to be adopted by fiscal 1997. SFAS 121 establishes the
accounting standards for the impairment of long-lived assets, certain intangible
assets and cost in excess of net assets acquired to be held and used, and for
long-lived assets and certain intangible assets to be disposed of. SS/L does not
expect the adoption of SFAS 121 to have a material impact on its financial
position or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which is required to be adopted by fiscal 1997. SFAS
123 establishes accounting and disclosure requirements using a fair value based
method of accounting for stock based employee compensation plans, including
stock arrangements by investors for the benefit of their investees. Under SFAS
123, SS/L may either adopt the new fair value based accounting method or
continue the intrinsic value based method and provide pro forma disclosures of
net income as if the accounting provisions of SFAS 123 had been adopted. SS/L
intends to elect to continue the intrinsic value method of accounting for stock
based employee compensation plans and provide the required pro forma
disclosures; therefore such adoption will have no effect on SS/L's operations.
2. CONTRACTS-IN-PROCESS:
MARCH 31,
---------------------
1996 1995
-------- --------
(IN THOUSANDS)
U.S government contracts:
Amounts billed............................................... $ 11,374 $ 8,319
Unbilled contract receivables................................ 12,927 15,562
-------- --------
24,301 23,881
-------- --------
Commercial contracts:
Amounts billed............................................... 122,313 35,217
Unbilled contract receivables................................ 104,657 144,308
-------- --------
226,970 179,525
-------- --------
$251,271 $203,406
======== ========
F-45
98
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. CONTRACTS-IN-PROCESS: (CONTINUED)
Unbilled amounts include recoverable costs and accrued profit on progress
completed which has not been billed. Such amounts are billed upon shipment of
the product, achievement of contractual milestones, or completion of the
contract and are reclassified to billed receivables.
Payment terms and conditions vary between contracts, however, SS/L
generally requires, for commercial contracts, advance deposits equal to varying
percentages of the total contract amount.
Billed receivables relating to long-term contracts shown above are expected
to be collected within one year. Upon launch of a satellite, SS/L reclassifies
the orbital component of unbilled receivables to long term. During the years
ended March 31, 1996 and 1995, $10,227,000 and $41,973,000, respectively, were
reclassified to long-term receivables. Unbilled receivables include $5,871,000
of orbital receivables expected to be collected in fiscal 1997. Long-term
receivable balances related to satellite orbitals at March 31, 1996 are
scheduled to be received as follows (in thousands):
1998...................................................... $ 7,863
1999...................................................... 7,817
2000...................................................... 7,194
2001...................................................... 7,080
Thereafter................................................ 33,173
------
$ 63,127
======
Selling, general and administrative expenses for the years ended March 31,
1996, 1995 and 1994 were $40,273,000, $31,163,000 and $26,398,000 and include
independent research and development costs of $11,171,000, $9,471,000 and
$6,697,000, respectively.
3. PROPERTY, PLANT AND EQUIPMENT:
MARCH 31,
----------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Land........................................................... $ 22,300 $ 22,300
Buildings and improvements..................................... 58,721 57,331
Machinery, equipment, furniture and fixtures................... 167,406 151,389
Leasehold improvements......................................... 5,317 5,133
Construction-in-process........................................ 15,788 11,698
-------- --------
$ 269,532 $ 247,851
======== ========
Depreciation and amortization expense was $23,249,000, $22,724,000 and
$21,649,000 and capitalized interest costs were $127,000, $100,000 and $373,000
for the years ended March 31, 1996, 1995 and 1994, respectively.
4. FINANCING ARRANGEMENTS:
Foreign currency exchange facilities:
At March 31, 1996 and 1995, SS/L had foreign currency exchange contracts
(forwards and swaps) with several banks to purchase and sell foreign currencies,
primarily Japanese yen, aggregating $246,483,000 and $296,349,000, respectively.
Such contracts were designated as hedges of certain foreign contracts and
subcontracts to be performed through May 2006. The fair value of these
contracts, based on quoted market prices, was $217,382,000 and $352,273,000 at
March 31, 1996 and 1995, respectively. At March 31, 1996
F-46
99
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS: (CONTINUED)
deferred gains on forward contracts to sell yen were $23,995,000 and deferred
losses on forward contracts to purchase foreign currencies, primarily yen, were
$5,106,000. At March 31, 1995 deferred losses on forward contracts to sell yen
were $53,836,000 and deferred gains on forward contracts to purchase yen were
$2,088,000. SS/L is exposed to credit-related losses in the event of
nonperformance by counter parties to these financial instruments, but does not
expect any counter party to fail to meet its obligation.
The maturity of foreign currency exchange contracts held at March 31, 1996
is consistent with the contractual or expected timing of the transactions being
hedged, principally receipt of customer payments under long-term contracts and
payments to vendors under subcontracts. These foreign exchange contracts mature
as follows (in thousands):
TO PURCHASE TO SELL
-------------------- ---------------------
AT AT AT AT
YEARS CONTRACT MARKET CONTRACT MARKET
TO MATURITY RATE RATE RATE RATE
------------------------------------------ -------- ------- -------- --------
1......................................... $ 40,157 $37,712 $ 97,734 $ 87,595
2 to 5.................................... 20,461 17,800 67,330 56,007
6 to 10................................... 15,127 14,064
Thereafter................................ 5,674 4,204
------- ------- -------- --------
$ 60,618 $55,512 $185,865 $161,870
======= ======= ======== ========
Debt
Long-term debt comprises:
MARCH 31,
-------------------
1996 1995
------- -------
(IN THOUSANDS)
Export -- Import credit facility
(weighted average interest rate of 5.8% and 5.0%,
respectively).................................................. $32,184 $34,040
Note purchase facility
(weighted average interest rate of 4.26%)...................... 25,868
Revolving credit agreement
(weighted average interest rate of 8.25%)...................... 7,000
------- -------
$65,052 $34,040
======= =======
SS/L borrowed a total of $42,912,000 under an export-import credit facility
("the EX-IM Facility") with a Japanese bank. The EX-IM Facility is fully secured
by a letter of credit arrangement with another bank. At March 31, 1996, no
amounts remained available for borrowing under this facility. Principal is to be
repaid in semiannual installments through November 1, 2005. Interest is charged
at the London Interbank Offer Rate (LIBOR) less 1/4% and is payable
semiannually on May 1 and November 1.
In 1994 SS/L entered into a $140,000,000 note purchase facility (the "Note
Purchase Facility") with an Italian bank. Borrowings are determined by formula
and are made in accordance with a specified schedule through the earlier of June
30, 1998, or until the facility is fully disbursed. Principal is to be repaid on
the earlier of twenty three months from the final acceptance date of certain
satellite deliveries or April 30, 2000. Interest is charged at a weighted
average rate of 4.26% and is payable semiannually. There were no borrowings
under this facility during the year ended March 31, 1995. All borrowings under
this facility reduce the amount available under SS/L's Revolving Credit
Agreement (see below).
F-47
100
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS: (CONTINUED)
SS/L has a $250,000,000 revolving credit facility ("the Revolving Credit
Agreement") with a group of banks, which provides for borrowings through
December 23, 1997 at which time the Revolving Credit Agreement expires.
Borrowings are unsecured and bear interest, at SS/L's option, at various rates
based on the lead bank's prime rate, or margins over the Federal Funds rate or
LIBOR. SS/L pays a commitment fee on the unused portion of the Revolving Credit
Agreement. The LIBOR interest rate is subject to a reduction of one-tenth of 1%
based on the achievement of a specific financial covenant. SS/L achieved this
covenant for the years ended March 31, 1995 and 1996. The Revolving Credit
Agreement contains customary covenants requiring SS/L to maintain specified net
worth and debt to equity ratios, an interest coverage ratio and a current asset
to debt ratio. In addition, the Revolving Credit Agreement limits amounts that
may be paid as dividends and advances to and from affiliates. The Revolving
Credit Agreement further provides that the total advances and letters of credit
outstanding may not exceed $250,000,000.
Subsequent to March 31, 1996, SS/L received authorization under the EX-IM
Facility, the Note Purchase Facility and the Revolving Credit Agreement to
permit the transaction under the definitive Agreement and Plan of Merger
described in Note 11.
The aggregate maturities of long-term debt for the years 1998 through 2001
are as follows: $22,020,000, $2,145,000, $2,146,000 and $28,013,000.
SS/L has other outstanding letters of credit of approximately $61,728,000
at March 31, 1996.
5. INCOME TAXES:
The components of the provision for income taxes are as follows:
YEAR ENDED MARCH 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
-------------------------------
Current:
Federal............................................. $ 1,836 $ 198
State, local & foreign.............................. 3,107
------- -------
4,943 198
Deferred, principally federal......................... 10,237 $11,946 10,260
------- ------- -------
Total............................................... $15,180 $11,946 $10,458
======= ======= =======
The provision for income taxes excludes a deferred tax benefit of $544,000
and $1,107,000 for the years ended March 31, 1996 and 1995, respectively,
related to SS/L's share of Globalstar, L.P. losses (see Note 6).
F-48
101
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES: (CONTINUED)
The income tax provision differs from the amount computed by applying the
statutory federal income tax rate to income before income taxes for the
following reasons:
YEAR ENDED MARCH 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Provision at statutory federal income tax rate........ $ 9,942 $ 6,719 $ 4,832
State income taxes, net of federal income tax
benefit............................................. 2,219 1,767 1,300
Non-deductible goodwill amortization.................. 2,360 2,360 2,360
Impact of increase in federal rate on deferred tax
liability........................................... 956
Losses of ISTI........................................ 330 875 672
Other................................................. 329 225 338
------- ------- -------
Total provision for income taxes............ $15,180 $11,946 $10,458
======= ======= =======
Deferred income taxes have been calculated using an asset and liability
method. The deferred tax liability on the accompanying balance sheet arises from
the tax effect of the temporary differences between the carrying amounts of
assets and liabilities for financial and income tax reporting purposes, and is
principally related to use of the long-term contract method of accounting for
tax purposes, the liability for other postretirement benefits and differences in
tax and book bases of assets and liabilities acquired.
At March 31, 1996, the reported deferred tax liability is net of future tax
benefits of $6,864,000 arising from net operating loss carryforwards which
expire beginning in 2007. Tax carryforward benefits will be used in the periods
that net deferred tax liabilities mature.
The significant components of the deferred income tax assets and
liabilities are:
MARCH 31,
-------------------
1996 1995
------- -------
(IN THOUSANDS)
Deferred tax assets:
Postretirement benefits other than pensions.................... $13,719 $13,313
Net operating loss carryforwards............................... 6,864 16,212
Compensation and benefits...................................... 4,681 3,355
Other, net..................................................... 4,376 1,449
------- -------
29,640 34,329
Deferred tax liabilities:
Income recognition on long-term contracts...................... 60,315 56,791
Property, plant and equipment.................................. 26,869 26,032
Pension costs.................................................. 8,764 8,121
------- -------
95,948 90,944
------- -------
Net deferred income tax liability................................ $66,308 $56,615
======= =======
6. INVESTMENTS:
In March 1994, SS/L agreed to purchase an 11% limited partnership interest
in Loral Qualcomm Satellite Services, L.P. ("LQSS") for $6,000,000. LQSS's only
asset is 18,000,000 general partnership interests in Globalstar, L.P.
("Globalstar"), which represents a 38.3% interest in Globalstar at March 31,
1996 and 1995. Globalstar was formed to design, construct and operate a
worldwide, low-earth orbit satellite-
F-49
102
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS: (CONTINUED)
based digital telecommunications system. SS/L's investment is net of its share
of Globalstar's pretax losses of $1,553,000 and $3,163,000 in the years ended
March 31, 1996 and 1995, respectively.
In connection with the construction of the Globalstar system, Globalstar
entered into a $1.4 billion contract with SS/L to design, manufacture, test and
obtain launch vehicles and launch services for its constellation of 56
satellites. Under the contract, SS/L has agreed to act as Globalstar's agent to
obtain launch vehicles, arrange for the launch of Globalstar satellites and
obtain insurance to cover the replacement cost of satellites or launch vehicles
lost in the event of a launch failure. SS/L has entered into subcontracts with
certain of Globalstar's direct or indirect limited partners, some of whom are
shareholders of SS/L. Revenue recorded under the Globalstar contract for the
years ended March 31, 1996, 1995 and 1994 was $336,977,000, $97,258,000 and
$9,522,000, respectively. Billed and unbilled receivables from Globalstar were
$10,082,000 and $72,535,000, and $9,700,000 and $20,579,000 at March 31, 1996
and 1995, respectively.
Globalstar's space segment contract with SS/L calls for approximately $310
million of the contract billings to be deferred as vendor financing. Of the $310
million, $90 million is interest bearing at the 30-day LIBOR rate plus 3% per
annum. The remaining $220 million of vendor financing is non-interest bearing.
Globalstar will repay the non-interest bearing portions as follows: $49 million
following the launch and acceptance of 24 or more satellites (the "Preliminary
Constellation"), $61 million upon the launch and acceptance of 48 or more
satellites (the "Full Constellation"), and the remainder in equal installments
over the five-year period following acceptance of the Preliminary and Full
Constellations. SS/L's subcontractors have assumed a portion of this vendor
financing which totals approximately $121 million and will be paid on similar
terms. Payment of the $90 million interest bearing vendor financing will be
deferred until December 31, 1998 or the Full Constellation Date, whichever is
earlier. Thereafter, interest and principal will be repaid in twenty equal
quarterly installments over the next five years.
At March 31, 1996, $33,849,000 of the vendor financing receivable is
interest bearing.
SS/L has agreed to guarantee approximately $11,700,000 of Globalstar's
obligation under a $250,000,000 credit agreement. In return for providing such
guarantee, SS/L will receive warrants to purchase 195,094 shares of Globalstar
Telecommunications Limited common stock at $26.50 per share.
In April 1994, SS/L purchased common stock representing a five percent
interest in Orion Network Systems, Inc. for $5,000,000. At March 31, 1996, the
carrying value of the investment approximated market value. The investment is
accounted for using the cost method.
7. RELATED PARTY TRANSACTIONS:
SS/L, its shareholders, and Loral have entered into a stockholders'
agreement ("the Stockholders' Agreement") which provides for management fees to
be paid to Loral, ranging from 0.5% to 1% of sales, as defined, depending upon
SS/L's operating performance. Such management fees were $5,608,000, $3,169,000
and $2,981,000 for the years ended March 31, 1996, 1995 and 1994, respectively.
The Stockholders' Agreement also requires SS/L to pay Loral an annual fee
for overhead reimbursement, not to exceed 1% of SS/L's adjusted sales, as
defined, for each fiscal year. This fee amounted to $3,427,000, $3,287,000 and
$3,512,000 for the years ended March 31, 1996, 1995 and 1994, respectively.
SS/L was billed for certain operational, executive, administrative,
financial, legal and other services provided by LAC and other Loral divisions,
and SS/L charged LAC certain overhead costs. Net costs billed to SS/L by LAC and
other Loral divisions were $7,066,000, $8,518,000 and $5,934,000 for the years
ended March 31, 1996, 1995, and 1994, respectively.
F-50
103
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS: (CONTINUED)
In connection with contract performance, SS/L provides services to and
acquires services from Loral and its affiliated companies. A summary of such
transactions and balances is as follows:
YEAR ENDED MARCH 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Revenue from services sold............................ $ 1,096 $ 1,103 $ 672
Cost of purchased services............................ 28,228 27,631 16,441
Balances at year end:
Receivable.......................................... $ 430 $ 724 $ 2,875
Payable............................................. 15,823 7,272 10,272
------- ------- -------
Due to Loral affiliates, net.......................... $15,393 $ 6,548 $ 7,397
======= ======= =======
SS/L's sales to, purchases from, and balances with the Alliance partners
are as follows:
YEAR ENDED MARCH 31,
--------------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
Revenue from services sold........................... $ 32,561 $ 3,073 $ 1,420
Cost of purchased services........................... 249,092 85,489 63,255
Balances at year end:
Receivable......................................... $ 15,066 $ 840 $ 571
Payable............................................ 38,257 19,521 8,541
Loral granted certain key employees of SS/L options to purchase shares of
Loral common stock. At March 31, 1996, 1995 and 1994, options to purchase
466,304, 445,788 and 387,996 shares of Loral common stock were outstanding,
respectively, (adjusted for a two for one stock split in each of fiscal years
1996 and 1994). SS/L has agreed to pay Loral any difference between the market
value of Loral stock at the time of exercise and the option price for up to
200,000 shares authorized by SS/L's stockholders, and to reimburse Loral for any
tax benefit resulting from shares granted in excess of that amount. For the
years ended March 31, 1996, 1995 and 1994, $4,510,000, $726,000 and $533,000,
respectively, of compensation expense was accrued for the excess of market value
of Loral stock over exercise prices for options exercisable subject to the
authorized limitation.
8. COMMITMENTS AND CONTINGENCIES:
At March 31, 1996, SS/L was party to various noncancellable real estate
leases with minimum aggregate rental commitments payable as follows (in
thousands):
1997............................................................... $ 5,935
1998............................................................... 3,906
1999............................................................... 1,996
2000............................................................... 1,827
2001............................................................... 1,488
Thereafter......................................................... 14,880
-------
$ 30,032
=======
F-51
104
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Leases covering major items of real estate contain renewal and/or purchase
options which may be exercised by SS/L. Rent expense was $6,440,000, $4,805,000
and $4,731,000 for the years ended March 31, 1996, 1995, and 1994, respectively.
Due to the long lead times required to produce purchased parts, SS/L has
entered into various purchase commitments with suppliers. These commitments
aggregated $841,376,000 at March 31, 1996.
SS/L is party to various litigation arising in the normal course of its
operations. In the opinion of management, the ultimate liability for these
matters, if any, will not have a material adverse effect on SS/L's financial
position or results of operations.
Under the Stockholders' Agreement, a change of control of Loral Corporation
within the meaning of such agreement would provide each of SS/L's Alliance
Partners with the right to (i) put their equity interests back to SS/L at fair
market value or (ii) purchase a pro rata share of Loral's equity interest in
SS/L for fair market value (subject to receiving certain authorizations
including U.S. government approval). In addition, an Alliance Partner which
dissents against certain actions of the Board of Directors approved by Loral and
at least two other Alliance Partners, including material changes in SS/L's
strategic plan and related lines of business, a merger, sale of substantially
all assets of SS/L, or sale of stock which increases outstanding shares by more
than 10%, may offer its interests to the other Alliance Partners at 90% of fair
market value; if not purchased by the Alliance Partners, SS/L would be required
to repurchase such shares at that price. In the event any of SS/L's Alliance
Partners put their interests back to SS/L, Loral will acquire such interests.
(See Note 11.)
9. PENSIONS AND OTHER EMPLOYEE BENEFITS:
Pensions:
SS/L maintains a contributory defined benefit pension plan covering
substantially all employees. Benefits are based on members' salaries and years
of service. This plan is administered under the direction of LAH. SS/L's funding
policy is generally to contribute in accordance with cost accounting standards
that affect government contractors, subject to the Internal Revenue Code and
regulations thereon. Contributions for the year ended March 31, 1996, 1995 and
1994 were $3,990,000, $58,000 and $3,993,000, respectively. Plan assets are
invested primarily in U.S. government and agency obligations and listed stocks
and bonds.
Net pension costs include the following components:
YEAR ENDED MARCH 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Service cost -- benefits earned during the
period........................................... $ 3,676 $ 3,950 $ 2,897
Interest cost on projected benefit obligation...... 10,070 9,025 8,199
Actual loss (return) on plan assets................ (27,838) 372 (13,184)
Net amortization and deferral...................... 18,110 (10,672) 3,610
-------- -------- --------
Net pension costs.................................. $ 4,018 $ 2,675 $ 1,522
======== ======== ========
F-52
105
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. PENSIONS AND OTHER EMPLOYEE BENEFITS: (CONTINUED)
The following table sets forth the Plan's funded status:
YEAR ENDED MARCH 31,
--------------------------------
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
--------------------------------
Actuarial present value of benefit obligations:
Vested benefits.................................... $128,032 $98,540 $92,745
-------- ------- -------
Accumulated benefits............................... $129,290 $99,279 $93,412
Effect of projected future salary increases........ 17,711 13,908 15,243
-------- ------- -------
Projected benefits................................. 147,001 113,187 108,655
Plan assets at fair value............................ 140,934 112,837 115,030
-------- ------- -------
Plan assets (less than) in excess of projected
benefit obligation................................. (6,067) (350) 6,375
Unrecognized net prior service cost.................. 63 (40) (900)
Unrecognized net loss................................ 27,347 21,760 18,513
-------- ------- -------
Prepaid pension cost included in other assets in the
accompanying balance sheet......................... $ 21,343 $21,370 $23,988
======== ======= =======
The principal actuarial assumptions are as follows:
Discount rate...................................... 7.50% 8.50% 7.75%
Rate of increase in compensation levels............ 4.50% 4.75% 4.75%
Expected long-term rate of return on plan assets... 9.50% 9.50% 9.50%
Postretirement Health Care and Life Insurance Cost:
In addition to providing pension benefits, SS/L provides certain health
care and life insurance benefits for retired employees and dependents.
Participants are eligible for these benefits when they retire from active
service and meet the eligibility requirements for SS/L's pension plans. These
benefits are funded primarily on a pay-as-you-go basis with the retiree
generally paying a portion of the cost through contributions, deductibles and
coinsurance provisions.
In March 1993, SS/L adopted various plan amendments resulting in
unrecognized prior service gains, which are being amortized commencing in 1994.
Postretirement health care and life insurance costs include the following
components:
YEAR ENDED MARCH 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Service cost -- benefits earned during the period..... $ 405 $ 386 $ 364
Interest cost on accumulated postretirement benefit
obligation.......................................... 1,549 1,445 1,682
Net amortization and deferrals........................ (1,316) (1,481) (1,311)
------- ------- -------
Total postretirement health care and life insurance
costs............................................... $ 638 $ 350 $ 735
======= ======= =======
F-53
106
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. PENSIONS AND OTHER EMPLOYEE BENEFITS: (CONTINUED)
The following table reconciles the amounts recognized in the balance sheet:
YEAR ENDED MARCH 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees............................................ $13,539 $10,562 $13,510
Fully eligible plan participants.................... 3,229 2,805 3,181
Other active plan participants...................... 6,031 4,275 5,915
------- ------- -------
Total accumulated postretirement benefit obligation... 22,799 17,642 22,606
Fair value of assets.................................. (1,868) (1,348) (997)
------- ------- -------
Unfunded accumulated postretirement benefit
obligation.......................................... 20,931 16,294 21,609
Unrecognized prior service gain related to plan
amendments.......................................... 13,696 14,968 16,240
Unrecognized net (loss) gain.......................... (1,164) 2,738 (2,699)
------- ------- -------
Accrued postretirement health care and life insurance
costs............................................... $33,463 $34,000 $35,150
======= ======= =======
The principal assumptions used in determining the pension benefit
obligation are as follows:
Discount rate......................................... 7.50% 8.50% 7.75%
Rate of increase in compensation levels............... 4.50% 4.75% 4.75%
Present healthcare cost trend rate.................... 10.59% 11.73% 12.36%
Ultimate trend rate by the year 2004.................. 5.50% 6.00% 6.00%
Changing the assumed health care cost trend rate by 1% in each year would
change the accumulated postretirement benefit obligation by approximately
$2,150,000 and the aggregate service and interest cost components for 1996 by
approximately $240,000.
Postemployment Benefits:
Effective April 1, 1994, SS/L adopted Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS
112"). SFAS 112 requires that the costs of benefits provided to employees after
employment but before retirement be recognized in the financial statements on an
accrual basis. The adoption of SFAS 112 did not have a material impact to the
financial position or results of operations of SS/L.
Employee Savings Plan:
SS/L employees participate in the Loral Aerospace Savings Plan ("the
Plan"). Under the Plan, SS/L matches 60% of participating SS/L employees'
contributions, up to 6% of base pay. SS/L's matching contributions made in Loral
common stock were $2,852,000, $2,976,000 and $2,782,000 for the years ended
March 31, 1996, 1995 and 1994, respectively.
10. INTERNATIONAL SPACE TECHNOLOGY, INC. COMMON STOCK TRANSACTIONS:
In September 1993 and March 1994, International Space Technology, Inc.
("ISTI"), a corporate joint venture with unrelated third parties, entered into
agreements to sell, in installments, a 22.8% equity interest in ISTI to two
unaffiliated entities. Under the first installment, ISTI sold 267.85 common
shares for $2.9 million in 1994, representing a 17.6% equity interest in ISTI.
In November 1994, in conjunction with the stock sales agreements, ISTI issued an
additional 28.95 common shares to one of the minority shareholders, increasing
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107
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INTERNATIONAL SPACE TECHNOLOGY, INC. COMMON STOCK TRANSACTIONS: (CONTINUED)
the minority interest in ISTI by 1.6% to 19.2%. Accordingly, 17.6% of the losses
of ISTI incurred subsequent to the sale and prior to November 8, 1994, and 19.2%
of such incurred losses after November 7, 1994, have been allocated to the
minority interest. Additional sales of shares under the agreements are
contingent upon completion of certain product qualifications by SS/L.
11. SUBSEQUENT EVENTS:
On April 22, 1996, Loral Corporation ("Loral") and Lockheed Martin
Corporation ("Lockheed Martin") consummated a definitive Agreement and Plan of
Merger (the "Merger Agreement") among Loral, Lockheed Martin and LAC Acquisition
Corporation, a wholly owned subsidiary of Lockheed Martin, providing for the
transactions that resulted in the defense electronics and systems integration
businesses of Loral becoming a subsidiary of Lockheed Martin. Concurrently with
the execution of the Merger Agreement, Loral, certain wholly-owned subsidiaries
of Loral and Lockheed Martin entered into the Restructuring, Financing and
Distribution Agreement (the "Distribution Agreement"), which provides, among
other things, for (i) the transfer of Loral's space and communications
businesses, including its direct and indirect interests in Globalstar, L.P.
("Globalstar"), Globalstar Telecommunications Limited ("GTL"), Space Systems/
Loral, Inc. ("SS/L") and other affiliated businesses, as well as certain other
assets to Loral Space & Communications Ltd., a Bermuda company ("Loral
SpaceCom"), (ii) the distribution of all of the shares of Loral SpaceCom common
stock to holders of Loral common stock and persons entitled to acquire shares of
Loral common stock on a one-for-one basis (the "Spin-Off") each as of a record
date (the "Spin-Off Record Date"), and (iii) the contribution by Lockheed Martin
of $612,274,000, of which $344,000,000 represents payment for preferred stock,
convertible into a 20% equity interest in Loral SpaceCom, to be retained by
Lockheed Martin following the Spin-Off and the Merger.
On April 23, 1996, the merger between Loral and Lockheed Martin was
completed. In conjunction with the merger, Loral's space and communications
businesses, including its direct and indirect interests in Globalstar, GTL, SS/L
and other affiliated businesses, as well as certain other assets, have been
transferred to Loral Space & Communications Ltd., a Bermuda corporation.
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108
EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- ---------------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger, dated as of January 7, 1996, among Loral Corporation,
Lockheed Martin Corporation and LAC Acquisition Corporation+
2.2 Restructuring, Financing and Distribution Agreement, dated as of January 7, 1996, among
Loral Corporation, Loral Aerospace Holdings, Inc., Loral Aerospace Corp., Loral General
partner, Inc., Loral Globalstar L.P., Loral Globalstar Limited, the Registrant and
Lockheed Martin Corporation+
2.3 Amendment to Merger Agreement***
2.4 Amendment to Distribution Agreement***
3.1 Memorandum of Association of Registrant+
3.2 Form of Memorandum of Increase of Share Capital+
3.3 Amended and Restated Bye-laws of Registrant***
4 Rights Agreement+
10.1 Tax Sharing Agreement***
10.2 Shareholders Agreement between the Registrant and Loral Corporation***
10.3 SS/L Stockholders Agreement+
10.4 Lehman Stockholders Agreement***
10.5 Amended and Restated Agreement of Limited Partnership of Globalstar, L.P.*
10.6 Subscription Agreements by and between Globalstar, L.P. and each of Globalstar
Telecommunications Limited, AirTouch Communications, Alcatel Spacecom, Loral General
Partner, Inc., Hyundai/Dacom, Vodastar Limited, Loral/Qualcomm Satellite Services, L.P.
and Finmeccanica S.p.A.*
10.7 Service provider agreements by and between Globalstar, L.P. and each of AirTouch
Satellite Services, Finmeccanica S.p.A., Loral General Partner, Inc., Loral/DASA
Globalstar, L.P., Hyundai/Dacom, TE.SA.M and Vodastar Limited*
10.8 Development Agreement by and between QUALCOMM Incorporated and Globalstar, L.P.*
10.9 Contract between Globalstar, L.P. and Space Systems/Loral, Inc.*
10.10 Credit Agreement among Globalstar, L.P. and various banks and Loral Guarantee+
10.11 Registrant's 1996 Stock Option Plan+
10.12 Registrant's Common Stock Purchase Plan for Non-Employee Directors+
10.13 Employment Agreement between the Registrant and Bernard L. Schwartz+
10.14 Exchange Agreement among the Registrant, Lockheed Martin Corporation and Loral
Corporation***
10.15 Amendment to Partnership Agreement of Globalstar, dated March 6, 1996***
10.16 Amendment of Globalstar Credit Agreement***
10.17 Lockheed Martin Guarantee***
20 Documents or Statements to Shareholders**
21 List of Subsidiaries of the Registrant***
27 Financial Data Schedule***
- ---------------
*Incorporated by reference to the Registration Statement on Form S-1 filed by
Globalstar Telecommunications Limited (File No. 33-86808).
**Incorporated by reference to Loral's Solicitation/Recommendation Statement on
Schedule 14D-9 dated January 12, 1996.
***Filed herewith.
+Incorporated by reference to the Registration Statement on Form 10 filed by
the Company. (1-14180)