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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM APRIL 1, 1996 TO
DECEMBER 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 as the registrant was required to file such reports and has
been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in the registrant's definitive proxy statement incorporated by
reference in Part III of this Form 10-K.
At February 28, 1997, 191,092,308 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
$3 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1997 definitive proxy statement are
incorporated by reference into Part III.
The financial statements required by Rule 3.05 of Regulation S-X of the
registrant's significant investee, Globalstar, L.P., are incorporated by
reference herein from the Annual Report on Form 10-K filed by Globalstar
Telecommunications Limited.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Loral Space & Communications Ltd. and its subsidiaries ("Loral" or the
"Company") is one of the world's leading satellite communications companies,
with substantial interests in both the manufacture and operation of
geosynchronous ("GEO") and low-earth-orbit ("LEO") satellite systems. Advances
in technology which have dramatically improved satellites' price/performance
ratios and increasing demand for telecommunications services worldwide are
accelerating the integration of space-based communications systems with
terrestrial wireless and wireline communications networks. Loral believes that
it is well-positioned to capitalize on the numerous satellite communications
service opportunities resulting from this trend.
Loral was formed to effectuate the distribution of Loral Corporation's
("Old Loral") space and telecommunications businesses (the "Distribution") to
shareholders of Old Loral pursuant to a merger agreement ("the Merger") dated
January 7, 1996 between Old Loral and Lockheed Martin Corporation ("Lockheed
Martin"). The Distribution was made on April 23, 1996.
Loral manages and will soon own 100% of Space Systems/Loral, Inc. ("SS/L"),
one of the world's leading manufacturers of space systems. Loral also manages
and is the largest equity owner of Globalstar, L.P. ("Globalstar"), which is
building and preparing to launch and operate a constellation of LEO satellites
expected to be placed in service in 1998 that will support digital telephone
service to handheld and fixed terminals worldwide. Loral, together with
partners, will act as the Globalstar service provider in Canada, Brazil and
Mexico and, with QUALCOMM Incorporated ("Qualcomm"), holds the exclusive right
to provide in-flight phone service using Globalstar in the United States.
On March 14, 1997, Loral acquired Skynet Satellite Services ("Skynet"), the
third largest domestic satellite service provider from AT&T. The Skynet
acquisition will advance the Company's strategy of becoming a global provider of
satellite-based services and will complement the Company's existing satellite
manufacturing capabilities. The Company believes that Skynet is positioned to
benefit from the Company's focus on satellite-related businesses and intends to
expand Skynet, which has heretofore limited its operations to the U.S. market,
to become a worldwide satellite communications service provider.
Loral intends to pursue additional satellite-based communications services
opportunities, including CyberStar, a proposed worldwide high-speed broadband
communications system comprised of three GEO satellites designed to provide
interactive multimedia data transmission. Loral holds FCC orbital position
assignments, subject to final licensure, for two of the necessary CyberStar
orbital slots covering Asia, Europe and the Middle East. Loral and the other FCC
applicants have reached an agreement for CyberStar's orbital assignment in the
Americas region. FCC licensure for all of CyberStar's orbital locations is
anticipated during 1997. Loral is also exploring opportunities to participate in
offerings of domestic and international direct-to-home services ("DTH").
Loral's strategy is to capitalize on its innovative capabilities, market
position and advanced technologies to offer value-added satellite-based services
as part of the evolving worldwide communications networks and, where
appropriate, to form strategic alliances with major telecommunications service
providers and equipment manufacturers to enhance and expand its satellite
communications service opportunities.
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The following table presents a brief description of the orbital slots that
the Company and Skynet are authorized to use. The Telstar 402R satellite is
currently in service at 89 degreesW. The Company intends to use its LoralSat
authorizations at 77 degreesW and 129 degreesW in connection with Skynet's
business. All of its CyberStar authorizations are subject to final licensure.
ORBITAL
SLOTS COVERAGE AREA FUNCTION
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Telstar: 69degreesW North America
89degreesW United States
Video and data at C- and Ku-bands
93degreesW North America
97degreesW United States
LoralSat: 77degreesW(1) North America
Video and data at C- and Ku-bands
129degreesW(1) North America
CyberStar: 105.5d greesE(2)(3) Asia
28d greesE(2)(3) Europe, Middle East
Interactive broadband multimedia at
Ka-band
115degreesW(2) North and South
America
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(1) Loral's authority to use these orbital locations has been challenged in a
proceeding before the FCC. The Company has also applied to expand coverage
to South America subject to successful international coordination.
(2) FCC licensure for all of CyberStar's orbital locations is anticipated during
1997.
(3) While the FCC has associated these orbital slots with the Company for
purposes of international coordination and is supporting the Company's
position before the International Telecommunication Union ("ITU"), these
orbital slots are subject to prior claims by third parties who have received
the support of their respective countries before the ITU. There is no
assurance that this international coordination will be successful.
COMPETITION
The space and communications industry is highly competitive and many of the
Company's competitors have significantly greater financial, technical and
regulatory resources than those of the Company. The Company will compete with
such parties for customers and for local regulatory approval in jurisdictions in
which the Company or such third parties may wish to operate. In addition, the
Company will have to compete for allocation of scarce frequency assignments and
geosynchronous orbital slots in order to pursue its business plan. There is no
assurance that the Company will be able to compete effectively against such
parties. In addition, the Company may face additional competition from new
entrants in the future.
SPACE SYSTEMS/LORAL
SS/L is a worldwide leader in the design, manufacture and integration of
telecommunications, weather and direct broadcast satellites with over 35 years
experience. As one of the premier providers of satellites and other space
systems, SS/L competes principally on the basis of technical excellence, a long
record of reliable performance, competitive pricing and on-orbit delivery
packages. The Company believes that SS/L's advanced manufacturing and testing
facilities and long-term customer relationships have enabled SS/L to compete
effectively in the commercial space systems marketplace. At March 31, 1997,
Loral has a 75.5% ownership interest in SS/L and agreements in principle to
acquire the remaining 24.5%.
SS/L is the leading supplier of satellites to Intelsat, an international
consortium of 135 member nations and the world's largest operator of commercial
communications satellites. Other significant customers include APT Satellite,
Chinasat, Globalstar, MCI, PanAmSat, Skynet and TCI. SS/L has an impressive
track record of successful satellite programs, possesses a broad range of
technological capabilities in spacecraft design, as well as all critical
spacecraft subsystems, and maintains a completely integrated complex of
satellite manufacturing, assembly, integration and testing facilities. The
satellites built by SS/L have accumulated more than 600 years of service in
space. This 600-year milestone represents the combined success of 82
communications and weather satellites built by SS/L during the past three and a
half decades.
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SS/L has built a strong reputation for excellence in its field, with a
history of technical innovation that includes producing the first three-axis
stabilized satellites, introducing bipropellant propulsion systems for
commercial satellites that permit significant increases in the satellites'
payload and extend the satellites' on-orbit lifetime, introducing rechargeable
nickel-hydrogen batteries with a life span of 10 years or more, pioneering the
use of advanced composites to significantly enhance satellite performance at
lighter weights and delivering the first communications satellite with more than
ten kilowatts of power. SS/L also created the first multi-mission geostationary
satellite. Since 1993, SS/L has shortened delivery schedules significantly,
increased spacecraft reliability by 30% and increased spacecraft power by 60%.
When combined with recent improvements in transmission technology, the total
communications capacity of an SS/L satellite has increased 20-fold during this
four-year period.
Three major European space systems manufacturers, Aerospatiale, Alcatel and
Finmeccanica (the "Alliance Partners"), currently hold or shortly will hold, in
exchange for their SS/L common stock, Loral securities. SS/L and the Alliance
Partners have agreed generally to 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 has enhanced
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. For example, through the Alliance,
SS/L has been able to enter the payload business in support of Aerospatiale's
prime contract under the Eutelsat, Thaicom and Sirius programs.
Loral made a strategic decision to increase its ownership in SS/L to 100%.
The first step in implementing this strategy was the acquisition by Loral in
August 1996 of the 18.3% interest in SS/L owned by certain partnerships
affiliated with Lehman Brothers Inc. in exchange for 7,500,000 newly issued
shares of common stock of the Company, 267,256 shares of common stock of GTL
previously held by the Company and $4 million in cash. As a result of this
transaction, the Company increased its ownership of SS/L from 32.7% to 51%. In
March 1997, Loral increased its ownership to 75.5% by acquiring the SS/L common
stock held by DASA and Finmeccanica for $93.5 million in cash and $93.5 million
market value of Loral convertible preferred securities, respectively. In order
to acquire the remaining 24.5% of SS/L, Loral shortly expects to complete
similar transactions with Aerospatiale and Alcatel, who will each exchange their
SS/L common stock for a combination of Loral common stock and Loral convertible
preferred securities with a market value of $93.5 million.
PROGRAMS
Some of SS/L's current programs include:
Telecommunications
Telstar. These telecommunications satellites being built for Skynet will
be among the most powerful satellites in the industry. Telstar 5 and Telestar 6
will provide service to the United States, the Caribbean, Mexico and Southern
Canada. Carrying a total of 52 transponders each, the satellites will generate
about 50% more radio frequency power than any other fixed-service satellites.
Telstar's increased payload capability will be achieved through the use of
highly efficient techniques for dissipating thermal energy and for generating
and storing electricity, together with extensive use of advanced composites such
as high efficiency silicon cells and nickel-hydrogen batteries.
Intelsat/FOS-II. In March 1997, SS/L entered into a contract with Intelsat
to build two high-powered, high-capacity satellites, called the Follow-on Series
("FOS") II program. The FOS-II satellites will allow Intelsat to provide the
Indian Ocean region with advanced communications and digital services to
customers equipped with small earth stations. The FOS-II spacecraft will carry a
significantly greater percentage of high-power amplifiers and solar array power
than the Intelsat VIIA series. Each of the FOS-II satellites will operate 44
C-band transponders and 12 Ku-band transponders.
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Apstar-IIR. Using its proven standard three-axis configuration, 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. The satellite is expected to
have a life span of more than 12 years. Its high power transponders are designed
to enable the use of small diameter receiving dishes, providing an inexpensive
means of establishing a direct-to-home satellite-based telecommunications
network in the region.
Chinasat 8. SS/L has contracted with China Telecommunications Broadcast
Satellite Corporation ("Chinasat") to construct Chinasat 8, a high-powered
communications satellite that will provide video, data and digital voice service
throughout China.
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. SS/L is the effective owner of the eight
high-powered Ku-band transponders on Mabuhay and has interests in a partnership
with Mabuhay to market DTH services in the region using this payload.
M2A. In December 1996, SS/L entered into a contract with P.T. Pasifik
Satelit Nusantara of Jakarta, Indonesia to build a high-powered satellite, the
Multi-Media Satellite System ("M2A") and provide long lead parts for an optional
second satellite. The contract also includes options to provide five additional
satellites. M2A will provide multimedia and telephony services throughout Asia
and will be the most powerful C-band satellite launched. The spacecraft also
will have the ability to operate 54 transponders in the standard C-band,
extended C-band and the X-band and will have seven shaped spot beams and one
global beam. The satellite is designed to permit customers to use small,
inexpensive terminals to receive and transmit both data and voice.
PAS-7 and PAS-8. SS/L has a contract with PanAmSat for the PAS-7 and PAS-8
spacecraft which will be used for various applications.
DTH Satellites
SS/L has entered the new and growing direct-to-home satellite business
through its contracts with MCI/News Corp., Tempo Satellite Inc., PanAmSat and
Asia Broadcasting and Communications Network. DTH television, with hundreds of
channels of digital programming, will be received by anyone with a satellite
dish having diameters ranging between 18-36 inches. SS/L is currently building
DTH satellites for MCI/News Corp. and Tempo to serve the U.S. markets, for
PanAmSat to serve the Central and South American markets and for ABCN to serve
Asian markets. These satellites will be high-powered, high-capacity satellites
optimized for digital broadcast service. By using video compression technology,
SS/L expects its customers to generate an 8-fold increase in the number of
channels and programs available to viewers.
Globalstar
SS/L has designed and is prime contractor for the manufacture of
Globalstar's constellation of 48 LEO satellites and 16 spare satellites (8
on-orbit) and will obtain launch services and launch insurance. These satellites
will provide voice, data, fax and position-location services to public and
private users worldwide.
Weather and Environment
GOES Weather Satellites. SS/L is the leader in the design and manufacture
of weather satellites. SS/L is currently the principal supplier for the National
Oceanic and Atmospheric Administration ("NOAA"), the world's largest buyer of
weather satellites, and is prime contractor for NOAA's next generation of
advanced weather-watching and environmental GOES satellites. The current GOES K,
L and M satellites being built by SS/L for NOAA mark a new era in U.S.
weather-watching. These satellites will be the first to provide 24-hour
monitoring and measurement of dynamic weather events in real time. These
satellites are the first three-axis, body stabilized, meteorological spacecraft
to be used by NOAA, and will also be the first to provide simultaneous,
independent imaging and sounding in geostationary orbit. The first satellite in
the five-member series, GOES-8, was launched in April 1994 and GOES-9 was
launched in May 1995.
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MTSAT. SS/L is manufacturing for Japan's Ministry of Transport the
Multifunctional Transport Satellite, an advanced geostationary satellite that
will play a crucial role in Japan's next generation of satellite-enhanced air
traffic management systems. The MTSAT will provide enhancement of communication
and position information to Japan's air traffic capability. These enhancements
are provided through the use of satellite communications and navigational aids.
Communication blind spots created by rugged terrain and buildings are expected
to be virtually eliminated. The navigational and surveillance aid provided by
the MTSAT will also make it possible to optimize aircraft routes which should
result in greater air traffic capacity, planning and more economical travel.
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 is supplying the Rocketdyne Division of Boeing Corporation on-board
electrical power systems for International Space Station Alpha. 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.
TECHNICAL CAPABILITIES
Active research and development projects are underway for both
communications and payload equipment and supporting bus elements. Highlights of
the payload program include the development of active microwave components,
which are among the lightest and most compact in the industry, and high power
handling state-of-the-art multiplexers and antennas that can be customized for
various customer requirements within a year of satellite delivery. Investments
in state-of-the-art computer-aided design and modeling tools have enabled SS/L
to eliminate expensive and time-consuming prototyping of most equipment, thereby
further reducing production time.
SS/L's capabilities in spacecraft bus technologies are also evident in its
composite structural design, which, with certain exceptions, allows structural
components to be manufactured of light-weight/high-strength composite materials.
SS/L was also the first to employ heat pipes in its bus to control heat transfer
in commercial satellites, thereby providing a more benign temperature
environment and increased reliability. Nickel hydrogen batteries, when combined
with SS/L's patented thermal management system, provide one of the most
efficient space batteries ever produced. A new technology currently being
developed by SS/L could result in the doubling of such efficiency within the
next three years. A new telemetry and command system employing serial interfaces
is also being introduced in 1997.
SS/L, in conjunction with a French traveling wave tube manufacturer,
developed a new generation of traveling wave tubes that radiate heat directly to
space rather than through the spacecraft structure. This technique has now
become the worldwide standard for high-powered broadcast satellites.
One of the primary factors affecting mission life and satellite costs is
the design of the propulsion system. Typically, half of the launch weight of a
satellite is related to the propulsion system and its fuel. Thus, continued
advances in propulsion technology are essential to reducing the total cost of a
satellite in orbit, to extending system life and to increasing payloads. SS/L
pioneered the now-accepted industry standard use of integrated bipropellant
propulsion systems for achieving orbit and on-orbit control.
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In 1992, SS/L became the first U.S. company licensed to exchange flight
hardware with a Russian company. Through this joint venture, SS/L has developed
a fully qualified electric propulsion system for on-orbit stationkeeping that is
five times as efficient as its bipropellent predecessors.
FACILITIES
To support its position as a leader in the commercial satellite
marketplace, SS/L has designed and constructed advanced manufacturing and
testing facilities. With more than 20 buildings covering nearly one million
square feet, SS/L offers a full spectrum of satellite capabilities. Through its
Alliance Partners, SS/L also provides joint development, manufacturing and
testing of spacecraft and subsystems at facilities in France and Italy. Its
comprehensive engineering, manufacturing and integration facilities range from
laboratories focused on attitude-control systems, high-technology materials,
solar arrays, batteries and power electronics, to enclosed test ranges for
all-weather testing of antenna subsystems.
High Bay Facility. A High Bay Facility provides a clean-room environment
that prevents contamination during the satellite assembly process. This facility
was recently doubled in size to provide greater capacity. The High Bay Facility
is the focal point for all system-level activity, serving as the fabrication and
assembly point for selected subsystems. By putting integration, assembly and
testing activity in one large contiguous complex, SS/L was able to improve
product quality and cost efficiency.
Space Simulation Chamber. SS/L's 39-foot Space Simulation Chamber
simulates the space environment, allowing testing of the satellite's ability to
perform under on-orbit conditions. Thermal vacuum testing, in which the chamber
is evacuated to 1/10,000,000 of atmospheric pressure, is conducted as well as
temperature and operational testing. Banks of infrared heat lamps inside the
chamber simulate radiated solar energy and liquid nitrogen pumped through tubing
maintains the chamber walls at -196 degrees Celsius.
Test Range. SS/L constructed a Compact Antenna Test Range ("CATR") that
permits SS/L to test satellite radio frequency waves as they would appear 22,300
miles in space. This facility was designed for satellite testing and includes
two precision machined 40- and 60-ton reflectors housed in a radio frequency
quiet testing area. The CATR replaces outdoor test ranges twenty miles or more
in length to test the beam shape produced by beam forming antenna arrays that
focus the satellite's limited available transmitting power over the target
region. The Company believes that SS/L's on-site CATR allows it to reduce its
average time to delivery by more than two months. To supplement the CATR and to
maximize use of the test range for complete antennae systems, SS/L has
constructed a smaller near-field on-site test range for antennae subsystems,
also in an enclosed, protected environment.
Mission Control Center. The on-orbit lifetime of a modern spacecraft may
be up to 15 years. Mission control centers, which may be used for the
positioning of the spacecraft in its final orbit and the operation or monitoring
of the spacecraft on a permanent basis, are available at SS/L and may be used
for control during any of the mission phases, depending upon the customer's
wishes. This self-contained center uses state-of-the-art communications, data
processing, and display technology to maintain contact with launch sites and
remote tracking stations during launch, orbit transfer, and checkout. It is used
for all space flight programs requiring on-orbit delivery. It can monitor
satellite telemetry and transmit satellite commands in order to maintain the
satellite's position in space, control the performance of its mission and
respond promptly to unanticipated anomalies. The operational experience gained
from these co-located facilities is used to provide feedback to the spacecraft
designers so that "user friendliness" can be incorporated into the design of
future spacecraft.
Solar Array Facility. This facility allows SS/L to perform in-house
fabrication, integration and acceptance testing of solar arrays for its
satellite program. It is capable of handling up to a five-panel array, and up to
four different arrays can be integrated and tested concurrently.
Materials Manufacturing Technology Center. Graphite composite parts that
are used in satellite designs because of their advantageous combination of low
weight, high strength and dimensional stability over thermal gradients are being
assembled in-house at SS/L's materials laboratory.
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Battery and Power Electronics Facility. One of the most extensive U.S.
space battery assembly and test facilities, this laboratory was designed and
developed in conjunction with work performed by SS/L in connection with the
International Space Station Alpha.
Vibration Facility. Vibration modal surveys and random vibration tests are
conducted at SS/L via vibration shakers, amplifiers and control facilities.
SS/L's satellites are subjected to vibration testing which simulates the extreme
stress of lift off.
CUSTOMERS
Sales to the U.S. government represented 8%, 10% and 23% of revenues for
the nine months ended December 31, 1996 and for the years ended March 31, 1996
and 1995, respectively. Sales to foreign customers, primarily in Asia,
represented 25%, 27% and 15% of revenues for the nine months ended December 31,
1996 and for the years ended March 31, 1996 and 1995, respectively. For the nine
months ended December 31, 1996, two commercial customers represented 28% and 15%
of revenues. For the year ended March 31, 1996, two commercial customers
represented 30% and 13% of revenues. Four commercial customers represented 23%,
20%, 15% and 13% of revenues for the year ended March 31, 1995.
COMPETITION
Competition in the commercial satellite industry is intense. Among SS/L's
significant competitors are Hughes, Lockheed Martin, Matra Marconi and TRW, many
of whom 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, it 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.
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 allowable costs incurred and receives a fee
consisting of a base amount that is fixed at the inception of the contract (the
base amount may be zero) and an award amount that is based on the customer's
subjective evaluation of the contractor's performance 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.
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RESEARCH AND DEVELOPMENT
The Company believes that SS/L's future success will depend to a large
degree on its ability to continue to conceive and develop new products and
services and enhance existing products on a more rapid and less expensive basis
than its competitors. Accordingly, SS/L expects to continue to invest in
product-related research and development, to create new products and to seek
customer and strategic partner investments in these products. These strategic
relationships have included, and may include in the future, joint development
arrangements, equity investments in joint ventures and acquisitions of strategic
product lines and businesses.
SS/L's internally-funded research and development expenditures were
approximately $16.3 million, $11.2 million and $9.5 million, respectively, for
the nine months ended December 31, 1996 and the fiscal years ended March 31,
1996 and 1995.
INSURANCE
SS/L carries liability insurance and is indemnified under certain contracts
with respect to certain potential liabilities to third parties arising from
operation of SS/L's products. There can be no assurance, however, that such
insurance and indemnification would be applicable to and adequate to cover
SS/L's potential liabilities to third parties. Furthermore, SS/L cannot predict
whether third-party liability insurance will continue to be available at premium
levels that justify purchase of such insurance or whether insurance or
indemnification will be available at all.
BACKLOG
As of December 31, 1996, SS/L's funded backlog was approximately $1.5
billion. Total backlog was $2.2 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 $1.1 billion of funded backlog as of
December 31, 1996 is currently scheduled to be performed within the next 12
months. Because many factors affect the conclusion of definitive agreements for
contracts awarded and the production and delivery of SS/L's products, no
assurance can be given as to whether or when revenues will be recognized from
SS/L's backlog. Year-to-year comparisons of backlog are not necessarily
indicative of future operations.
GLOBALSTAR
The Company owns, directly and indirectly, approximately 34% of
Globalstar's outstanding equity and has overall management responsibility for
the design, construction, deployment and operation of the Globalstar System.
Globalstar is building and preparing to launch and operate a worldwide, LEO
satellite-based digital telecommunications system. The Globalstar System(TM) 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. To date, Globalstar's designated service providers have agreed to
offer Globalstar service and seek to obtain all necessary local regulatory
approvals in more than 100 nations, accounting for approximately 88% of the
world's population.
The Globalstar System's worldwide coverage is designed to enable its
service providers to extend modern telecommunications services to millions of
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
Globalstar System has been designed to provide services at prices comparable to
today's cellular service and substantially lower than the prices announced by
Globalstar's anticipated principal competitors. Globalstar service providers
will set their own retail pricing in their assigned service territories and will
pay Globalstar approximately $0.35 to $0.55 per minute on a wholesale basis.
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
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booths or ordinary wireline telephones, and data terminals and facsimile
machines. Dual-mode and tri-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.
As of February 1997, each of the elements of the Globalstar System -- space
and ground segments, digital communications technology, handset supply, service
provider arrangements and licensing -- is on schedule to begin launching
satellites in the second half of 1997, to commence commercial operations in the
second half of 1998 and to have a full constellation of 48 operational
satellites, plus eight in-orbit spares, launched by the end of 1998:
Space Segment. The first Globalstar satellite has been
fully-assembled and is now in pre-flight testing, and another four
satellites are currently being assembled. Production is proceeding on
schedule for the remaining satellites. Three different launch providers
have signed definitive agreements for the launch of the Globalstar
satellite constellation, providing a variety of launch options and
considerable launch flexibility. Mission operations preparations and launch
vehicle production and dispenser development are on schedule.
Ground Segment. The first four Globalstar gateways, which are
currently in advanced development and are to be located in Australia,
France, South Korea and the United States, are currently under
construction. These gateways will support Globalstar's data network,
monitor the initial launch and orbital placement of Globalstar's first
satellites, and serve as prototypes for production gateways that will
support Globalstar service. In addition, Globalstar's satellite operations
control center ("SOCC") facility has been completed.
Digital Communications Technology. Qualcomm's Code Division Multiple
Access ("CDMA") technology has now been successfully deployed in South
Korea, Hong Kong and cities in the United States supporting terrestrial
personal communications services ("PCS") and digital cellular service, and
its CDMA implementation for Globalstar has been successfully demonstrated
in a simulated satellite environment. This demonstration validated
Globalstar's encoding, modulation, control software, time and frequency
distribution and up/down links between satellites and handsets.
Handset Supply. Qualcomm and two other manufacturers, Ericsson and
TELITAL, are on schedule in their design and development of Globalstar's
handset.
Service Providers. Globalstar and its partners have been seeking
alliances with service providers throughout the world and have entered into
a number of agreements in specific territories. For example, in November
1996, ChinaSat, a subsidiary of China's Ministry of Posts and
Telecommunications, agreed to act as the exclusive distributor of
Globalstar services in China and to support four Globalstar gateways, the
first of which is expected to be operational by 1998. Globalstar has also
formed a joint venture with the principal Russian long distance carrier,
Rostelecom, to provide Globalstar service in that country and is
negotiating a service provider agreement with that joint venture.
Globalstar believes that these relationships with in-country service
providers will facilitate the granting of local regulatory approvals --
particularly where, as is the case in China, the service provider and the
licensing authority are one and the same -- as well as providing local
marketing and technical expertise.
Licensing. In January 1995, the Federal Communications Commission
("FCC") granted authority for the construction, launch and operation of the
Globalstar System and assigned spectrum for its user links. Later that
year, the 1995 World Radiocommunication Conference ("WRC95") allocated
feeder link spectrum on an international basis for mobile satellite
services ("MSS") systems such as Globalstar, and in November of 1996 the
FCC authorized Globalstar's feeder links.
Globalstar has raised or received commitments for approximately $2.0
billion in equity, debt and vendor financing, representing 78% of the total
financing currently expected to be required to complete the system and to
achieve worldwide operations. As a result of several recent decisions designed
to assure and upgrade system performance and maintain schedule -- including
procurement of three launches on the Starsem Soyuz launch
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vehicle, additional communications system integration testing procedures,
development of additional and enhanced service features, cost growth and other
factors -- Globalstar currently estimates the cost for the design, construction
and deployment of the Globalstar System, including working capital, cash
interest on anticipated borrowings and operating expenses, to be approximately
$2.5 billion, as compared with approximately $2.2 billion estimated at December
31, 1995. In addition, Globalstar has agreed to purchase from SS/L eight
additional spare satellites at a cost estimated at approximately $175 million.
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 469 million in 1988 to 753
million in 1996 and is projected to increase to 1.2 billion by 2002.
Nonetheless, during the same period, waiting lists for fixed service have
increased from 30 million to 45 million, resulting in an average waiting time
before installation of approximately one and a half years. Similarly, the
cellular market has grown from four million worldwide subscribers in 1988 to an
estimated 123 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's
population will have access to wireless telephone service principally through
satellite-based systems like the Globalstar System. Globalstar believes that its
addressable market exceeds 30 million people.
The Globalstar System has been designed with attributes which the Company
believes compare favorably to other proposed global MSS systems including: (i)
Globalstar's unique combination of CDMA technology and path diversity through
multiple satellite coverage, which 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 MSS systems and (iv) gateways installed in most major
countries, minimizing tail charges (i.e. amounts charged by carriers other than
the 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.
STRATEGIC PARTNERS
Globalstar has selected strategic partners whose marketing, operating and
technical expertise will enhance Globalstar's capabilities. These partners are
playing key roles in the construction, operation and marketing of the Globalstar
System. Globalstar's founding partners are Loral and Qualcomm, the leading
supplier of CDMA digital telecommunications technology. Globalstar's other
strategic partners are:
TELECOMMUNICATIONS TELECOMMUNICATIONS EQUIPMENT
SERVICE PROVIDERS AND AEROSPACE SYSTEMS MANUFACTURERS
- ----------------- -----------------------------------
- - AirTouch - Alcatel
- - Dacom - Alenia
- - France Telecom - DASA
- - Vodafone - Finmeccanica
- Hyundai
- SS/L
SS/L is providing the system's satellites under a fixed-price contract that
also requires SS/L to obtain launch services and launch insurance. Qualcomm is
designing and will manufacture Globalstar Phones and gateways and certain ground
support equipment.
BUSINESS STRATEGY
Globalstar's strategy for successful operation is based upon: (i) providing
potential users worldwide with high quality telecommunications services, (ii)
employing a system architecture designed to minimize cost and
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technological risks and (iii) leveraging the marketing, operating and technical
capabilities of its strategic partners.
WORLDWIDE HIGH QUALITY SERVICE
To achieve rapid and sustained customer acceptance of the system, the
Globalstar System has been designed to provide a high quality, worldwide service
that combines the best of existing cellular service with the technological
advantages of the Globalstar System as described herein to meet the needs of
individual end users.
Worldwide Coverage and Access. The Globalstar System's worldwide coverage
has been designed to enable its service providers to extend modern
telecommunications services rapidly and economically to significant numbers of
people who currently lack basic telephone services and to enhance wireless
telecommunications in areas underserved or not served by existing or
contemplated cellular systems. Globalstar expects to provide a communications
solution in parts of the world where the build-out of terrestrial systems cannot
be economically justified. The Globalstar System has also been designed to
enable international travelers to make and receive calls at a unique telephone
number through their mobile Globalstar Phone anywhere in the world where
Globalstar service is authorized by local regulatory authorities.
Multiple Satellite Coverage; Soft Handoff. CDMA digital communications
technology combined with continuous multiple satellite coverage and signal path
diversity (a patented SS/L method of signal reception not available to competing
systems) will enable the Globalstar System to provide service to a wide variety
of locations, with less potential for signal blockage from buildings, terrain or
other natural features. Globalstar Phones have been designed to operate with a
single satellite in view, although typically signals from two to four satellites
overhead will be combined to provide service. Therefore, the loss of an
individual satellite is not expected to result in any gap in global coverage.
Each mobile Globalstar Phone has been designed to communicate with as many as
three satellites simultaneously, combining the signals received to ensure
maximum service quality. As satellites are constantly moving in and out of view,
they will be seamlessly added to and removed from the calls in progress, thereby
reducing the risk of call interruption.
Superior Call Quality; Increased Privacy. Based on terrestrial simulations
of the Globalstar System, Globalstar expects that Qualcomm's CDMA digital
technology will enable Globalstar to provide digital voice services which will
have clarity, quality and privacy similar to those of existing digital
land-based cellular systems. Qualcomm's CDMA technology, which is available to
Globalstar on an exclusive basis for commercial MSS applications, has also been
selected for digital cellular service by 12 of the 15 largest U.S. cellular
service providers and the two largest holders of PCS services in the U.S. (by
population served).
Efficient Use of Satellite Resources. The Globalstar System's use of
multiple satellites to communicate with each Globalstar Phone (a patented SS/L
method of signal reception not available to competing systems) has been designed
to allow its communications signals to bypass obstructions. Path diversity is
expected to permit Globalstar to maintain its desired level of service quality
while using less power and satellite resources than would be required in a
system using single path satellites, which attempt to penetrate obstructions by
using higher single satellite power and overall higher link margins.
No Voice Delay. Globalstar satellites' LEO of 750 nautical miles is
expected to result in no perceptible voice delay, as compared with the
noticeable time delay of calls utilizing geosynchronous satellites, which orbit
at an altitude of 22,500 nautical miles. Globalstar believes that its system
will also entail noticeably less voice delay than mid-medium orbit MSS systems
and, in many cases, than LEO systems requiring on-board satellite call
processing to support satellite-to-satellite switching systems.
EMPLOYING A SYSTEM ARCHITECTURE DESIGNED TO MINIMIZE COST AND RISK
Simple, Cost-Effective System Architecture. To achieve low cost, reduce
technological risk and accelerate its deployment, Globalstar has devised a
system architecture using small satellites incorporating well-established design
features, and located the system's call processing and switching operations on
the ground, where they are accessible for maintenance and can benefit from
continuing technological advances. Hand-held and vehicle-mounted Globalstar
Phones are anticipated to be priced comparably and will be similar in
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function to current digital cellular telephones. Dual-mode and tri-mode
Globalstar Phones will be able to access both Globalstar and a variety of local
land-based analog and digital cellular services, where available. Multiple
manufacturers will be licensed to manufacture Globalstar Phones in order to
promote competition and reduce prices. Globalstar gateways have been
competitively priced in order to encourage the placement of one or more gateways
in each country served, thus reducing tail charges for the terrestrial portion
of each call.
Low-Cost Service. Globalstar intends to offer its service providers
effective average prices substantially lower than those announced by its
anticipated principal competitors. Globalstar's service providers will set their
own retail pricing and will pay to Globalstar wholesale prices generally
expected to range between $0.35 and $0.55 per minute. Another proposed
satellite-based system has proposed retail pricing of more than $3.00 per
minute. As a result of its pricing commitments to its service providers or as a
result of competitive pressures, Globalstar may not be in a position to pass on
to its service providers unexpected increases in the cost of constructing the
Globalstar System. However, Globalstar believes that its low system and
operating costs and high gross margins at target pricing and usage levels
provide it with substantial additional pricing flexibility if necessary to meet
competition.
Simple Space Segment of Proven Design. Globalstar believes its system will
cost less to design and construct and may be the first of the proposed worldwide
systems to provide commercial service. To achieve low cost, reduce technological
risk and accelerate deployment of the Globalstar System, Globalstar's system
architecture uses small satellites incorporating a well-established repeater
design that acts essentially as a simple "bent pipe," relaying signals received
directly to the ground. All of the system's call processing and switching
operations are on the ground, where they are accessible for maintenance and can
benefit from continuing technological advances. The Globalstar space segment is
being manufactured under a fixed-price contract with SS/L. The contract provides
for the construction of 56 satellites meeting designated performance
specifications and for SS/L to obtain launch services and launch insurance.
Flexible, Low-Cost Ground Segment. Globalstar has been designed to offer
local governments and service providers affordable telephone infrastructure
where the cost of build-out of land-based wireline or wireless telephone systems
is either too great or not economically justifiable. By purchasing a single
gateway for approximately $3 million to $8 million (depending on the capacity
desired), a service provider can extend basic telephone service to fixed
terminals on a national basis in countries as large as Saudi Arabia and mobile
service to cover an area almost as large as Western Europe. As a result of the
low cost of its gateways, Globalstar expects that its service providers will
install gateways in most of the major countries in which they offer service.
Each country with a Globalstar gateway will have access to domestic service
without the imposition of international tail charges on in-country calls,
thereby offering subscribers the lowest possible cost for domestic calls, which
account for the vast majority of all cellular calls today.
Competitively Priced Globalstar Phones. Hand-held and vehicle-mounted
Globalstar Phones are anticipated to be priced comparably and will be similar in
function to current digital cellular telephones. Moreover, mobile Globalstar
Phones will use less power on average than conventional analog cellular
telephones and are therefore expected to enjoy longer battery life. Dual-mode
and tri-mode Globalstar Phones will be able to access both Globalstar and a
variety of local land-based analog and digital cellular services, where
available. Mobile and fixed Globalstar Phones are expected to cost less than
$750 each, and Globalstar public telephone booths are expected to cost between
$1,000 and $2,500, depending upon desired capacity and the number of units
sharing a fixed antenna. Qualcomm is required to license three additional
manufacturers of Globalstar Phones and has recently granted a license to each of
Ericsson and TELITAL for such purpose; Globalstar believes that licensing
multiple manufacturers will spur competition, which will reduce prices. As is
the case with many cellular systems today, service providers may subsidize the
cost of Globalstar Phones to generate additional usage revenue. In addition,
national and local governments may subsidize some or all elements of system
cost, particularly in rural areas, thereby reducing the cost of access to
subscribers.
LEVERAGING THE CAPABILITIES OF GLOBALSTAR'S STRATEGIC PARTNERS
Loral has overall management responsibility for the design, construction,
deployment and operation of the Globalstar System. Globalstar's strategic
partners will play key roles in the design, construction, operation and
marketing of the Globalstar System.
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Telecommunications service providers AirTouch, Dacom, France Telecom and
Vodafone are providing in-country marketing and telephony expertise to
Globalstar. Globalstar's strategic partner service providers have been granted
exclusive rights to provide Globalstar service in 71 countries around the world
in which they have particular marketing strength and experience and access to an
established customer base of 60 million subscribers. Six additional service
providers have agreed to offer Globalstar service in 32 additional countries. To
maintain their service provider rights on an exclusive basis, these service
providers and additional service providers are required to make minimum payments
to Globalstar equal to 50% of target revenues. Based upon current targets (which
are subject to adjustment in 1998 based upon an updated market analysis), such
minimum payments total approximately $5 billion through 2005. In order to
accelerate the deployment of gateways around the world prior to the In-Service
Date, Globalstar and the service providers intend to jointly finance the
procurement of 33 gateways for resale to service providers. Globalstar expects
to recover its investment in this gateway financing program from such resales.
There can be no assurance that the service providers will elect to retain their
exclusivity and make such payments or place such orders for Globalstar Phones
and gateways.
Globalstar expects to add additional service providers in order to provide
coverage throughout the world. Each service provider will, subject to obtaining
required local regulatory approvals, market and distribute Globalstar service in
its designated territories and own and operate the gateways necessary to serve
its markets.
Telecommunications equipment and aerospace systems manufacturers SS/L,
Alcatel, Alenia, DASA, Finmeccanica and Hyundai have contracted to design, build
and deploy the Globalstar System. Qualcomm, using its CDMA technology, is
designing and will manufacture Globalstar Phones and gateways and has primary
responsibility, along with Globalstar, for the design and implementation of the
ground operations control centers ("GOCCs"). Qualcomm's CDMA technology is
available to Globalstar on an exclusive basis for commercial MSS satellite
applications. SS/L is performing under a fixed-price contract for the
construction of Globalstar's satellites in conjunction with its alliance
partners, Aerospatiale, Alcatel, DASA and Finmeccanica, and with Hyundai.
THE GLOBALSTAR SYSTEM
Globalstar intends to offer low-cost, high quality telecommunications
services throughout the world. The Globalstar System will be comprised of its
48-satellite LEO constellation (together with eight on-orbit and eight
additional spare satellites) and a Ground Segment consisting of two SOCCs and
two 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 four gateways; 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 Services and Globalstar Phones. Globalstar's most important
service will be voice telephony service, which Globalstar is expected 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 Globalstar Phones, 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
Based on terrestrial simulations of the Globalstar System, Globalstar
expects that its digital voice services will have clarity, quality and privacy
similar to those of existing digital land-based cellular systems. Moreover, the
system has been designed to minimize call interruptions ("dropped calls")
resulting from movements on the part of the user or the satellites. 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
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those offered by analog systems such as existing cellular telephones. The
Globalstar System will function best when there is an unobstructed line-of-sight
between the user and one or more of the Globalstar satellites overhead.
Competing systems without Globalstar's path diversity depend on each user
maintaining contact with a single satellite. Obstacles such as buildings, trees
or mountainous terrain may degrade service quality, more so than would be the
case with terrestrial cellular systems, and service may not be available in the
core of high-rise buildings.
By planning for volume production and utilizing commercially available
off-the-shelf components where possible, Globalstar expects that its Globalstar
Phones, unlike those of certain other proposed MSS systems, 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 granted a license to manufacture Globalstar Phones to each of Ericsson and
TELITAL and has agreed to license at commercially reasonable royalty rates at
least one additional qualified Globalstar Phone manufacturer.
Fixed Globalstar Phones for No-Telephone Areas. The majority of the
world's population does not have 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 and powered by
local generators or solar panels 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 directional Globalstar
antennas. Directional antennae also provide for more efficient use of the
system's capacity.
Mobile Globalstar Phones for No-Cellular Areas. In certain regions,
land-based cellular systems cannot be economically justified 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 function and cost
to today's full-featured cellular telephones. Unlike any cellular telephone in
existence today, however, these units will have the ability to operate (both for
making and receiving calls) in virtually every inhabited area of the world where
Globalstar service is authorized.
Globalstar mobile terminals will all be equipped with omnidirectional
antennas, similar to cellular telephone antennas, that connect equally well
regardless of the direction in which they are pointed. Each mobile terminal will
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. As a result of
this efficiently-managed power system, mobile Globalstar Phones are expected to
draw less power, on average, than conventional cellular telephones and are
therefore expected to enjoy longer battery life.
Dual-Mode and Tri-Mode Globalstar Phones for Local and Global
Roaming. 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 and tri-mode handsets and vehicle-mounted units. Dual-mode and
tri-mode telephones 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 and
tri-mode telephones will enable the user to make and receive calls through a
unique access number anywhere in the world where service is authorized.
Dual-mode and tri-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 and tri-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).
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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.
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, is expected to be deployed on the Globalstar System and 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) used 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 on an international scale. Although no present participant is
currently providing the same global personal telecommunications service proposed
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 its system
substantially earlier than Globalstar, Globalstar's ability to compete in areas
served by such competitor may be adversely affected. A number of satellite-based
telecommunications systems not involved in the MSS Proceeding have also been
proposed using geosynchronous satellites and, in one case, the 2 GHz band for a
MEO system.
Globalstar's most direct competitors are the two other MSS applicants which
received FCC licenses, Iridium and Odyssey. Although Iridium has announced plans
to launch its first satellites within the upcoming months, Globalstar does not
believe that Iridium will be in service substantially earlier than Globalstar's
In-Service Date. Odyssey's launch date is unknown. ICO was not an applicant or a
licensee in the MSS proceeding or any other proceedings before the FCC; it is
seeking to operate in a different frequency band not available for use by MSS
systems under current international guidelines in place until 2000. Comsat, the
U.S. signatory to Inmarsat, has applied to the FCC to participate in the
procurement of facilities of the system proposed by ICO. It has also sought FCC
approval of a proposal to extend the scope of services provided by
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Inmarsat, currently limited to maritime services, to include telecommunication
services to land-based mobile units. These applications are currently pending
before the FCC. Comsat has been instructed in the past by the U.S. government to
seek to ensure that ICO does not receive preferred access to any market and that
nondiscriminatory access to such areas for all mobile satellite communications
networks be established, subject to spectrum coordination and availability.
Nonetheless, because ICO is affiliated with Inmarsat and because its investors
include the state-owned telecommunications monopolies in a number of countries,
there can be no assurance that ICO might not be given preferential treatment in
the local licensing process in those countries. It is also possible that one or
more of the two pending MSS applicants will demonstrate financial qualifications
sufficient to obtain an FCC license and become a competitor of Globalstar.
Geostationary-based satellite systems, including American Mobile Satellite
Corporation ("AMSC"), Asia Pacific Mobile Telecom ("APMT"), Afro-Asia Satellite
("ASC"), PTAsia Cellular Satellite ("ACeS"), Lockheed Martin's Satphone and
Comsat's Planet-1, plan to provide satellite-based telecommunications services
in areas proposed to be serviced by Globalstar. Certain of these systems are
being proposed by governmental entities. Because some of these 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. Globalstar's business would be adversely affected if
competitors began operations or expanded existing operations in Globalstar's
target markets before completion of its system.
RESEARCH AND DEVELOPMENT
Globalstar has entered into a contract with Qualcomm whereby Qualcomm is
performing certain development tasks related to the Globalstar System. In
addition, Globalstar is performing certain in-house engineering tasks that are
classified as development costs. Total development expenses incurred for the
years ended December 31, 1996 and 1995 and the period from March 23
(commencement of operations) to December 31, 1994 were $42 million, $63 million
and $21 million, respectively.
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SKYNET
On March 14, 1997, the Company acquired Skynet for $478 million in cash.
Skynet is a leading U.S. satellite communications service provider that owns and
operates the Telstar satellite network. Skynet's customers lease transponder
capacity to distribute network television programming to local affiliate
stations, collect live video feeds for the reporting of news and sporting
events, and to offer direct-to-home subscription and pay-per-view television
programming, distance learning and educational television, as well as business
services such as VSAT networks, data distribution for information services and
other business television services. The Company intends to expand Skynet, which
has heretofore limited its operations to the U.S. market, to become a worldwide
satellite service provider.
Skynet currently has one high-powered satellite operating in orbit. This
satellite provides coverage over the continental U.S., Hawaii, Alaska, Puerto
Rico and the U.S. Virgin Islands and is equipped with 24 C-band and 24 Ku-band
transponders. Skynet also owns and operates Telstar 302 and Telstar 303. These
satellites have already exceeded their 10-year design life and are now in
inclined orbits, generating modest revenues from customers that have tracking
antennas or do not require continuously-available service.
Skynet holds FCC licenses to construct, launch and operate three additional
high-powered C/Ku band satellites. The addition of these satellites will
substantially increase Skynet's capacity within the United States, and will
extend its coverage area to Canada and Mexico, subject to obtaining rights from
regulatory authorities in those countries. Telstar 5 is expected to be in
service in 1997. Skynet has entered into a contract with SS/L for on-orbit
delivery (including launch and launch insurance) of Telstar 5 and Telstar 6,
with options for Telstar 7 and a ground spare. These satellites are each
expected to be equipped with 24 C-band and 28 Ku-band transponders. Skynet
expects to expend approximately $200 million in 1997 under this contract.
The following table sets forth certain data concerning Skynet's existing
and planned satellites.
MAXIMUM IN SERVICE
SATELLITE TRANSPONDERS BANDWIDTH EIRP DATE
--------------------------- ------- --------- ----------
Telstar 302* 24 C-band 36 MHz 35 dBW 11/84
Telstar 303* 24 C-band 36 MHz 35 dBW 9/85
Telstar 402R 24 C-band 36 MHz 35.2 dBW 11/95
8 Ku-band 54 MHz 44.3 dBW
16 Ku-band 27 MHz
Telstar 5 24 C-band 36 MHz 37 dBW 1997
4 Ku-band 54 MHz 46.5 dBW
24 Ku-band 27 MHz
Telstar 6 24 C-band 36 MHz 37 dBW 1999
4 Ku-band 54 MHz 46.5 dBW
24 Ku-band 27 MHz
- ---------------
* Currently operating in inclined orbit. Telstar 302 and Telstar 303 are
operating beyond their designed lives, and, subject to FCC approval, can be
expected to continue to generate modest revenues for approximately two
years.
Transponders on Telstar 402R are used by ABC and Fox television networks
and the Public Broadcasting System. As a result, local affiliates of these
networks, as well as schools and universities that wish to receive PBS
broadcasts directly, have antennas pointed at Skynet's satellite. This
configuration creates a "neighborhood" attractive to other users requiring
similar distribution channels, giving the Company a competitive advantage in
serving both television networks and television programming syndicates and for
distance learning.
Although Skynet has generally leased transponder capacity to its customers,
it had in the past sold some of its transponder capacity to third parties. In
the future, Skynet intends to make its transponders available only on a leased
basis. Due to the on-orbit failure of Telstar 401 in January 1997, a total of 8
C-band and 11 Ku-band transponders on Telstar 402R and Telstar 5 will be used to
restore service to Skynet customers who had previously purchased transponders on
Telstar 401. If such customers choose not to be restored on Telstar 402R or
Telstar 5, these transponders will then be available for lease at prevailing
market rates and Skynet will refund the unamortized portion of the purchase
price.
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COMPETITION
Skynet is subject to significant competition. Skynet's competitors in the
U.S. domestic satellite services industry have significantly greater financial,
manufacturing, marketing and technical resources than those of the Company. As
the Company expands into international markets, it will have to compete, in
addition, with international operators including Intelsat and PanAmSat. Further,
Skynet's satellites face competition from alternative technologies, including
fiber optic cable technology and other terrestrial alternatives, which could
reduce demand for its services.
AT&T has agreed for a period of three years from the acquisition not to
compete with the Company in providing and marketing certain satellite services
as well as in the operation of certain satellites, and to afford the Company
preferred supplier status with respect to its purchase of certain satellite
services for a period of five years following the acquisition.
K&F INDUSTRIES, INC.
Loral owns 22.5% of K&F, which 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 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"),
believes it is the leading worldwide manufacturer of aircraft fuel tanks,
supplying approximately 90% of the worldwide general aviation and commercial
transport market and over 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, Japan Air Systems, Lufthansa, Swissair, Northwest Airlines,
United Airlines, USAirways and Continental Airlines. 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 December 31, 1996 amounted to approximately $167 million. Backlog
consists of firm orders for K&F's products which have not been shipped.
Approximately 84% of such total backlog is expected to be shipped by December
31, 1997, with the balance expected to be shipped over the subsequent two-year
period.
PATENTS AND PROPRIETARY RIGHTS
SS/L relies, in part, on patents, trade secrets and know-how to develop and
maintain its competitive position. It holds 127 patents in the U.S. and 138
patents abroad and has applications for 45 patents pending in the U.S. and 176
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 1997 and 2015.
In connection with the Globalstar System, Globalstar's design and
development efforts have yielded ten patents issued and 22 patents pending in
the United States, as well as four patents issued and more than 130 patents
pending internationally for various aspects of communication satellite system
design and implementation of CDMA technology relating to the Globalstar System.
Qualcomm has obtained 87 issued patents and 251 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.
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. In such an
event, Globalstar or SS/L could be required to redesign its system or satellite,
as the case may be, or pay royalties to obtain a license, which could increase
cost or delay implementation of the system or construction of the satellite, as
the case may be.
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EMPLOYEES
As of December 31, 1996, the Company had approximately 60 full-time
employees, none of whom is subject to any collective bargaining agreement.
As of December 31, 1996, SS/L had approximately 3,600 full-time employees
none of whom is subject to any collective bargaining agreement.
As of December 31, 1996, Globalstar had approximately 140 full-time
employees, none of whom is subject to any collective bargaining agreement.
At March 14, 1997, Skynet had approximately 140 full-time employees, some
of whom are subject to collective bargaining agreements.
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 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.
THE COMPANY
Risks Inherent in New Satellite Services. The Company's ability to
successfully develop and provide a variety of satellite-based services will
depend upon various factors, many of which may be beyond the control of the
Company. The Company's prospects and financial condition will depend on its
ability, among other things, to operate in a regulated environment, compete with
others for customers, frequency assignments and orbital slots, fund the capital
needs of the programs that it is pursuing, design, launch and operate satellite
systems effectively, market its services and keep pace with technological
advances and innovations.
U.S. Regulation. The FCC regulates the use of radio spectrum in the United
States, including the licensing of satellites designed to provide domestic or
international service. The Company has a number of applications pending before
the FCC for licenses to construct, launch and operate various satellite systems.
While the Company has received FCC authorization with respect to several of its
proposed programs, such authorizations remain subject to petitions for
reconsideration. There can be no assurance that the Company's authorizations
will not be challenged, or that, if challenged, the petitioners will not be
successful in persuading the FCC to rescind the Company's authorizations.
Moreover, applicable statutes and regulations permit judicial appeals of the
authorizations. There can be no assurance that such appeals will not be filed,
or, if filed, that such appeals will not be granted and the Company's
authorizations revoked.
The Company's pending FCC application for two extended Ku-band systems and
its authorization for two fixed satellite service ("FSS") orbital slots have
been challenged by third parties before the FCC. In determining whether to grant
the Company authorization, the FCC must evaluate whether the Company satisfies
certain FCC standards and meets financial qualification requirements. There is
no assurance that the FCC will find the Company qualified as a licensee for the
extended Ku-band systems, the FSS orbital slots, or for future systems that may
be proposed by the Company. Moreover, there can be no assurance that the FCC
will act on the Company's pending applications in a timely manner. Regulatory
delays could adversely affect the Company or result in significant cost
increases. In addition, even if the FCC were to grant the Company its requested
authorizations, such authorizations are subject to petitions for reconsideration
and judicial review as described above. The failure by the Company to meet
construction and other milestones established with the FCC may also result in
the revocation of its authorizations.
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The FCC may, at any time, modify its rules, policies and the Company's
authorizations, which may include adopting modifications that impose
restrictions or limitations on the operation of the Company's satellites, with a
corresponding material adverse effect on the Company's prospects and financial
condition.
International Coordination and Regulation. The Company's operations are
subject to international coordination. The failure to successfully coordinate
its satellites on an international basis may adversely affect the Company's
ability to provide services outside the United States. Two of the Company's
Ka-band orbital slots for Cyberstar are located in positions that are subject to
prior claims of parties from other countries. There is no assurance that the
Company and such parties will be able to reach a satisfactory accommodation.
Regulatory schemes in countries in which the Company seeks to operate may also
impede the Company's operations. There is no assurance that necessary approvals
will be granted on a timely basis in the jurisdictions in which the Company
wishes to operate, if at all, or that restrictions applicable thereto will not
be unduly burdensome.
Competition. The space and communications industry is highly competitive
and is dominated by companies with significantly greater financial, technical
and regulatory resources than those of the Company. The Company will compete
with such parties for customers and for local regulatory approval in
jurisdictions in which the Company or such third parties may wish to operate. In
addition, the Company will have to compete for allocation of scarce frequency
assignments and geosynchronous orbital slots in order to pursue its business
plan. There is no assurance that the Company will be able to compete effectively
against such parties. In addition, the Company may face additional competition
from new entrants in the future.
Additional Financing Requirements. The Company is currently considering a
number of opportunities that will involve significant capital expenditures by
the Company, many of which will not be expected to generate revenues until years
after such capital outlay. In addition, the capital requirements of SS/L and
Globalstar are also significant. In order to fully fund all such opportunities
or to make additional investments in SS/L and Globalstar, 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 of Globalstar. There
can be no assurance that such financing may be obtained on favorable terms, if
at all. In addition, any issuance of equity securities by Globalstar may result
in a dilution of the Company's equity interest to the extent the Company does
not participate therein. A shortfall in meeting such capital needs could prevent
completion of some or all of the projects currently being pursued by the Company
or SS/L and Globalstar.
Limited Control over Globalstar. While the Company manages Globalstar, the
Globalstar partnership agreement limits the ability of the Company to take
certain actions without the approval of at least one Independent Representative
to the General Partners' Committee. As a result, the Company may be unable to
cause Globalstar to take actions which the Company might deem to be in its best
interests.
Risks Inherent in Foreign Operations. The Company expects that a
substantial portion of its business will be conducted outside of the United
States. Such operations are subject to certain risks such as changes in domestic
and foreign government regulations and telecommunications standards, tariffs or
taxes and other trade barriers. Accordingly, government actions in foreign
countries could have a significant effect on the Company's operations.
Political, economic or social instability or other developments in such
countries, including currency fluctuations and the inability to convert foreign
currencies to U.S. dollars, could also adversely affect the Company's
operations. In addition, the Company's agreements relating to local operations
may be governed by foreign law or enforceable only in foreign jurisdictions. As
a result, in the event of a dispute, it may be difficult for the Company to
enforce its rights under such agreements.
Risks Associated with Changing Technology. The space and communications
industries are characterized by rapid technological advances and innovations.
There is no assurance that one or more of the technologies utilized or under
development by the Company may not become obsolete, or that its services will be
in demand by the time they are offered. The Company will be dependent upon
technologies developed by third parties to implement key aspects of its strategy
to integrate its satellite systems with terrestrial networks, and there can be
no assurance that such technologies will be available to the Company on a timely
basis or on reasonable terms.
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Conflicts of Interest. Partners of Globalstar and shareholders of the
Company are principal suppliers to, subcontractors for, and customers of or
service providers for SS/L and Globalstar. In addition, SS/L is the prime
contractor for Globalstar's satellite constellation and for Skynet's Telstar
satellites. SS/L and its subcontractors have provided vendor financing to
Globalstar. As a result, conflicts of interest may arise with respect to such
contracts and arrangements. The Globalstar partnership agreement provides for
certain procedures relating to the approval of agreements entered into by
Globalstar and its partners.
Reliance on Key Personnel. The success of the Company's business will be
partially dependent upon the ability of the Company, SS/L, Globalstar and Skynet
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 officers of the Company 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 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,
Skynet 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 to either (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).
The Company expects that a significant portion of its worldwide income will
not be subject to tax by the United States, Bermuda or by the countries from
which it derives its income. However, the extent to which certain jurisdictions
may require the Company to pay tax or to make payments in lieu of tax cannot be
determined in advance.
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.
SPACE SYSTEMS/LORAL
Dependence on Limited Number of Customers and Programs. SS/L historically
has derived a large portion of its total revenues from a limited number of
customers. Sales to the U.S. Government represented 8%, 10%, 23% of revenues for
the nine months ended December 31, 1996 and the years ended March 31, 1996, and
1995 respectively. Sales to foreign customers, primarily in Asia, represented
25%, 27% and 15% of revenues for the nine months ended December 31, 1996 and for
the years ended March 31, 1996 and 1995, respectively. For the nine months ended
December 31, 1996, two commercial customers represented 28% and 15% of revenues.
For the year ended March 31, 1996, two commercial customers represented 30% and
13% of revenues. Four commercial customers represented 23%, 20%, 15% and 13% of
revenues for the year ended March 31, 1995.
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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. Loral's acquisition of Skynet, and
the resulting affiliation between SS/L and Skynet, which is a competitor to a
number of SS/L's existing and potential customers, may adversely affect SS/L's
ability to win satellite contracts from such customers in the future.
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
communications 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 products.
Risk of Satellite Malfunction or Launch Failure. Certain of SS/L's
contracts provide that a portion 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.
Satellite malfunctions may also damage a manufacturer's reputation for quality
and its relationship with the affected customers.
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, where international operations are contemplated, may require
the approval of foreign regulatory authorities as well. 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 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 an adverse effect on SS/L's business operations.
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 period in question. The risks inherent in
long-term fixed-price contracts include the forecasting of costs and schedules,
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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 republics of the former Soviet Union and the People's Republic
of China are affected by U.S. government policies and international agreements.
To the extent appropriate launch services and insurance become unavailable or
prohibitively expensive to the satellite industry, including SS/L, 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.
GLOBALSTAR
Development Stage Company
Globalstar is a development stage company and has no operating history.
From its inception, Globalstar has incurred net losses and expects such losses
to continue. Globalstar will require expenditures of significant funds for
development, construction, testing and deployment before commercialization of
the Globalstar System. Globalstar does not expect to launch satellites until the
second half of 1997, to commence operations before the second half of 1998 or to
have positive cash flow before 1999. There can be no assurance that Globalstar
will achieve its objectives by the targeted dates.
As of February 1997, Globalstar estimates the cost for the design,
construction and deployment of the Globalstar System, including working capital,
cash interest on anticipated borrowings and operating expenses, to be
approximately $2.5 billion. Actual amounts may vary from this estimate.
Additional funds would be required in the event of unforeseen delays, cost
overruns, launch failures, technological risks, adverse regulatory developments,
or to meet unanticipated expenses and for system enhancements and measures to
assure system performance and readiness for the space and ground segments. As of
February 13, 1997, Globalstar had raised or received commitments for
approximately $2.0 billion. Globalstar believes that its current capital, vendor
financing commitments, the availability of the Globalstar credit agreement and
the proceeds from the exercise of the warrants, are sufficient to fund its
requirements into the first quarter of 1998. Globalstar intends to raise the
remaining funds required from a combination of sources including debt issuance
(which may include an equity component), financial support from the Globalstar
partners, projected service provider payments, projected net service revenues
from initial operations and anticipated payments received from the sale of
gateways and Globalstar Phones. Although Globalstar believes it will be able to
obtain these additional funds, there can be no assurance that such funds will be
available on favorable terms or on a timely basis, if at all. If there are
unforeseen delays, if technical or regulatory developments result in a need to
modify the design of all or a portion of the Globalstar System, if service
provider agreements for additional territories are not entered into at the times
or on the terms anticipated by Globalstar or if other additional costs are
incurred, the risk of which is substantial, additional capital will be required.
The ability of
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Globalstar to achieve positive cash flow will depend upon the successful and
timely design, construction and deployment of the Globalstar System, the
successful marketing of its services by service providers and the ability of the
Globalstar System to successfully compete against other satellite-based
telecommunications systems, as to which there can be no assurance. If Globalstar
fails to commence commercial operations in the second half of 1998 or achieve
positive cash flow in 1999, additional capital will be needed.
Globalstar believes it will be able to obtain the additional financing it
requires, but there can be no assurance that the capital required to complete
the Globalstar System will be available from public or private capital markets
or from its existing partners on favorable terms or on a timely basis, if at
all. A substantial shortfall in meeting its capital needs would prevent
completion of the Globalstar System.
Many of the problems, delays and expenses encountered by an enterprise in
Globalstar's stage of development 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. These include delays in 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 made to enhance its features, performance or marketability or in response
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.
Regulation
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 markets in which its service providers intend to
operate. Even though a Globalstar affiliate has received a FCC authorization,
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.
Globalstar's business may also be significantly affected by regulatory changes
resulting from judicial decisions and/or adoption of treaties, legislation or
regulation by the national authorities where the Globalstar System plans to
operate.
Globalstar's FCC license, as modified on November 19, 1996, authorizes the
construction, launch and operation of the satellite constellation and assigns
the system user links and feeder links in the United States. Globalstar's feeder
link frequencies were allocated internationally at WRC95, and have been assigned
by the FCC for use in the United States in accordance with the international
allocation. However, use of the feeder link frequencies remains subject to
restrictions that may be adopted in a potential FCC proceeding to adopt the
international allocations into the U.S. Table of Frequency Allocations. The FCC
recently adopted rules for the use of a portion of the frequencies allocated at
WRC95 for MSS feeder links (such as Globalstar's) to a proposed high-speed
wireless data service. Although these rules are intended to preclude harmful
interference with other uses of these bands, they may ultimately permit uses of
these frequencies that could diminish their usefulness for MSS feeder links.
Separate licenses must also be obtained from the FCC for operation of gateways
and Globalstar Phones in the United States.
To the extent that additional MSS systems are authorized by the FCC or
other national regulatory bodies to use the spectrum for which Globalstar has
been authorized, the Globalstar System's capacity would be reduced. In addition,
Globalstar's FCC license is subject to two pending judicial appeals. While
Globalstar believes that these appeals are without merit, there can be no
assurance that these appeals would not result in either reversal or stay of the
FCC's decision to grant Globalstar's FCC license to LQP or ultimately result in
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the granting of additional licenses by the FCC or its adoption of an auction
procedure to award licenses, which might materially increase the cost of
obtaining such licenses.
Authorization will be required in each country in which Globalstar Phones
are used and in which Globalstar's gateways are located. Local regulatory
approval for operation of the Globalstar System is the responsibility of the
service providers in each territory. 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, and if they are not
successful, Globalstar service will not be available in such territories. 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 markets in which service is
authorized.
Regulatory schemes in countries in which Globalstar or its service
providers seek to operate may impose impediments on Globalstar's operations.
There can be no assurance that such restrictions would not be unduly burdensome.
Glonass, the Russian Global Navigation Satellite System, operates worldwide
in a portion of the frequency band proposed to be used by Globalstar and other
MSS systems for user uplinks. Although Glonass has proposed to migrate to lower
frequencies, there can be no assurance that such migration will be implemented
in a manner fully acceptable to Globalstar. In addition, there are requirements
for interference protection between Globalstar and Glonass under consideration,
which, if adopted, may render a segment of the MSS spectrum unusable for MSS
user uplinks. While any likely limitation is not expected to have a material
adverse effect upon Globalstar's capacity, nevertheless, these actions may have
the effect of reducing Globalstar capacity in some markets.
European Union competition law proscribes agreements that restrict or
distort competition in the European Union. Globalstar and others have responded
to an inquiry from the Commission of the European Union requesting information
regarding their activities. A violation of European Union competition law could
subject Globalstar to fines or enforcement actions that could delay 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 which, if adopted, would give
the Commission broad regulatory authority over satellite telecommunications
systems such as the Globalstar System.
Technological Factors
The Globalstar System is exposed to the risks inherent in a large-scale
complex telecommunications system employing advanced technologies which must be
adapted to the Globalstar application and which have never been used as a
commercial whole. Deployment of the Globalstar satellite constellation will
involve volume production and testing of satellites in quantities significantly
higher than those previously prevailing in the industry. The integration of a
worldwide LEO satellite-based system like Globalstar has never occurred; there
is no assurance that such integration will be successfully implemented. The
operation of the Globalstar System will require the detailed design and
integration of advanced digital communications technologies in devices from
personal handsets and public telephone networks to gateways in remote regions of
the globe and satellites operating in space. The failure to develop, produce and
implement the system, or any of its diverse and dispersed elements, as required,
could delay the In-Service or Full Constellation Date of the Globalstar System
or render it unable to perform at levels required for commercial success.
Satellite launches are subject to significant risks, including disabling
damage to or loss of the satellites. 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. The McDonnell-Douglas Delta launch vehicle, scheduled
to launch the first eight satellites (four per launch) of the Globalstar
satellite constellation, suffered a launch failure on January 17, 1997. The
United States government is currently investigating the cause of this launch
failure, the second in this rocket's last 62 launches. Globalstar's first
launch, which is currently scheduled for September 1997 aboard a Delta II
rocket,
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could be delayed by this investigation. Nevertheless, Globalstar does not expect
that such delay, if any, in the initial launch date would result in a delay in
the In-Service Date or the Full Constellation Date. The Ukrainian Zenit launch
vehicle, which is proposed to launch 36 Globalstar satellites (12 per launch),
has never been used in commercial applications. Satellite launches of groups of
more than eight commercial satellites have not been attempted before. Globalstar
intends to launch the last 12 satellites of its constellation in groups of four
on three separate launches of the Russian Starsem Soyuz rocket. There is no
assurance that Globalstar satellite launches will be successful or that its
launch failure rate will not exceed the industry average.
The Zenit launch contracts provide for relaunches at no additional charge
in the event of a hot failure. However, the launch provider may, because of
financial reasons or otherwise, be unable to provide such relaunches. A single
launch failure would result in a loss of either four or 12 Globalstar
satellites. Although the cost of replacing such satellites and launch vehicles
will in most cases be covered by insurance, a launch failure could result in
delays in the In-Service or the Full Constellation Date.
SS/L has agreed to obtain launch vehicles for Globalstar and arrange for
the launch of all 56 satellites, subject to pricing adjustments in light of
future market conditions, which may, in turn, be influenced by international
political developments. An adverse change in launch vehicle market conditions
which prohibits Globalstar from utilizing the launch vehicles for which it has
contracted could result in an increase in the launch cost payable by Globalstar,
which may be substantial. In addition, there can be no assurance that
replacement launch vehicles will be available in the future at a cost or on
terms acceptable to Globalstar.
Two of the launch operators are subject to U.S. export control regulations.
Yuzhnoye, based in Ukraine, has certain ties with Russia and intends to launch
the Zenit rocket from the Baikonur launch site in Kazakhstan. Arianespace, which
will be providing the Soyuz rockets, also intends to launch from Baikonur.
Changes in governmental policies or political leadership in the United States,
Ukraine, Russia or Kazakhstan could affect the cost, availability, timing or
overall advisability of utilizing these launch providers. While there is no
assurance that the necessary export licenses will be obtained, Globalstar has
provided against the risk that such licenses will not be granted or that the
deterioration in the relationships between the United States and these countries
may make the use of such launch providers inadvisable by procuring options on
sufficient launches with a U.S.-based launch provider to launch all the
remaining satellites of the Globalstar constellation. If Globalstar were to
exercise these options for U.S. launches in the wake of the failure to obtain
any necessary export licenses or as a result of adverse developments in U.S.
relations with these countries, the cost of launching the Globalstar satellite
constellation would be significantly increased.
A number of factors will affect the useful lives of Globalstar's
satellites, including the quality of construction, expected gradual
environmental degradation of solar panels and the durability of component parts.
Random failure of satellite components could result in damage to or loss of a
satellite ("cold failures"). In rare cases, satellites could also be damaged or
destroyed by electrostatic storms or collisions with other objects. As a result
of these factors, 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 were significantly shorter than 7 1/2 years. Globalstar anticipates
using funds generated from operations to develop a second generation of
satellites. If sufficient funds from operations are not available and Globalstar
is unable to obtain external financing for the second-generation constellation,
Globalstar will not be able to deploy a second-generation satellite
constellation to replace first-generation satellites at the end of their useful
lives. In that event, the Globalstar System would cease operations at that time.
Globalstar intends to 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. SS/L has agreed to
obtain on Globalstar's behalf insurance for the cost of replacing satellites
lost in hot failures, and for any relaunch costs not covered by the applicable
launch contract, in certain circumstances subject to pricing adjustments in
light of future market conditions. An adverse change in insurance market
conditions may result in an increase in the insurance premium paid by
Globalstar, which may be substantial. In addition, there is no
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assurance that launch insurance will be available or that, if available, would
be at a cost or on terms acceptable to Globalstar.
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.
However, 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, Globalstar's In-Service or Full Constellation Date may be
delayed. In addition, unless otherwise required, Globalstar does not currently
intend to purchase insurance to cover cold failures that may occur once the
satellites have been successfully deployed from the launch vehicle.
The space and communications industries are characterized by rapid
technological advances and innovations. There is no assurance that one or more
of the technologies utilized or under development by Globalstar may not become
obsolete, or that its services will be in demand by the time they are offered.
Globalstar will be dependent upon technologies developed by third parties to
implement key aspects of its strategy to integrate its satellite systems with
terrestrial networks, and there can be no assurance that such technologies will
be available to Globalstar on a timely basis or on reasonable terms.
Future Operating Factors
The availability of Globalstar service in each region or country will
depend upon the cooperation, operational and marketing efficiency,
competitiveness, finances and regulatory status of Globalstar's service provider
in that region or country. The willingness of companies to become service
providers will depend upon a variety of factors, including pricing, local
regulations and Globalstar's competitiveness with other satellite-based
telecommunications systems. Globalstar believes that enlisting the support of
established telecommunications service providers, some of which are the dominant
carriers in their markets, will be essential both to obtaining necessary local
regulatory approvals and to rapidly accessing a broad market of potential users.
Globalstar's strategic service providers have agreed to act as exclusive service
providers in 71 countries although it is anticipated that in many cases these
partners will enter into strategic alliances with local service providers to
provide Globalstar service in these countries. In addition, Globalstar expects
to raise additional funds prior to the Full Constellation Date in the form of
service provider payments from prospective service providers in other
territories throughout the world. Globalstar's business plan assumes that
Globalstar will contract with service providers to provide service in the
remaining territories of the world, in certain cases, on terms more favorable to
Globalstar than those contained in its founding service provider agreements.
There can be no assurance that additional service provider agreements will be
entered into in the future or that this plan will be achieved. If such service
provider payments are not realized, Globalstar will be required to obtain other
sources of financing in order to complete the Globalstar System.
If the service providers fail to obtain the necessary local regulatory
approval or to adequately market and distribute Globalstar's services,
Globalstar's business could be adversely affected. There can be no assurance
that enough service providers will contract for Globalstar service and procure
and install the gateways and obtain the regulatory licenses necessary for
complete global service. Failure to offer service in any particular region will
eliminate that area's market potential and reduce Globalstar's ability to
service its global roamer market.
Certain strategic partners and other third parties are designing and
constructing the component parts of the Globalstar System. In the event such
parties are unable to perform their obligations, Globalstar's In-Service and
Full Constellation Date may be delayed and its costs may be increased.
Globalstar expects that a substantial portion of its business will be
conducted outside of the United States. Such operations are subject to certain
risks such as changes in domestic and foreign government regulations and
telecommunications standards, tariffs or taxes and other trade barriers.
Accordingly, government actions in foreign countries could have a significant
effect on Globalstar's operations. Political, economic or social instability or
other developments in such countries, including currency fluctuations, could
also adversely affect Globalstar's operations. In addition, Globalstar's
agreements relating to local operations may
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be governed by foreign law or enforceable only in foreign jurisdictions. As a
result, in the event of a dispute, it may be difficult for Globalstar to enforce
its rights under such agreements.
Globalstar's largest potential markets are in developing countries or
regions that are substantially underserved and not expected to be served by
existing telecommunications systems. In doing business in such markets,
Globalstar and its local service providers may face market, inflation, interest
rate and currency fluctuation, government policy, price and wage, exchange
control, taxation and social instability, expropriation and other economic,
political or diplomatic conditions that are significantly more volatile than
those commonly experienced in the United States and other industrialized
countries. Although Globalstar anticipates that it will receive payments from
its service providers in U.S. dollars, limited availability of U.S. currency in
these local markets may prevent a service provider from making payments in U.S.
dollars. Moreover, exchange rate fluctuations may affect the price Globalstar
will be entitled to receive for its services.
Globalstar's pricing to service providers will, under certain
circumstances, not be automatically adjusted for inflation; in such cases,
Globalstar will be able to increase its pricing to service providers only if the
service provider increases its prices to subscribers, and it may be required to
lower its pricing if the service provider lowers its prices to subscribers. In
recent years, pricing in the telecommunications industry has trended downward,
in some cases making it difficult for service providers to raise their prices to
compensate for cost inflation. Although Globalstar expects future service
provider agreements to contain pricing terms more favorable to Globalstar than
those contained in its agreements with founding service providers, there can be
no assurance that such terms will be achieved.
Globalstar has entered into an agreement with a bank syndicate for a $250
million credit facility expiring December 15, 2000, and also expects to utilize
$310 million of committed vendor financing. The Globalstar credit agreement
permits Globalstar to incur up to $950 million of indebtedness on a senior
basis, including the $500 million aggregate principal amount of Globalstar's
11 3/8% Senior Notes sold in February 1997, to finance the build-out of the
Globalstar System; an unlimited amount of indebtedness may be incurred by
Globalstar on a subordinated basis. Significant additional debt is expected to
be incurred in the future. As a result, Globalstar is expected to be highly
leveraged. Globalstar will be dependent on its cash flow from operations to
service this debt. Any delay in the commencement of Globalstar operations will
adversely affect Globalstar's ability to service its debt obligations. The
discretion of Globalstar's management with respect to certain business matters
will be limited by covenants contained in the Globalstar credit agreement, the
Indenture related to the Senior Notes and future debt instruments. Among other
things, the covenants contained in the Globalstar credit agreement and the
Indenture restrict, condition or prohibit Globalstar from paying cash
distributions on its ordinary partnership interests, creating liens on its
assets, making certain asset dispositions, conducting certain other business and
entering into transactions with affiliates and related persons. In the event the
Globalstar credit agreement ceases to be guaranteed, it will also contain
certain financial covenants limiting the ability of Globalstar to incur
additional indebtedness. 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. Moreover, a failure to comply with the obligations
contained in the Globalstar credit agreement, the Indenture and or any
agreements with respect to additional financing could result in an event of
default under such agreements, which could permit acceleration of the related
debt and acceleration of debt under future debt agreements that may contain
cross-acceleration or cross-default provisions.
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 participant is
currently providing the same global personal telecommunications service proposed
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 succeeds in marketing and deploying its system
substantially earlier than Globalstar, Globalstar's ability to compete in areas
served by such competitor may be adversely affected. A number of satellite-based
telecommunications systems not involved in the MSS Proceeding have also been
proposed using geostationary satellites and, in one case, the 2 GHz band for a
MEO system.
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Globalstar's most direct competitors are the two other MSS applicants which
received FCC licenses, Iridium and Odyssey. ICO was not an applicant or a
licensee in the MSS Proceeding or any other proceedings before the FCC; it is
seeking to operate in a different frequency band not available for use by MSS
systems under current international guidelines in place until 2000. Comsat, the
U.S. signatory to Inmarsat, has applied to the FCC to participate in the
procurement of facilities of the system proposed by ICO. It has also sought FCC
approval of a proposal to extend the scope of services provided by Inmarsat,
currently limited to maritime services, to include telecommunications services
to land-based mobile units. These applications are currently pending before the
FCC. Comsat has been instructed in the past by the U.S. government to seek to
ensure that ICO does not receive preferred access to any market and that
non-discriminatory access to such areas for all mobile satellite communications
networks be established, subject to spectrum coordination and availability.
Nonetheless, because ICO is affiliated with Inmarsat and because its investors
include state-owned telecommunications monopolies in a number of countries,
there can be no assurance that ICO might not be given preferential treatment in
the local licensing process in those countries. It is also possible that one or
more of the two pending MSS applicants will demonstrate financial qualification
sufficient to obtain an FCC license and become a competitor of Globalstar.
In addition to competing for investment capital, subscribers and service
providers in markets all over the world, the MSS systems, including Globalstar,
also compete with each other for the limited spectrum available for MSS
operations. Unlike CDMA systems such as Globalstar and Odyssey, which permit
multiple systems to operate within the same band, the design of Iridium's TDMA
system requires a separate frequency segment dedicated specifically for its use.
If more than two CDMA systems become operational, CDMA systems like Globalstar
will effectively have a smaller spectrum segment within which to operate their
user uplinks in the U.S. While CDMA does permit spectrum sharing among competing
systems, the capacity of the systems operating within that spectrum will
decrease as the number of systems operating in the band increases. For example,
Globalstar's capacity over a given area would decrease by approximately 25% if
the total number of licensed MSS systems increased from three to four, assuming
that Iridium is one of the licensed systems and the two other CDMA systems
receiving licenses have technical characteristics similar to Globalstar's and
experience the same level of usage.
The FCC has no authorization to extend the U.S. band plan for CDMA and TDMA
Big LEO systems to other countries. However, it has stated that it plans to
express the view in discussions with other administrations that global satellite
systems are more likely to succeed if individual administrations adopt
complementary systems for licensing them.
Geostationary-based satellite systems, including AMSC, APMT, ASC, ACeS,
Lockheed Martin's Satphone and Comsat's Planet-1, plan to provide
satellite-based telecommunications services in areas proposed to be serviced by
Globalstar. Because some of these 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 bases,
thereby increasing the competition to Globalstar. For example, Comsat has
announced a global mobile satellite service (Planet-1) using existing Inmarsat
satellites, a six-pound, laptop-size phone, costing $3,000 with an expected
per-minute usage rate of $3.00.
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 statements and other
publicly available information of the other MSS applicants, Globalstar will be a
low-cost provider. Depending on the competitive environment, however, pricing
competition could require Globalstar to reduce its anticipated pricing to
service providers, thus adversely affecting its financial performance.
Satellite-based telecommunications systems are characterized by high
up-front costs and relatively low marginal costs of providing service. Several
systems are being proposed and, while the proponents of these
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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 operational. If the capacity of Globalstar and any competing
systems exceeds demand, price competition could be particularly intense.
Teledesic, Spaceway and Cyberstar have each applied to the FCC for licenses
to operate satellite-based telecommunications and video transmission systems in
the 28 GHz Ka-band. Certain MSS applicants, not including Globalstar, have
applied to use this band for their feeder uplinks, as have proponents of
land-based local multipoint distribution system ("LMDS") for cellular television
services. The FCC is in the process of developing a band-width allocation plan
for use of the available Ka-band spectrum by these services. Globalstar's
primary business will be voice telephony, and its data transmission business
will be focused on small data packet services such as paging and messaging. It
therefore does not regard the television or broadband data services to fixed
terminals proposed by Teledesic, Spaceway and Cyberstar or the wireless cable
and fixed telephony services proposed by the LMDS applicants as competing
services.
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.
Subscriber acceptance of the Globalstar System (both in terms of placement
of Globalstar Phones and subscriber usage thereof) will depend upon a number of
factors, including price, demand for service and the extent of availability of
alternative telecommunications systems. If the level of actual subscriber demand
and usage for Globalstar service is below that expected by Globalstar,
Globalstar's cash flow will be adversely affected. Globalstar's hand-held phone
is expected to be larger and heavier for the same talk time than today's smaller
and lighter pocket-sized, hand-held cellular telephones and is expected to have
a significantly longer and thicker antenna than hand-held cellular telephones.
The Globalstar System will function best when there is an unobstructed
line-of-sight between the user and one or more of the Globalstar satellites.
Obstacles such as buildings, trees or mountainous terrain may degrade service
quality, more so than would be the case with terrestrial cellular systems, and
service may not be available in the core of high-rise buildings. There is no
assurance that these characteristics of the hand-held Globalstar Phone will not
adversely affect subscriber demand for Globalstar service.
There has been adverse publicity concerning alleged health risks associated
with the use of portable hand-held telephones with transmitting antennas
integrated into handsets. On August 1, 1996, the FCC announced new guidelines
for evaluating environmental radio frequency radiation from FCC-regulated
transmitters based primarily on the exposure criteria recommended in 1986 by the
National Council on Radiation Protection Measurements ("NCRP"). Guidelines
applicable to certain portable transmitting devices are based on the NCRP
criteria and the exposure criteria developed by the Institute of Electrical and
Electronic Engineers and recommended in 1992 by the American National Standards
Institute. These guidelines were to become effective as to applications filed
after January 1, 1997; the FCC, however, has deferred the effective date until
September 1, 1997. The handsets Globalstar has contracted with Qualcomm to
develop for use by mobile subscribers will have antennas for communication with
the satellites and, in the case of the dual-mode and tri-mode hand-held
Globalstar Phones, with the land-based cellular system. Because hand-held
Globalstar Phones will use on average lower power to transmit signals than
traditional cellular units, Globalstar does not believe that the proposed new
guidelines will require any significant modifications of the Globalstar System
or of the mobile hand-held Globalstar Phones designed to be used with the
Globalstar System. There can, however, be no assurance that the guidelines, as
adopted, or any associated health concerns, would not have an adverse effect on
Globalstar's mobile handset business.
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The success of Globalstar's business will be partially dependent upon the
ability of Globalstar to attract and retain highly qualified technical and
management personnel. None of the employees of Globalstar has an employment
contract with Globalstar nor does Globalstar 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 Globalstar's business.
Other Factors
Partners of LQSS, the managing general partner of Globalstar, or their
affiliates are principal suppliers to Globalstar of the major components of the
Globalstar System, and are also expected to engage in the manufacture of system
elements to be sold to service providers and subscribers. During the design,
development and deployment of the Globalstar System, Globalstar will be
substantially dependent upon the management skills of Loral and certain
technologies developed by Loral, Qualcomm and SS/L to design and manufacture the
Globalstar satellite constellation, SOCCs, GOCCs, gateways and Globalstar
Phones. Globalstar has entered into contracts for the design of various segments
of the Globalstar System with affiliates of LQSS, including a fixed-price
satellite production contract with SS/L and a cost-plus-fee contract with
Qualcomm to design the gateways, GOCCs and Globalstar Phones. To the extent that
such contracts have been or will be awarded to partners of Globalstar or LQSS or
their affiliates, such parties will have a conflict of interest with respect to
the terms thereof.
Partners and affiliates of Globalstar, including companies affiliated with
or controlled by Loral, will be among Globalstar's principal service provider
customers and may therefore have conflicts of interest with respect to the terms
of Globalstar's service provider agreements and any proposed amendments thereto.
In addition, if Globalstar is unable to offer Globalstar service to a service
provider on competitive terms in a particular country or region, such a service
provider, which may be a partner of Globalstar, can act as a service provider to
a competing MSS system in such region or country while at the same time serving
as a Globalstar service provider in other markets.
SKYNET
Competition. Skynet is subject to significant competition. Skynet's
competitors in the U.S. domestic satellite services industry have significantly
greater financial, manufacturing, marketing and technical resources than those
of the Company. As the Company expands into international markets, it will have
to compete, in addition, with international operators including Intelsat and
PanAmSat. Further, Skynet's satellites face competition from alternative
technologies, including fiber optic cable technology and other terrestrial
alternatives, which could reduce demand for its services.
Regulation. The Skynet operations are subject to the Communications Act
and are regulated by the FCC. The FCC licenses all radio facilities used in the
United States including satellites and earth station facilities used to
communicate with satellites. Such licenses are limited in duration and must be
renewed (or new licenses obtained) at the expiration of the license term if the
licensee intends to continue providing services. There can be no assurance that
the authorizations for Telstar 5 and Telstar 6 will not be challenged or, if
challenged, that such challenges will not be successful. Because Skynet's
operations are subject to FCC regulation, Skynet's prospects and financial
condition may be adversely affected by the adoption of new laws, policies or
regulations that have the effect of modifying the regulatory environment under
which Skynet currently operates or the conditions of the licenses granted by the
FCC. In addition, as part of the regulatory process for orbital slot allocation
of its satellites, Skynet is required to engage in frequency coordination with
other satellite operators. Although Skynet has in the past been able to
coordinate its existing satellites, there can be no assurance that satisfactory
coordination will be achieved for any of Skynet's future satellites.
Any expansion of Skynet's operations beyond the domestic U.S. market will
subject Skynet to the regulatory authority of the national communications
authorities of the countries in which it will operate. Skynet, its customers or
customers with which Skynet will do business, will be required to have
authorization for each country in which Skynet will do business. There can be no
assurance that such approvals will be
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granted on a timely basis in all jurisdictions in which Skynet wishes to operate
in the future or that restrictions applicable thereto will not be unduly
burdensome.
Risk of Delays and Cost Overruns. A significant delay in the delivery or
launch of any of Skynet's future satellites would adversely affect the Company's
marketing plan for such satellite. There can be no assurance that increases in
cost due to change orders or delay will not occur. If such additional costs are
incurred, and if internally generated cash flow is not sufficient to fund such
costs, the Company may need to obtain additional financing. There can be no
assurance that such financing will be available.
Risk of Satellite Loss, Reduced Performance or Malfunction. Satellites are
subject to significant risks, including satellite defects, launch failure,
destruction and damage that may result in incorrect orbital placement and
prevent proper commercial operation. Approximately 15% of all commercial GEO
satellite launches have resulted in a total or constructive total loss although
there is a significant difference in mission success rates of the various launch
service providers. Skynet intends to launch Telstar 5 on the Russian Proton
launch vehicle, which has a launch success rate of 92%. In addition, satellites,
even when properly placed into orbit, are thereafter subject to risk of loss,
destruction or damage resulting from design or manufacturing defects, military
actions or acts of war, electrostatic storm or collision with space debris. In
1994 and 1997, Skynet experienced loss of its Telstar 402 and Telstar 401
satellites, respectively, resulting in lost service and a corresponding adverse
effect on Skynet's results of operations. The Company intends to maintain
insurance covering Skynet's satellites as is customary in the industry. There
can be no assurance, however, that such insurance can be purchased on favorable
terms, if at all.
Limited Life of Satellites. Satellites have limited useful lives. A number
of factors will affect the useful life of a satellite, including the quality of
its construction, the durability of its component parts and its station-keeping
fuel supply. The Telstar 4 series was built by Lockheed Martin Astro-Space.
Telstar 402R has an expected remaining useful life of approximately 13 years;
however, Telstar 402R is a similar flight model to Telstar 401 and Telstar 402,
which have experienced total loss of service. Telestar 5,6 and 7 are entirely
different satellites being built by SS/L. Skynet's operating results would be
adversely affected to the extent the useful lives of its satellites are
significantly shorter than expected.
Risks Related to Russian Launch Provider. Skynet plans to launch Telstar 5
on a Russian-built Proton rocket from the Baikonur launch site in Kazakhstan.
The governmental, political, social and legal structures within Russia and
Kazakhstan are evolving and may be subject to additional changes. Changes in
governmental policies or political leadership in the United States, Russia or
Kazakhstan could affect the cost, availability, timing and/or overall
advisability of using a Russian launch provider.
Technological Developments. Technology in the satellite industry is in a
rapid and continuing state of change as new technologies develop. There can be
no assurance that Skynet will be able to keep pace with such technological
developments.
ITEM 2. PROPERTIES
The Company sub-leases office space from Lockheed Martin at 600 Third
Avenue, New York, New York 10016.
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 797,000 square feet of space from various
third parties.
Globalstar leases approximately 56,000 square feet of office space from
Lockheed Martin in San Jose, California and 12,000 square feet for its back-up
GOCC in El Dorado Hills, California.
Management believes that all facilities are sufficient to allow the Company
to carry on its operations.
Skynet maintains two telemetry, tracking and control stations located in
Hawley, Pennsylvania and Three Peaks, California.
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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. The trial judge,
however, in an order dated July 12, 1996, reversed the jury verdict. Loral
Fairchild has appealed the court's decision. Loral Fairchild's claims against
other defendants remain pending, but if the court's decision is affirmed on
appeal, a substantial portion, but not all, of the damage claims against the
other defendants would be adversely affected. Matsushita has been granted a
declaratory judgment that it has a valid and enforceable license under the CCD
patents. In addition, a trial on Matsushita's claim against Loral Fairchild for
tortious interference was conducted during July 1996 but the Court has not yet
ruled on the matter.
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 Old Loral from any losses relating thereto.
Neither SS/L or Globalstar is a party to any pending legal proceedings
material to its financial condition or results of operation.
Environmental Regulation. Operations at SS/L, Skynet and Globalstar 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 and its
subsidiaries or Globalstar.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
(A) MARKET PRICE AND DIVIDEND INFORMATION
The Company's common stock is traded on the NYSE under the symbol LOR. The
following table sets forth, for each of the periods indicated, the reported high
and low sales prices per share of the Company's common stock as reported on the
NYSE:
HIGH LOW
---- ----
PERIOD ENDING DECEMBER 31, 1996
Quarter ended June 30, 1996............................. $18 1/2 $10 1/2
Quarter ended September 30, 1996........................ 16 5/8 11 1/8
Quarter ended December 31, 1996......................... 19 5/8 15 1/4
The Company does not currently anticipate paying any dividends or
distributions on its common stock or on the Series A Convertible Preferred Stock
held by Lockheed Martin. Neither Globalstar nor SS/L has paid any dividends or
distributions since their respective dates of inception or acquisition by Loral,
as the case may be. The Globalstar credit agreement and the indenture related to
the Globalstar senior notes 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. To the extent that the
Company or SS/L and Globalstar incur debt financing in the future, similar
limitations will likely be imposed.
(B) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At February 28, 1997, there were approximately 6,600 holders of record of
the Company's common stock.
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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 prior to April 23, 1996 for Loral Space & Communications Ltd.
represents the space and communications operations of Old Loral.
LORAL SPACE & COMMUNICATIONS LTD.
PRO FORMA COMBINED OPERATIONS INCLUDING AFFILIATES
(In thousands, except per share data)
(Unaudited)
Loral currently reports the results of operations of its affiliates, SS/L,
Globalstar and K&F, using the equity method of accounting. To provide an
understanding of the operations managed by Loral, the following pro forma
combined financial data have been prepared to aggregate the results of Loral and
its affiliates for the nine months ended December 31, 1996 and 1995.
NINE MONTHS ENDED DECEMBER 31, 1996
-------------------------------------------------------------
PRO FORMA
SS/L GLOBALSTAR K&F LORAL(1) COMBINED(2)
---------- ---------- -------- -------- -----------
Revenues.................................................. $1,017,653 $212,703 $ 5,088 $ 949,729
========= ======== ======== ============
Operating income (loss) before Globalstar system
development and start up costs and K&F program
investment.............................................. $ 54,011 $ 62,399 $(12,201) $ 104,209
Globalstar system development and start up costs and K&F
program investment...................................... -- $ 45,624 20,239 -- 65,863
---------- ---------- -------- -------- -----------
Operating income (loss) after Globalstar system
development and start up costs and K&F program
investment.............................................. 54,011 (45,624) 42,160 (12,201) 38,346
Interest income (expense), net............................ 6,081 (10,969)(3) (27,197) 28,699 (3,386)
---------- ---------- -------- -------- -----------
Income (loss) before taxes................................ 60,092 (56,593)(3) 14,963 16,498 34,960
Income taxes.............................................. (27,643) -- 81 (2,912) (30,474)
Equity in loss of affiliates.............................. (1,549) -- -- (4,709) --
Other shareholders' interest.............................. 125 -- -- -- 4,391
---------- ---------- -------- -------- -----------
Income (loss) before extraordinary item................... 31,025 (56,593) 15,044 8,877 8,877
Loss on retirement of debt................................ -- -- (9,142) -- --
---------- ---------- -------- -------- -----------
Net income (loss)......................................... $ 31,025 $(56,593) $ 5,902 $ 8,877 $ 8,877
========= ========= ======== ======== ============
Weighted shares outstanding............................... 229,396 229,396
======== ============
Earnings per share........................................ $ 0.04 $ 0.04
======== ============
NINE MONTHS ENDED DECEMBER 31, 1995
------------------------------------------------------------
PRO FORMA
SS/L GLOBALSTAR K&F LORAL(1) COMBINED(2)
-------- ---------- -------- -------- -----------
Revenues.................................................. $768,121 $199,784 $ 3,841 $ 745,539
======== ======== ======== ============
Operating income before Globalstar system development and
start up costs and K&F program investment............... $ 16,832 $ 56,380 $ 1,575 $ 74,787
Globalstar system development and start up costs and K&F
program investment...................................... -- $ 60,831 22,674 -- 83,505
-------- ---------- -------- -------- -----------
Operating income (loss) after Globalstar system
development and start up costs and K&F program
investment.............................................. 16,832 (60,831) 33,706 1,575 (8,718)
Interest income (expense), net............................ 5,280 9,830 (31,288) (7,563) (23,741)
-------- ---------- -------- -------- -----------
Income (loss) before taxes................................ 22,112 (51,001) 2,418 (5,988) (32,459)
Income taxes.............................................. (11,745) -- -- 2,093 (9,652)
Equity in loss of affiliates.............................. (1,009) -- -- (11,360) --
Other shareholders' interest.............................. 115 -- -- -- 26,856
-------- ---------- -------- -------- -----------
Income (loss) before extraordinary item................... 9,473 (51,001) 2,418 (15,255) (15,255)
Loss on retirement of debt................................ -- -- (1,913) -- --
-------- ---------- -------- -------- -----------
Net income (loss)......................................... $ 9,473 $(51,001) $ 505 $(15,255) $ (15,255)
======== ========= ======== ======== ============
Weighted shares outstanding............................... 175,133 175,133
======== ============
Earnings (loss) per share................................. $ (0.09) $ (0.09)
======== ============
- ---------------
(1) As reported.
(2) Net of intercompany eliminations.
(3) Includes a preferred distribution on Globalstar's Redeemable Preferred
Partnership Interests of $15,899.
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LORAL SPACE & COMMUNICATIONS LTD.
(IN THOUSANDS EXCEPT PER SHARE DATA)
YEARS ENDED MARCH 31,
NINE MONTHS ENDED -----------------------------------------
DECEMBER 31, 1996 1996 1995 1994 1993
----------------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Management fee from affiliate.......... $ 5,088 $ 5,608 $ 3,169 $ 2,981 $ 2,576
Equity in net income (loss) of
affiliates(1)........................ (4,709) (8,628) (8,988) 1,174 663
Income loss before cumulative effect of
accounting change(2)................. 8,877 (13,785) (7,873) (3,694) (5,242)
Net income (loss)...................... 8,877 (13,785) (7,873) (3,694) (12,001)
Earnings (loss) per share.............. .04 (.08) N/A N/A N/A
CASH FLOW DATA:
Used in operating activities........... $ 3,003 $ 1,319 $ 8,439 $ 587 $ 5,905
Used in (provided by) investing
activities........................... 1,962 115,031 92,055 25,288 (2,697)
Provided by equity transactions........ 602,413 116,362 100,494 25,875 3,208
Provided by Convertible Preferred
Equivalent Obligations ("Convertible
preferreds")......................... 583,292 -- -- -- --
Dividends paid per share............... -- N/A N/A N/A N/A
MARCH 31,
-----------------------------------------
DECEMBER 31, 1996 1996 1995 1994 1993
----------------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents.............. $ 1,180,752 $ 12 $ -- $ -- $ --
Investment in Globalstar(1)............ 175,639 195,221 110,970 25,288 --
Investment in SS/L..................... 267,418 144,051 140,007 138,191 137,017
Total assets........................... 1,699,326 354,396 251,819 163,479 137,017
Convertible preferreds................. 583,292 -- -- -- --
Shareholders' equity(3)/Invested
equity............................... 1,070,069 354,396 251,819 159,198 137,017
- ---------------
(1) Globalstar commenced operations on March 23, 1994.
(2) 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.
(3) As of December 31, 1996, the book value per share of the Series A Preferred
Stock and the Common stock (which the Company is required to disclose herein
in accordance with applicable Bermuda law) was $4.52 and $4.51,
respectively. Book value per share represents the quotient obtained by
dividing shareholders' equity by the number of outstanding shares of Common
Stock, giving effect to the conversion of the Series A Preferred Stock,
plus, in the case of such preferred stock, the $.01 liquidation preference
thereof.
SPACE SYSTEMS/LORAL, INC.
(IN THOUSANDS)
YEARS ENDED MARCH 31,
NINE MONTHS ENDED -------------------------------------------
DECEMBER 31, 1996 1996 1995 1994 1993
------------------ ---------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues............................ $1,017,653 $1,121,619 $633,717 $596,267 $517,242
Gross profit........................ 64,157 34,406 27,785 24,964 19,855
Income before cumulative effect of
change in accounting(1)........... 31,025 12,367 5,554 3,591 2,594
Net income (loss)................... 31,025 12,367 5,554 3,591 (18,076)
MARCH 31,
-------------------------------------------
DECEMBER 31, 1996 1996 1995 1994 1993
------------------ ---------- -------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 19,181 $ 126,863 $ 52,222 $ 26,578 $ 10,121
Total assets........................ 1,059,064 908,677 766,475 743,016 640,499
Long-term debt...................... 127,586 65,052 34,040 92,249 73,000
Shareholders' equity................ 478,893 447,868 435,501 429,947 426,356
- ---------------
(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.
36
38
GLOBALSTAR, L.P.
(In thousands, except per partnership interest amounts)
YEAR ENDED DECEMBER 31, 1994 CUMULATIVE
---------------------------------
PRE-CAPITAL
SUBSCRIPTION PERIOD(1) MARCH 23 MARCH 23, 1994
--------------------------- (COMMENCEMENT YEARS ENDED DECEMBER (COMMENCEMENT
YEAR ENDED JANUARY 1 TO OF OPERATIONS) TO 31, OF OPERATIONS) TO
DECEMBER 31, MARCH 22, DECEMBER 31, --------------------- DECEMBER 31,
1993 1994 1994 1995 1996 1996
------------ ------------ ----------------- --------- --------- -----------------
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses.............. 11,510 6,872 28,027 80,226 61,025 169,278
Interest income................. -- -- 1,783 11,989 6,379 20,151
Net loss applicable to ordinary
partnership interests......... 11,510 6,872 26,244 68,237 71,969 166,450
Net loss per weighted average
ordinary partnership
interest outstanding.......... 0.73 1.50 1.53
Cash distributions per ordinary
partnership interest.......... -- -- --
OTHER DATA:
Deficiency of earnings to cover
fixed charges(2).............. N/A N/A 71,969
CASH FLOW DATA:
Used in operating activities.... -- -- (23,052) (38,368) (46,622) (108,042)
Used in investing activities.... -- -- (50,549) (280,345) (384,264) (715,158)
Provided by partners' capital
transactions.................. -- -- 147,161 318,630 284,714 750,505
Provided by (used in) other
financing activities.......... -- -- -- (1,875) 95,750 93,875
DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 21,180 $ 71,602 $ 73,560
Working capital (deficiency)..................................... (53,481) 17,687 35,423
Globalstar System under construction............................. 891,033 400,257 71,996
Total assets..................................................... 942,913 505,391 151,271
Vendor financing liability....................................... 130,694 42,219 --
Borrowings under long-term revolving credit facility............. 96,077 -- --
Redeemable preferred partnership interests....................... 302,037 -- --
Ordinary partners' capital....................................... 315,186 386,838 112,944
- ---------------
(1) Reflects certain costs incurred by Loral and Qualcomm prior to March 23,
1994, which were reimbursed by Globalstar through a capital subscription
credit or agreement for repayment in connection with the $275.0 million
capital subscription and commencement of Globalstar's operations on March
23, 1994.
(2) The ratio of earnings to fixed charges is not meaningful as Globalstar is in
the development stage and, accordingly, has incurred operating losses.
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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, SS/L and Skynet,
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. and its subsidiaries (the "Company" or
"Loral") is one of the world's leading satellite communications companies, with
substantial interests in both the manufacture and operation of geosynchronous
("GEO") and low-earth-orbit ("LEO") satellite systems. Loral manages and will
soon own 100% of Space Systems/Loral, Inc. ("SS/L"), one of the world's leading
manufacturers of space systems. Loral also manages and is the largest equity
owner of Globalstar, L.P. ("Globalstar"), a system of LEO satellites expected to
be placed in service in 1998 that will support digital telephone service to
handheld and fixed terminals worldwide. In addition, on March 14, 1997, Loral
purchased Skynet Satellite Services ("Skynet"), the third largest domestic
satellite service provider, from AT&T.
Loral was formed to effectuate the distribution of Loral Corporation's
("Old Loral") space and telecommunications businesses (the "Distribution") to
shareholders of Old Loral pursuant to a merger agreement (the "Merger") dated
January 7, 1996 between Old Loral and Lockheed Martin Corporation ("Lockheed
Martin").
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, Loral had $1.2 billion of cash and cash equivalents.
Loral intends to utilize its existing capital base and access to the capital
markets to initially fund the Skynet acquisition, make additional investments in
Globalstar and Globalstar service provider opportunities, increase its ownership
in SS/L and invest in additional satellite telecommunications opportunities. In
connection with the Merger between Old Loral and Lockheed Martin, Lockheed
Martin assumed approximately $206 million of the guarantee under the Globalstar
Credit Agreement. The balance of $44 million of the guarantee was assumed by
various Globalstar partners, including $11.7 million by SS/L. Loral has agreed
to indemnify Lockheed Martin for its liability, if any, in excess of $150
million under its guarantee of the Globalstar Credit Agreement. Globalstar and
SS/L are currently financed without recourse to Loral other than the
indemnification described above.
It is anticipated that Loral will fund its operating requirements from
available cash balances and interest income generated from the temporary
investment of cash balances. Globalstar has no history of making distributions
on its ordinary partnership interests and is not expected to make distributions
until after commencement of full commercial operations. The Globalstar Credit
Agreement imposes restrictions on Globalstar's ability to make distributions on
its ordinary partnership interests.
Skynet. The Company intends to initially fund the Skynet purchase with its
available cash. The $478 million purchase price is subject to adjustment based
on net assets delivered on the closing date. Skynet currently has one
high-powered satellite operating in orbit and has a contract with SS/L for the
construction of two satellites and an option for one additional satellite and
one ground spare. Although short term borrowings may be required depending on
the timing of cash receipts and expenditures, Loral believes, based on current
projections, that Skynet's internal cash flows should be adequate to fund these
capital expenditures for the satellites under construction, the satellite under
option and related ground equipment.
Globalstar. As of February 1997, Globalstar estimates the cost for the
design, construction and deployment of the Globalstar System, including working
capital, cash interest on anticipated borrowings and operating expenses, to be
approximately $2.5 billion, as compared with approximately $2.2 billion
estimated at December 31, 1995. This increase arose primarily from a change in
launch vehicles and additional integration testing procedures to support system
readiness on schedule, scope changes to add features, capabilities and
functions, cost growth and other factors. In addition, Globalstar has agreed to
purchase from SS/L eight additional spare satellites at a cost of approximately
$175 million. Actual amounts may vary from these estimates and additional funds
would be required in the event of unforeseen delays, cost overruns, launch
38
40
failures, technological risks, adverse regulatory developments, or to meet
unanticipated expenses and for system enhancements and measures to assure system
performance and readiness for the space and ground segments.
As of February 13, 1997, Globalstar had raised or received commitments for
approximately $2.0 billion. Globalstar believes that its current capital, vendor
financing commitments, the availability of the Globalstar Credit Agreement and
proceeds from the exercise of warrants issued in connection with the Globalstar
Credit Agreement are sufficient to fund its requirements into the first quarter
of 1998. Globalstar intends to raise the remaining funds required from a
combination of sources, including debt issuance (which may include an equity
component), financial support from the Globalstar Partners, projected service
provider payments, projected net service revenues from initial operations and
anticipated payments from the sale of gateways and Globalstar phones. Although
Globalstar believes it will be able to obtain these additional funds, there can
be no assurance that such funds will be available on favorable terms or on a
timely basis, if at all.
SpaceSystems/Loral. Loral has made a strategic decision to increase its
ownership in SS/L to 100%. The first step in implementing this strategy was the
acquisition by Loral in August 1996 of the 18.3% interest in SS/L owned by the
Lehman Partnerships in exchange for 7,500,000 newly issued shares of common
stock of the Company, 267,256 shares of common stock of GTL previously held by
the Company and $4 million in cash. As a result of this transaction, the Company
increased its interest in SS/L from 32.7% to 51%. In February 1997, Loral
completed negotiations with SS/L's Alliance Partners to acquire their respective
ownership interests in SS/L for $374 million of which $93 million will be paid
in cash and the balance in Loral common stock and Loral convertible preferred
equivalent obligations. Alliance Partners exchanging SS/L common stock for Loral
common stock or convertible preferred equivalent obligations will retain
representation on the SS/L Board of Directors and continue their strategic
operating relationships with SS/L. Accordingly, in 1997, Loral expects to
discontinue the use of the equity method of accounting for SS/L and will
consolidate SS/L's financial position and results of operations in its financial
statements.
SS/L is the prime contractor for the design and construction of
Globalstar's 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. The
Company believes the operations and capitalization of SS/L are adequate to fund
its anticipated growth.
Other Business Opportunities. Loral intends to pursue additional
satellite-based communications service opportunities. These opportunities are in
formative stages and there can be no assurances that they will be further
developed or licensed, or that the necessary capital to complete such
opportunities will be available.
Cash Provided and Used. Cash used in operating activities for the nine
months ended December 31, 1996 and for the years ended March 31, 1996 and 1995
was $3.0 million, $1.3 million and $8.4 million, respectively, primarily due to
the items discussed in Results of Operations, below.
Cash used in investing activities for the nine months ended December 31,
1996 was $2.0 million, primarily due to the purchase of $2.5 million principal
amount of GTL Convertible Preferred Equivalent Obligations in April 1996 and $4
million used in connection with the purchase of the Lehman Partnerships'
interest in SS/L in August 1996, offset by the sale of property, plant and
equipment. Cash used in investing activities for the years ended March 31, 1996
and 1995 was $115.0 million and $92.1 million, respectively, primarily due to
investments in Globalstar. Investments in Globalstar totaled $105.2 million and
$103.6 million in the years ended March 31, 1996 and 1995, respectively, and
include an aggregate of $10.3 million of capitalized costs, principally
interest.
Net cash provided by financing activities for the nine months ended
December 31, 1996 was $1.2 billion, primarily due to the $600 million net
proceeds from the Distribution and $583 million net proceeds from issuance of
the Convertible Preferred Equivalent Obligations. Net cash provided by financing
activities for the years ended March 31, 1996 and 1995 was $116.4 million and
$100.5 million, respectively, representing the advances from Old Loral to fund
the above-mentioned activities.
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RESULTS OF OPERATIONS
The Company operates under a December 31 year-end. For the nine months
ended December 31, 1996, the consolidated financial statements include the
accounts of Loral Space & and Communications Ltd. and its subsidiaries. As such,
the following discussion compares these results of operations with the unaudited
nine months ended December 31, 1995. Old Loral operated under a March 31
year-end. For the years ended March 31, 1996 and 1995, the combined financial
statements reflect that portion of the space and communications operations
included in Old Loral's historical financial statements that were spun off to
Loral. Except for Globalstar, which since inception has had a December 31
year-end, the following discussion compares the results of operations for the
years ended March 31, 1996 and 1995. For Globalstar, the year ended December 31,
1995 is compared with the period March 23, 1994 (commencement of operations) to
December 31, 1994.
The results of operations for the periods through March 31, 1996 include
allocations and estimates of certain expenses of Loral based upon estimates of
actual services performed by Old Loral on behalf of Loral. The amount of
corporate office expenses for such periods has been estimated based primarily on
the allocation methodology prescribed by government regulations pertaining to
government contractors, which management of Loral believes is a reasonable
allocation method.
For the periods through March 31, 1996, interest was allocated to Loral
based upon Old Loral's historical weighted average debt cost applied to the
average investment in affiliates, which management of Loral believes to be a
reasonable allocation method. Interest related to Old Loral's investment in
Globalstar has been capitalized because Globalstar has not commenced its
principal operations.
Taxation. Loral is subject to U.S. Federal, state and local income
taxation at regular corporate rates on any income that is effectively connected
with the conduct of a U.S. trade or business. When such income is deemed removed
from the U.S. business, it is subject to an additional 30% "branch profits" tax.
Loral expects that a significant portion of its income will be from foreign
sources and will not be effectively connected with a U.S. trade or business;
some portion of its income, however, will be subject to taxation by certain
foreign countries.
The Company's U.S. subsidiaries are subject to U.S. taxes on their
worldwide income. In addition, a 30% U.S. withholding tax will be imposed on
dividends and interest paid by such subsidiaries to Loral Space & Communications
Ltd.
Comparison of Results for the Nine Months ended December 31, 1996 and 1995
The results of operations reflect net income of $8.9 million for the nine
months ended December 31, 1996 as compared with a loss of $15.3 million for the
same period in the prior year. This change is primarily attributable to interest
earned during 1996 on the investment of available cash balances as compared with
interest expense allocated from Old Loral during 1995. Total interest income,
net for the nine months ended December 31, 1996 was $28.7 million.
Management fees earned from SS/L of $5.1 million for the nine months ended
December 31, 1996 represent an increase of $1.2 million over the nine months
ended December 31, 1995. The management fees are based on SS/L sales which
increased $250 million, or 32%, to $1.0 billion.
Costs and expenses increased to $17.3 million for the nine months ended
December 31, 1996 from $2.3 million for the nine months ended December 31, 1995.
The primary reason for this increase is that 1996 expenses reflect the Company's
operations on a stand-alone basis without the benefit of economies of scale
under Old Loral.
Equity in net loss of affiliates decreased to $4.7 million for the nine
months ended December 31, 1996 from $11.4 million for the comparable period in
the prior year. This improvement is primarily due to increased net income of
SS/L, partially offset by the loss of tax benefit for Globalstar losses
following Loral's formation in Bermuda.
40
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The Company's effective income tax rate for the nine months ended December
31, 1996 was 17.7% compared with (35.0)% for the prior period. The current
period effective rate is lower than the statutory U.S. Federal income tax rate
because, as a Bermuda Company, a substantial portion of the Company's income is
foreign source income not subject to Federal taxation.
Pro Forma Combined Operations. Combined revenues of all companies
(Loral, Globalstar, SS/L and K&F), after intercompany eliminations, were $950
million for the nine months ended December 31, 1996, up 27 percent from the same
period in the prior year. Operating income increased to $104 million, compared
to $75 million for the same period in the prior year, before Globalstar system
development and start-up costs and K&F program investment of $66 million and $84
million, for the nine months ended December 31, 1996 and 1995, respectively. All
operating entities' peformance improved period-to-period.
Comparison of Results for the Years Ended March 31, 1996 and 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.
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 Old Loral 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, primarily as a result of Old Loral'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'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.
SUMMARY RESULTS OF OPERATIONS OF AFFILIATES
SPACE SYSTEMS/LORAL
Comparison of Results for the Nine Months Ended December 31, 1996 and 1995
During the nine months ended December 31, 1996, revenues from contracts
increased to $1.0 billion from $768.1 million during the comparable period of
the prior year. The increase in revenues was attributable primarily to higher
volume on commercial satellite programs of $260.5 million, including the
Globalstar program of $58.3 million, partially offset by lower volume on the
GOES weather satellite program of $11.0 million.
Operating income increased to $54.0 million for the nine months ended
December 31, 1996 from $16.8 million in the comparable period of the prior year.
This improvement resulted from the increase in revenues and a change in program
mix with new commercial awards having better margins than the older programs
being completed.
Interest income net of interest expense increased slightly to $6.1 million
for the nine months ended December 31, 1996 from $5.3 million in the prior year
period.
The effective tax rate decreased to 46% for the nine months ended December
31, 1996 from 53% for the comparable period in the prior year. This reduction
resulted from a decrease in the impact of non-deductible goodwill amortization.
41
43
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. The increase
in revenues is 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.
Operating income increased to $22.1 million from $17.9 million in the prior
year. The change in operating income primarily results from increased revenues,
a change in the current program mix and risk-management on programs requiring
in-orbit satellite delivery.
Interest income net of interest expense increased to $6.4 million from $1.3
million for 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.
The effective tax rate decreased to 53.4% in fiscal 1996 from 62.2% in the
prior year primarily due to the decreased impact of non-deductible goodwill
amortization.
GLOBALSTAR
Comparison of Results for the Nine Months Ended December 31, 1996 and 1995
Globalstar is a development stage partnership and has not commenced
commercial operations. For the period March 23, 1994 (commencement of
operations) to December 31, 1996, Globalstar has recorded cumulative net losses
of $149.1 million and net losses applicable to ordinary partnership interests of
$166.5 million. The net loss for the nine months ended December 31, 1996
decreased to $40.7 million as compared to $51.0 million for the nine months
ended December 31, 1995 due to a decrease in development costs partially offset
by a decrease in interest income. The net loss applicable to ordinary
partnership interests was $56.6 million during the current period, reflecting
$15.9 million of preferred distributions on the redeemable preferred partnership
interests. 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 commercial operations.
Globalstar has earned interest income of $20.2 million on cash balances and
short term investments since commencement of operations. Interest income during
the nine months ended December 31, 1996 was $4.9 million as compared to $9.8
million for the nine months ended December 31, 1995. Interest income for the
current period decreased as a result of lower average cash balances outstanding
during 1996.
Development costs were $30.8 million for the nine months ended December 31,
1996, representing 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 $46.7 million of development costs incurred during the same period
in 1995. The decline during the current year is primarily the result of the cost
sharing arrangement in Globalstar's contract with Qualcomm reaching its funding
limit in April 1996.
Marketing, general and administrative expenses were $14.8 million for the
nine months ended December 31, 1996 as compared to $14.2 million incurred during
the nine months ended December 31, 1995.
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 commercial operations, as
assets are placed into service.
Globalstar was organized as a limited partnership. As such, no income tax
provision (benefit) is reflected in its results 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.
42
44
Comparison of Results for the Year Ended December 31, 1995 to the Period March
23, 1994 (commencement of operations) to December 31, 1994
The net loss for the year ended December 31, 1995 increased to $68.2
million from $26.2 million in the period March 23, 1994 (commencement of
operations) to December 31, 1994 (the "Prior Period"), primarily due to
increased operating expenses partially offset by increased interest income.
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
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.
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.
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.
43
45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information required for this item is set forth in the Company's 1997
definitive proxy statement which is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
- ---------------------- --- ---------------------------------------------------------------
Bernard L. Schwartz... 71 Chairman of the Board of Directors and Chief Executive Officer
since January 1996. Prior to that, Chairman and Chief Executive
Officer of Old Loral since 1972.
Michael B. Targoff.... 52 President and Chief Operating Officer since March 1996. Prior
to that, Senior Vice President and Secretary of Old Loral since
April 1992. Prior to that, held other executive officer
positions with Old Loral.
Michael P. DeBlasio... 59 Senior Vice President and Chief Financial Officer since March
1996. Prior to that, Senior Vice President-Finance of Old Loral
since 1979.
Robert E. Berry....... 68 Senior Vice President since November 1996 and President of
Space Systems/Loral since 1990.
Jeanette H. Clonan.... 48 Vice President-Communications and Investor Relations since
November 1996. Prior to that, Director-Corporate Communications
from June 1996. Prior to that, Vice President-Corporate
Relations of Jamaica Water Securities since September 1992.
Stephen L. Jackson.... 55 Vice President -- Administration since March 1997. Prior to
that, Vice President-Administration of Old Loral since 1978.
Jerald A. Lindfelt.... 50 Vice President -- Business Operations since March 1997. Prior
to that, Division President of Old Loral since July 1991.
Nicholas C. Moren..... 50 Vice President and Treasurer since March 1996. Prior to that,
Vice President and Treasurer of Old Loral since April 1991.
Harvey B. Rein........ 43 Vice President and Controller since April 1996. Prior to that,
Assistant Controller of Old Loral since 1985.
Thomas B. Ross........ 67 Vice President-Government Relations since November 1996. Prior
to that, Vice President-Corporate Communications from April
1996. Prior to that, Vice President-Communications of
Globalstar from May 1995 to April 1996. Prior to that, Special
Assistant to the President and Senior Director for Public
Affairs of the National Security Council from April 1994 to May
1995 and Senior Vice President of Hill & Knowlton.
Eric J. Zahler........ 46 Vice President, General Counsel and Secretary since March 1996.
Prior to that, Vice President and General Counsel of Old Loral
since April 1992; prior to that, partner in the law firm of
Fried, Frank, Harris, Shriver & Jacobson.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under Items 11, 12 and 13, is set forth in the
Company's 1997 definitive proxy statement which is incorporated herein by
reference.
44
46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
PAGE
-----
Index to Financial Statements................................................ F-1
Loral Space & Communications Ltd.
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and March 31, 1996..... F-3
Consolidated Statements of Operations for the nine months ended December
31, 1996 and for the years ended March 31, 1996 and 1995................ F-4
Consolidated Statements of Shareholders' Equity/Invested Equity for the
nine months ended December 31, 1996 and for the years ended March 31,
1996 and 1995........................................................... F-5
Consolidated Statements of Cash Flows for the nine months ended December
31, 1996 and for the years ended March 31, 1996 and 1995................ F-6
Notes to Consolidated Financial Statements................................. F-7
Space Systems/Loral, Inc.
Independent Auditors' Report............................................... F-18
Consolidated Balance Sheets as of December 31, 1996 and March 31, 1996..... F-19
Consolidated Statements of Income for the nine months ended December 31,
1996 and the years ended March 31, 1996 and 1995........................ F-20
Consolidated Statements of Shareholders' Equity for the nine months ended
December 31, 1996 and the years ended March 31, 1996 and 1995........... F-21
Consolidated Statements of Cash Flows for the nine months ended December
31, 1996 and the years ended March 31, 1996 and 1995.................... F-22
Notes to Consolidated Financial Statements................................. F-23
Globalstar, L.P. (A development stage limited partnership)
Independent Auditors' Report............................................... *
Consolidated Balance Sheets as of December 31, 1996 and 1995............... *
Consolidated Statements of Operations for the period January 1, 1994 to
March 22, 1994 (the pre-capital subscription period), the period March
23, 1994 (commencement of operations) to December 31, 1994 and for the
years ended December 31, 1996 and 1995 and cumulative................... *
Consolidated Statements of Cash Flows for the period March 23, 1994
(commencement of operations) to December 31, 1994, and for the years
ended December 31, 1996 and 1995 and cumulative......................... *
Consolidated Statements of Partners' Capital and Subscriptions Receivable
for the period March 23, 1994 (commencement of operations) to December
31, 1996................................................................ *
Notes to Consolidated Financial Statements................................. *
- ---------------
* Incorporated herein by reference from the Annual Report on Form 10-K of
Globalstar Telecommunications Limited for the year ended December 31, 1996,
pages F-12 through F-29.
45
47
(a) 3. Exhibits
EXHIBIT NUMBER DESCRIPTION
- -------------- -------------------------------------------------------------------------------
2.1 Restructuring, Financing and Distribution Agreement, dated as of January 7,
1996, among Loral Corporation, Loral Aerospace Holdings, Inc., Loral Aerospace
Corp., Loral General Partner, Inc., Loral Globalstar L.P., Loral Globalstar
Limited, the Registrant and Lockheed Martin Corporation*
2.2 Amendment to Restructuring, Financing and Distribution Agreement, dated as of
April 15, 1996*
2.3 Agreement for the Purchase and Sale of Assets dated as of September 25, 1996 by
and between AT&T Corp., as Seller, and Loral Space & Communications Ltd., as
Buyer**
2.4 First Amendment to Agreement for the Purchase and Sale of Assets, dated as of
March 14, 1997, by and between AT&T Corp., or Seller, and Loral Space &
Communications Ltd., as Buyer******
3.1 Memorandum of Association*
3.2 Memorandum of Increase of Share Capital*
3.3 Second Amended and Restated Bye-laws*
3.4 Form of Schedule III to Second Amended and Restated Bye-laws relating to
Registrant's 6% Series C Convertible Redeemable Preferred Stock+
4.1 Rights Agreement dated March 27, 1996 between the Registrant and The Bank of
New York, Rights Agent*
4.2 Indenture dated as of November 1, 1996 between the Registrant and The Bank of
New York, as Trustee, relating to the Registrant's 6% Convertible Preferred
Equivalent Obligations due 2006+
10.1 Shareholders Agreement dated as of April 23, 1996 between Loral Corporation and
the Registrant*
10.2 Tax Sharing Agreement dated as of April 22, 1996 between Loral Corporation, the
Registrant, Lockheed Martin Corporation and LAC Acquisition Corporation*
10.3 Exchange Agreement dated as of April 22, 1996 between the Registrant and
Lockheed Martin Corporation*
10.4 Amended and Restated Agreement of Limited Partnership of Globalstar, L.P.,
dated as of March 6, 1996 among Loral/Qualcomm Satellite Services, L.P.,
Globalstar Telecommunications Limited, AirTouch Satellite Services, San Giorgio
S.p.A., Hyundai/Dacom, Loral/DASA Globalstar, L.P., Loral Globalstar L.P.,
TE.S.AM. and Vodastar Limited***
10.5 Subscription Agreements by and between Globalstar, L.P. and each of AirTouch
Communications, Alcatel SpaceCom, Loral General Partner, Inc., Hyundai/Dacom,
Vodastar Limited, Loral/Qualcomm Satellite Services, L.P. and Finmeccanica
S.p.A.****
10.6 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.S.AM. and Vodastar Limited****
10.7 Development Agreement by and between Qualcomm Incorporated and Globalstar,
L.P.****
10.8 Contract between Globalstar, L.P. and Space Systems/Loral, Inc.****
10.9 Revolving Credit Agreement dated as of December 15, 1995, as amended on March
25, 1996, among Globalstar, certain banks parties thereto and Chemical Bank, as
Administrative Agent***
10.10 Lockheed Martin Guarantee of Globalstar Credit Agreement*
10.11 1996 Stock Option Plan*++
10.12 Common Stock Purchase Plan for Non-Employee Directors*++
10.13 Employment Agreement dated as of April 5, 1996 between the Registrant and
Bernard L. Schwartz*++
46
48
EXHIBIT NUMBER DESCRIPTION
- -------------- -------------------------------------------------------------------------------
10.14 Agreement dated as of August 9, 1996 among Loral Space & Communications Ltd.,
Loral SpaceCom Corporation, Lehman Brothers Capital Partners II, L.P., Lehman
Brothers Merchant Banking Portfolio Partnership L.P., Lehman Brothers Offshore
Investment Partnership-Japan L.P.*****
10.15 Registration Rights Agreement dated as of August 9, 1996 among Loral Space &
Communications Ltd., Lehman Brothers Capital Partners II, L.P., Lehman Brothers
Merchant Banking Portfolio Partnership L.P., Lehman Brothers Offshore
Investment Partnership L.P. and Lehman Brothers Offshore Investment
Partnership-Japan L.P.*****
10.16 Registration Rights Agreement dated November 6, 1996 relating to the
Registrant's 6% Convertible Preferred Equivalent Obligations due 2006+
10.17 SS/L Stockholders Agreement*
10.18 Exchange Agreement dated as of December 19, 1996 between the Registrant and
Daimler-Benz Aerospace AG and Amendment No. 1 thereto, dated as of February 6,
1997+
21 List of Subsidiaries of the Registrant+
23 Consent of Deloitte & Touche LLP+
27 Financial Data Schedule (for SEC use only)+
99 Consolidated Financial Statements of Globalstar, L.P. and Independent Auditors'
Report incorporated by reference in this Annual Report on Form 10-K from the
Annual Report on Form 10-K of Globalstar Telecommunications Limited for the
year ended December 31,1996. +
- ---------------
*Incorporated by reference to the Registrant's Registration Statement on
Form 10 (No. 1-14180).
**Incorporated by reference to the Registrant's Form 8-K filed on September
25, 1996.
***Incorporated by reference to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1996 filed by Globalstar Telecommunications
Limited (File No. 0-25456).
****Incorporated by reference to the Registration Statement on Form S-1 of
Globalstar Telecommunications Limited (File No. 33-86808).
*****Incorporated by reference to the Registrant's Form 8-K filed on August 9,
1996.
******Incorporated by reference to the Registrant's Form 8-K filed on March 28,
1997.
+Filed herewith.
++Management compensation plan.
47
49
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: March 28, 1997
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 March 28, 1997
- ------------------------------------------ Officer and Director
Bernard L. Schwartz
ROBERT B. HODES Director March 28, 1997
- ------------------------------------------
Robert B. Hodes
GERSHON KEKST Director March 28, 1997
- ------------------------------------------
Gershon Kekst
CHARLES LAZARUS Director March 28, 1997
- ------------------------------------------
Charles Lazarus
MALVIN A. RUDERMAN Director March 28, 1997
- ------------------------------------------
Malvin A. Ruderman
E. DONALD SHAPIRO Director March 28, 1997
- ------------------------------------------
E. Donald Shapiro
ARTHUR L. SIMON Director March 28, 1997
- ------------------------------------------
Arthur L. Simon
THOMAS J. STANTON JR. Director March 28, 1997
- ------------------------------------------
Thomas J. Stanton Jr.
DANIEL YANKELOVICH Director March 28, 1997
- ------------------------------------------
Daniel Yankelovich
MICHAEL P. DEBLASIO Principal Financial Officer March 28, 1997
- ------------------------------------------
Michael P. DeBlasio
HARVEY B. REIN Principal Accounting Officer March 28, 1997
- ------------------------------------------
Harvey B. Rein
48
50
INDEX TO FINANCIAL STATEMENTS
Loral Space & Communications Ltd.
Independent Auditors' Report........................................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and March 31, 1996.............. F-3
Consolidated Statements of Operations for the nine months ended December 31, 1996
and for the years ended March 31, 1996 and 1995.................................. F-4
Consolidated Statements of Shareholders' Equity/Invested Equity for the nine months
ended December 31, 1996 and for the years ended March 31, 1996 and 1995.......... F-5
Consolidated Statements of Cash Flows for the nine months ended December 31, 1996
and for the years ended March 31, 1996 and 1995.................................. F-6
Notes to Consolidated Financial Statements.......................................... F-7
Space Systems/Loral, Inc.
Independent Auditors' Report........................................................ F-18
Consolidated Balance Sheets as of December 31, 1996 and March 31, 1996.............. F-19
Consolidated Statements of Income for the nine months ended December 31, 1996 and
the years ended March 31, 1996 and 1995.......................................... F-20
Consolidated Statements of Shareholders' Equity for the nine months ended December
31, 1996 and the years ended March 31, 1996 and 1995............................. F-21
Consolidated Statements of Cash Flows for the nine months ended December 31, 1996
and the years ended March 31, 1996 and 1995...................................... F-22
Notes to Consolidated Financial Statements.......................................... F-23
F-1
51
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Loral Space & Communications Ltd.
We have audited the accompanying consolidated balance sheets of Loral Space
& Communications Ltd. (a Bermuda company) and its subsidiaries (collectively,
the "Company") as of December 31, 1996 and March 31, 1996 and the related
consolidated statements of operations, shareholders' equity/invested equity and
cash flows for the nine months ended December 31, 1996 and the years ended March
31, 1996 and 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1996 and March 31, 1996, and the results of its operations and its
cash flows for the nine months ended December 31, 1996 and the years ended March
31, 1996 and 1995 in conformity with accounting principles generally accepted in
the United States of America.
DELOITTE & TOUCHE LLP
New York, New York
February 24, 1997
(March 14, 1997 as to Note 10)
F-2
52
LORAL SPACE & COMMUNICATIONS LTD.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31, 1996 MARCH 31, 1996
----------------- --------------
ASSETS
Current assets:
Cash and cash equivalents................................... $ 1,180,752 $ 12
Other current assets........................................ 29,555 --
---------- --------
Total current assets................................ 1,210,307 12
Property, plant and equipment, net............................ 17,939 --
Investments in affiliates..................................... 443,057 339,272
Other assets.................................................. 28,023 9,800
Deferred income taxes......................................... -- 5,312
---------- --------
$ 1,699,326 $354,396
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....................... $ 10,708 $ --
Accrued interest............................................ 6,000 --
Income taxes payable........................................ 2,311 --
Deferred income taxes....................................... 112 --
---------- --------
Total current liabilities........................... 19,131 --
Deferred income taxes......................................... 4,611 --
Pension and other postretirement liabilities.................. 19,723 --
Long-term liabilities......................................... 2,500 --
Convertible preferred equivalent obligations ($600,000
principal amount)........................................... 583,292 --
Commitments (Notes 3 and 10)
Shareholders' equity:
Series A convertible preferred stock, par value $.01;
150,000,000 shares authorized, 45,896,977 shares issued
and outstanding at December 31, 1996..................... 459 --
Series B preferred stock, par value $.01; 750,000 shares
authorized and unissued.................................. -- --
Common stock, par value $.01; 750,000,000 shares authorized,
191,092,308 shares issued and outstanding at December 31,
1996; 12,000 shares at March 31, 1996.................... 1,911 --
Paid-in capital............................................. 1,058,822 354,396
Retained earnings........................................... 8,877 --
---------- --------
Total shareholders' equity.......................... 1,070,069 354,396
---------- --------
$ 1,699,326 $354,396
========== ========
See notes to consolidated financial statements.
F-3
53
LORAL SPACE & COMMUNICATIONS LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEARS ENDED MARCH
NINE 31,
MONTHS ENDED --------------------
DECEMBER 31, 1996 1996 1995
----------------- -------- -------
Management fee from affiliate.......................... $ 5,088 $ 5,608 $ 3,169
Costs and expenses, net................................ (17,289) -- --
Allocated costs and expenses, net...................... -- (3,021) (3,202)
Interest income........................................ 34,699 -- --
Gain on exchange of affiliate's debentures............. -- -- 11,514
Interest expense....................................... (6,000) -- --
Allocated interest expense............................. -- (10,524) (9,456)
-------- -------- -------
Income (loss) before income taxes and equity in net
loss of affiliates................................... 16,498 (7,937) 2,025
Provision (benefit) for income taxes................... 2,912 (2,780) 910
-------- -------- -------
Income (loss) before equity in net loss of
affiliates........................................... 13,586 (5,157) 1,115
Equity in net loss of affiliates....................... (4,709) (8,628) (8,988)
-------- -------- -------
Net income (loss)...................................... $ 8,877 $(13,785) $(7,873)
======== ======== =======
Earnings (loss) per share:
Primary.............................................. $ .04 $ (.08)
======== ========
Fully diluted........................................ $ .04 $ (.08)
======== ========
Weighted average shares outstanding:
Primary.............................................. 229,396 183,580
======== ========
Fully diluted........................................ 229,396 183,580
======== ========
See notes to consolidated financial statements.
F-4
54
LORAL SPACE & COMMUNICATIONS LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/INVESTED EQUITY
NINE MONTHS ENDED DECEMBER 31, 1996 AND YEARS ENDED MARCH 31, 1996 AND 1995
SERIES A
CONVERTIBLE
PREFERRED
COMMON STOCK STOCK
--------------- --------------
SHARES SHARES RETAINED PAID-IN INVESTED
ISSUED AMOUNT ISSUED AMOUNT EARNINGS CAPITAL EQUITY
------- ------ ------ ------ -------- ---------- ---------
(IN THOUSANDS)
Balance March 31, 1994................ $ 159,198
Advances from Old Loral............... 100,494
Net loss.............................. (7,873)
---------
Balance March 31, 1995................ 251,819
Advances from Old Loral............... 116,362
Net loss.............................. (13,785)
Incorporation of Loral Space &
Communications Ltd.................. 12 $ 354,396 (354,396)
------- ---------- ---------
Balance March 31, 1996................ 12 354,396 --
Advances from Old Loral 2,425
April 23, 1996 Distribution:
Other assets transferred and
liabilities assumed, net from
Old Loral...................... 4,070
Common stock issued to Old Loral
shareholders and option
holders........................ 183,580 $1,836 254,152
Sale of Series A convertible
preferred stock................ 45,897 $459 343,541
Common stock issued to acquire
interest in SS/L.................... 7,500 75 100,238
Net income............................ $8,877
------- ------ ------ ---- ------ ---------- ---------
Balance December 31, 1996............. 191,092 $1,911 45,897 $459 $8,877 $1,058,822 $ --
======= ====== ====== ==== ====== ========== =========
See notes to consolidated financial statements.
F-5
55
LORAL SPACE & COMMUNICATIONS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE YEARS ENDED MARCH 31,
MONTHS ENDED -----------------------
DECEMBER 31, 1996 1996 1995
----------------- --------- ---------
Operating activities:
Net income (loss)................................. $ 8,877 $ (13,785) $ (7,873)
Equity in net loss of affiliates.................. 4,709 8,628 8,988
Tax benefit of Globalstar partnership losses...... -- 8,308 7,083
Deferred taxes.................................... (926) (4,470) (5,123)
Depreciation and amortization..................... 1,051 -- --
Gain on exchange of affiliate's debentures........ -- -- (11,514)
Receivable from SS/L.............................. (9,252) -- --
Other changes in operating assets and
liabilities.................................... (7,462) -- --
---------- --------- ---------
Cash used in operating activities................... (3,003) (1,319) (8,439)
---------- --------- ---------
Investing activities:
Payment for Globalstar service provider rights.... -- (9,800) --
Proceeds from sale of property, plant and
equipment...................................... 5,003 -- --
Cash received on exchange of affiliate's
debentures..................................... -- -- 11,514
Investment in affiliates.......................... (6,425) (105,231) (103,569)
Capital expenditures.............................. (540) -- --
---------- --------- ---------
Cash used in investing activities................... (1,962) (115,031) (92,055)
---------- --------- ---------
Financing activities:
Proceeds from convertible preferred equivalent
obligations.................................... 583,292 -- --
Proceeds from the Distribution.................... 612,274 -- --
Transaction costs related to the Distribution..... (12,286) -- --
Advances from Loral Corporation prior to the
Distribution................................... 2,425 116,362 100,494
---------- --------- ---------
Cash provided by financing activities............... 1,185,705 116,362 100,494
---------- --------- ---------
Increase in cash and cash equivalents............... 1,180,740 12 --
Cash and cash equivalents -- beginning of period.... 12 -- --
---------- --------- ---------
Cash and cash equivalents -- end of period.......... $ 1,180,752 $ 12 $ --
========== ========= =========
Non-cash investing and financing activities:
Assets transferred from Loral Corporation at
the Distribution............................. $ 31,383
==========
Liabilities assumed from Loral Corporation at
the Distribution............................. $ 27,313
==========
Acquisition of the interest in SS/L held by
certain partnerships affiliated with Lehman
Brothers:
Issuance of Loral common stock............ $ 100,313
==========
Transfer of GTL common stock, at cost..... $ 5,158
==========
Supplemental information:
Income taxes paid during the period............ $ 1,528
==========
See notes to consolidated financial statements.
F-6
56
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION OF LORAL SPACE & COMMUNICATIONS LTD.
Loral Space & Communications Ltd. and its subsidiaries (the "Company" or
"Loral") is one of the world's leading satellite communications companies, with
substantial interests in both the manufacture and operation of geosynchronous
("GEO") and low-earth orbit ("LEO") satellite systems. Loral manages and will
soon own 100% of Space Systems/Loral, Inc. ("SS/L"), one of the world's leading
manufacturers of space systems. Loral also manages and is the largest equity
owner of Globalstar, L.P. ("Globalstar"), a system of LEO satellites expected to
be placed in service in 1998 that will support digital telephone service to
handheld and fixed terminals worldwide. Loral, together with its partners, will
act as Globalstar service providers in Canada, Brazil and Mexico and, with
Qualcomm, Inc. ("Qualcomm") holds the exclusive right to provide in-flight phone
service using Globalstar in the United States. In addition, on March 14, 1997
Loral purchased Skynet Satellite Services ("Skynet"), the third largest domestic
satellite service provider, from AT&T (See Note 10). Loral also holds FCC
licenses for two orbital slots overlooking the Western Hemisphere, which it
intends to use in conjunction with the Skynet business.
Loral was formed to effectuate the distribution of Loral Corporation's
("Old Loral") space and telecommunications businesses (the "Distribution") to
shareholders of Old Loral and holders of options to purchase Old Loral common
stock pursuant to a merger agreement (the "Merger") dated January 7, 1996
between Old Loral and Lockheed Martin Corporation ("Lockheed Martin"). Certain
other assets and liabilities of Old Loral were transferred to Loral at the
Distribution. The Distribution of approximately 183.6 million shares of Loral
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
45,896,977 shares of Loral 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
Loral Space & Communications Ltd. operates under a December 31 year-end.
For the nine months ended December 31, 1996, the consolidated financial
statements include the accounts of Loral Space & Communications Ltd. and its
subsidiaries. All intercompany transactions have been eliminated.
The space and communications operations of Old Loral (the "Space &
Communications Operations") operated under a March 31 year-end. For the years
ended March 31, 1996 and 1995, the consolidated financial statements reflect
that portion of the space and communications assets and operations included in
Old Loral's historical financial statements that were spun-off to Loral. Certain
other non-operating assets of Old Loral were distributed to Loral on the
Distribution Date. However, those assets, consisting of certain fixed assets and
other miscellaneous assets, were not included in the March 31, 1996 and 1995
financial statements since those assets had been used principally in the Old
Loral operations acquired by Lockheed Martin.
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.
Investments in Affiliates
Investments in affiliates are accounted for using the equity method. Income
and losses of the affiliates are recorded based on Loral's beneficial 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.
F-7
57
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Allocation of Certain Expenses
For the years ended March 31, 1996 and 1995, the results of operations
include allocations and estimates of certain expenses of Loral based upon
estimates of actual services performed by Old Loral on behalf of Loral. The
amount of corporate office expenses reflected in these financial statements has
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
For the years ended March 31, 1996 and 1995, interest was allocated to
Loral based upon Old Loral's historical weighted average debt cost applied to
the average investment in affiliates, which management believes to be a
reasonable allocation method. Interest expense related to Old Loral's investment
in Globalstar was capitalized because Globalstar has not commenced commercial
operations.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," Loral accounts for stock-based awards
to employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Income Taxes
Commencing with the Distribution, Loral Space and Communications Ltd. is
subject to U.S. Federal, state and local income taxation at regular corporate
rates plus an additional 30% "branch profits" tax on any income that is
effectively connected with the conduct of a U.S. trade or business. U.S.
subsidiaries are subject to regular corporate tax on their worldwide income.
For the years ended March 31, 1996 and 1995, the Space & Communications
Operations were included in the consolidated U.S. Federal income tax return and
certain combined and separate state and local income tax returns of Old Loral.
However, for purposes of these financial statements, the provision (benefit) for
income taxes is computed as if the Space & 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 Old Loral
and are recorded through the invested equity account with Old Loral.
Deferred income taxes for all periods presented 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.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
primarily on the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the shorter of the
lease term or the estimated useful life of the improvements.
Earnings Per Share
Primary earnings per share is computed based upon the weighted average
number of shares of common stock and common equivalent shares (Series A
Convertible Preferred Stock) outstanding. For the nine months ended December 31,
1996, the impact on fully diluted earnings per share assuming the conversion of
certain convertible securities and giving effect to the resultant reduction in
interest costs is antidilutive,
F-8
58
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
resulting in the fully diluted amount equalling the primary amount. Earnings per
share for the year ended March 31, 1996 is computed based on the number of
shares issued to Old Loral's shareholders in the Distribution.
3. INVESTMENTS IN AFFILIATES
Investments in affiliates is summarized as follows (in thousands):
DECEMBER 31, 1996 MARCH 31, 1996
----------------- --------------
SS/L.................................................. $ 267,418 $144,051
Globalstar............................................ 175,639 195,221
K&F................................................... 23,568 22,937
Deferred K&F gain..................................... (23,568) (22,937)
-------- --------
$ 443,057 $339,272
======== ========
Equity in net income (loss) of affiliates consists of (in thousands):
YEARS ENDED MARCH
31,
NINE MONTHS ENDED -------------------
DECEMBER 31, 1996 1996 1995
------------------ -------- --------
SS/L............................................. $ 13,396 $ 4,044 $ 1,816
Globalstar....................................... (18,105) (20,980) (17,887)
Tax benefit of Globalstar partnership losses..... -- 8,308 7,083
-------- -------- --------
$ (4,709) $ (8,628) $ (8,988)
======== ======== ========
As discussed in Note 6, the tax benefit of Globalstar partnership losses is
not applicable for the nine months ended December 31, 1996.
F-9
59
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS IN AFFILIATES -- (CONTINUED)
The following table presents summary financial data for SS/L and K&F at
December 31, 1996 and March 31, 1996 and 1995 and for the periods then ended (in
thousands):
YEARS ENDED MARCH 31,
----------------------------------------------
NINE MONTHS ENDED
DECEMBER 31, 1996 1996 1995
---------------------- ---------------------- --------------------
SS/L K&F SS/L K&F SS/L K&F
---------- -------- ---------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues............................. $1,017,653 $212,703 $1,121,619 $264,736 $633,717 $238,756
Operating income..................... 54,011 42,160 22,054 41,555 17,872 36,077
Income (loss) before loss on
retirement of debt................. 31,025 15,044 12,367 507 5,554 (10,173)
Net income (loss).................... 31,025 5,902 12,367 (1,406) 5,554 (10,173)
MARCH 31,
----------------------------------------------
DECEMBER 31, 1996 1996 1995
---------------------- ---------------------- --------------------
SS/L K&F SS/L K&F SS/L K&F
---------- -------- ---------- -------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 19,181 $ 1,508 $ 126,863 $ 2,412 $ 52,222 $ 8,493
Working capital...................... 143,581 34,189 87,179 36,327 31,277 48,025
Total assets......................... 1,059,064 419,115 908,677 416,037 766,475 429,074
Long-term debt....................... 127,586 287,000 65,052 294,000 34,040 310,000
Shareholders' equity (deficiency).... 478,893 (33,306) 447,868 (39,701) 435,501 (34,748)
The following table presents summary financial data for Globalstar at
December 31, 1996, 1995 and 1994 and for the periods then ended (in thousands):
CUMULATIVE
YEAR ENDED MARCH 23, 1994 MARCH 23, 1994
DECEMBER 31, (COMMENCEMENT (COMMENCEMENT
------------------- OF OPERATIONS) TO OF OPERATIONS) TO
1996 1995 DECEMBER 31, 1994 DECEMBER 31, 1996
------- ------- ----------------- ------------------
STATEMENT OF OPERATIONS DATA:
Revenues....................... $ -- $ -- $-- $--
Operating loss................. 61,025 80,226 28,027 169,278
Interest income................ 6,379 11,989 1,783 20,151
------- ------- ------- --------
Net loss....................... 54,646 68,237 26,244 149,127
Preferred distributions........ 17,323 -- -- 17,323
------- ------- ------- --------
Net loss applicable to ordinary
partnership interests........ $71,969 $68,237 $26,244 $166,450
======= ======= ======= ========
DECEMBER 31,
-----------------------------------
1996 1995 1994
------- ------- -------
Balance sheet data:
Cash and cash equivalents................................. $21,180 $71,602 $73,560
Working capital (deficiency).............................. (53,481) 17,687 35,423
Globalstar System Under Construction...................... 891,033 400,257 71,996
Total assets.............................................. 942,913 505,391 151,271
Vendor financing liability................................ 130,694 42,219 --
Borrowings under long-term revolving credit facility...... 96,077 -- --
Redeemable preferred partnership interests................ 302,037 -- --
Ordinary partners' capital................................ 315,186 386,838 112,944
SS/L
SS/L, a company owned by Loral and four international aerospace and
communications companies (the "Alliance Partners"), designs and produces GEO and
LEO satellites and subsystems for communications,
F-10
60
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS IN AFFILIATES -- (CONTINUED)
remote earth sensing and direct-to-home broadcast television. At March 31, 1996,
Loral had an effective 32.7% interest in SS/L. Loral has made a strategic
decision to increase its ownership of SS/L to 100%. The first step in
implementing this decision was the acquisition by Loral in August 1996 of the
18.3% interest in SS/L owned by certain partnerships affiliated with Lehman
Brothers (the "Lehman Partnerships") in exchange for 7,500,000 newly issued
shares of common stock of the Company, 267,256 shares of common stock of GTL
previously held by the Company and $4 million in cash. As a result of this
transaction, the Company increased its interest in SS/L from 32.7% to 51%. As of
February 12, 1997, Loral had agreed to acquire the 49% interest in SS/L held by
the four Alliance Partners for $374 million of which $93 million will be paid in
cash and the balance in Loral common stock and convertible preferred equivalent
obligations. Following the sale, three of the Alliance Partners will retain
their representation on the SS/L Board of Directors. Accordingly, in 1997, Loral
expects to discontinue the use of the equity method of accounting for SS/L and
will consolidate SS/L's financial position and results of operations in its
financial statements.
SS/L, its shareholders and Loral have entered into a 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 $5,088,000, $5,608,000 and $3,169,000 for the nine
months ended December 31, 1996 and the years ended March 31, 1996 and 1995,
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 $2,695,000, $3,427,000 and
$3,287,000 for the nine months ended December 31, 1996 and for the years ended
March 31, 1996 and 1995, respectively.
At December 31, 1996, Loral has included in other current assets $9,252,000
due from SS/L primarily related to these management fees and overhead
reimbursement.
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 is building and preparing to launch and operate
a worldwide LEO satellite-based digital 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 a constellation of 48 LEO
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, 1996 and 1995, Loral had a 32.3% interest in Globalstar. In
1995, Globalstar received $186 million in equity from GTL, a public company that
acts as a general partner of Globalstar in which Loral invested $32,316,000 for
1,674,400 shares of common stock of GTL. In August 1996, 267,256 shares were
transferred to the Lehman Partnerships as part of the SS/L transaction described
above. At December 31, 1996, the market value, based on the last reported sales
price of Loral's GTL common shares, was $88.7 million. At December 31, 1996,
Loral had an effective ownership of 14,921,144 ordinary partnership interests of
the total 47,000,000 Globalstar ordinary partnership interests outstanding
(31.7%). At December 31, 1996, Loral's investment in Globalstar includes $10.3
million of capitalized costs, primarily interest. In March 1996, Loral purchased
$100,000,000 principal amount of GTL 6 1/2% Convertible Preferred Equivalent
Obligations, due 2006 par value $50 per share, ("GTL CPEOs") for $97,000,000. In
April 1996, Loral purchased an additional $2.5 million principal amount of the
GTL CPEOs for $2,425,000. Such amounts are included in the investment in
Globalstar. The GTL CPEOs must be redeemed by GTL on March 1, 2006. Loral, at
its option, may convert its holdings of GTL's CPEO's into 1,576,923 shares of
GTL common stock
F-11
61
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS IN AFFILIATES -- (CONTINUED)
subject to adjustment for certain anti-dilution provisions. Loral's interest
income for the nine months ended December 31, 1996 includes $5.5 million related
to its investment in GTL CPEOs.
On September 14, 1995, Loral, in its capacity as managing general partner
of Globalstar, granted certain officers options to purchase 140,000 shares of
the GTL common stock owned by Loral at an exercise price of $20.00 per share. On
December 12, 1995, Loral, in its capacity as managing general partner, granted
non-employee directors of Loral options to purchase 200,000 shares of the GTL
common stock owned by Loral at an exercise price of $33.375 per share. These
options are immediately exercisable and expire 12 years from date of grant; no
options were exercised or cancelled during the year.
On October 9, 1996, Loral, in its capacity as managing general partner,
granted certain officers options to purchase 152,000 shares of the GTL common
stock owned by Loral at an exercise price of $25.00 per share. Such options vest
over a three-year period and expire 10 years from date of grant; no options were
exercised or cancelled during the year.
On December 15, 1995, Globalstar entered into a $250 million credit
agreement (the "Credit Agreement") with a group of banks. Lockheed Martin, SS/L
and certain other Globalstar partners have guaranteed $206.3 million, $11.7
million and $32.0 million of the Credit Agreement, respectively. In addition,
Loral agreed to indemnify Lockheed Martin for any liability in excess of $150
million. In exchange for the guarantee and indemnity, GTL issued warrants to
purchase 4,185,318 shares of GTL common stock at $26.50 per share as follows:
Loral 942,428 warrants, Lockheed Martin 2,511,190 warrants, SS/L 195,094
warrants and certain other Globalstar partners 536,606 warrants. Proceeds
received from the exercise of the warrants will be used to purchase Globalstar
ordinary partnership interests under a one-for-one exchange arrangement. As part
of this transaction, Globalstar issued warrants to GTL to purchase an additional
1,131,168 ordinary partnership interests of Globalstar at $26.50 per interest.
On February 12, 1997, GTL and the holders of the warrants entered into an
arrangement under which GTL agreed to accelerate the vesting and exercisability
of the warrants to purchase 4,185,318 shares of GTL common stock at $26.50 per
share and the holders agreed to exercise such warrants. GTL agreed to register
for resale the GTL common stock issuable upon exercise of the warrants. In
addition, GTL announced its intention to distribute to the holders of its common
stock rights to subscribe for and purchase 1,131,168 GTL shares for a price of
$26.50 per share of which Loral will receive rights to purchase 159,172 shares.
Loral agreed to purchase all shares not purchased upon exercise of the rights.
Upon the exercise of the warrants and the rights, GTL will receive proceeds of
approximately $140.9 million, which it will use to exercise its warrants to
purchase 5,316,486 Globalstar ordinary partnership interests at $26.50 per
interest.
Pursuant to the Globalstar partnership agreement, Loral is responsible for
managing the operations of Globalstar and is entitled to receive a Managing
Partner's Allocation on commencement of commercial operations.
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. At December 31,
1996, SS/L had a 4.2% interest in Globalstar.
The Globalstar System has an estimated total cost of $2.5 billion for
capital expenditures, development costs and operating costs through the end of
1998, when full commercial service is scheduled to commence. As of February 13,
1997, Globalstar had raised or received commitments for approximately $2.0
billion, including the $310 million of vendor financing arrangements with SS/L
and its subcontractors. Globalstar intends to raise the remaining funds required
for the Globalstar System from a combination of sources, including debt issuance
(which may include an equity component), financial support from the Globalstar
F-12
62
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS IN AFFILIATES -- (CONTINUED)
partners, projected service provider payments, projected net service revenues
from initial operations and anticipated payments from the sale of gateways and
Globalstar phones.
In addition, Globalstar will purchase from SS/L eight additional spare
satellites that will increase Globalstar's ability to have at least 40
satellites in service during 1999, even in the event of launch failures. If the
launch program is successful, the additional satellites will serve as ground
spares, readily available for launch to replenish the constellation as needed in
response to satellite attrition during the first generation, or to increase
system capacity as required. If Globalstar were to experience a launch failure,
the costs associated with the construction and launch of replacement satellites
would be substantially covered by insurance, and in that event the cost of the
additional satellites used as replacements, currently estimated at $175 million,
would be reimbursed to Globalstar.
K&F
In 1989, Old Loral sold certain of its divisions to K&F for $430,000,000 in
cash 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, Old 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 Old Loral Board of Directors. Old Loral's interest in K&F was
transferred to Loral at the Distribution.
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 2% of K&F's capital stock.
4. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
Equipment, furniture and fixtures............................ $20,083
Leasehold improvements....................................... 171
-------
20,254
Accumulated depreciation..................................... (2,315)
-------
$17,939
=======
Depreciation and amortization expense was $1,051,000 for the nine months
ended December 31, 1996. No depreciation expense was allocated to the Space &
Communications Operations of Old Loral for the years ended March 31, 1996 and
1995.
5. CONVERTIBLE PREFERRED EQUIVALENT OBLIGATIONS
On November 1, 1996, the Company sold $600,000,000 of 6% Convertible
Preferred Equivalent Obligations (the "CPEOs") which, upon approval of the
Company's shareholders, will be mandatorily exchanged into shares of the
Company's 6% Series C Convertible Redeemable Preferred Stock ("Series C
F-13
63
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Preferred Stock") resulting in a reclassification of these amounts into
shareholders' equity. The Series C Preferred Stock will have an aggregate
liquidation preference equal to the aggregate principal amount of the CPEOs and
a mandatory redemption date of November 1, 2006. The Series C Preferred Stock
will be convertible into shares of common stock of the Company at any time after
60 days from the date of the original issuance of such stock at a conversion
price of $20 per share.
The Series C Preferred Stock will be redeemable in cash or Loral common
stock at any time, in whole or in part, at the election of the Company (at a
premium which declines over time) commencing November 5, 1999.
6. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
YEARS ENDED MARCH
31,
NINE MONTHS ENDED --------------------
DECEMBER 31, 1996 1996 1995
------------------ ------- -------
Current:
U.S. Federal................................ $2,913 $(5,772) $ 3,730
State and local............................. 925 (660) 426
------- ------- -------
3,838 (6,432) 4,156
Deferred, principally U.S. Federal............ (926) 3,652 (3,246)
------- ------- -------
Total provision (benefit) for income
taxes............................. $2,912 $(2,780) $ 910
======= ======= =======
The provision for income taxes excludes a current tax benefit of $186,000
and $5,206,000 for the years ended March 31, 1996 and 1995, respectively, and a
deferred tax benefit of $8,122,000 and $1,877,000 for the years ended March 31,
1996 and 1995, respectively, related to the Globalstar partnership loss included
in equity in net loss of affiliates.
The effective income tax rate differs from the statutory Federal income tax
rate for the following reasons:
YEARS ENDED MARCH 31,
NINE MONTHS ENDED -----------------------
DECEMBER 31, 1996 1996 1995
------------------ -------- --------
Statutory U.S. Federal income tax rate....... 35.0% (35.0)% 35.0%
Foreign source income taxed at lower rate.... (21.3) -- --
State and local income taxes, net of Federal
income tax................................. 3.0 (4.0) 4.0
Undistributed income of affiliates........... -- 4.0 7.0
Other, net................................... 1.0 -- (1.1)
----- ----- -----
Effective income tax rate.................... 17.7% (35.0)% 44.9%
===== ===== =====
For the nine months ended December 31, 1996, income before income taxes
includes approximately $10 million of foreign source income.
At December 31, 1996, the deferred tax liability relates primarily to the
tax effect of the temporary differences between the carrying amount of
U.S.-based property, plant and equipment for financial and income tax reporting.
At March 31, 1996, the deferred tax asset relates primarily to the tax effect of
the temporary differences between the carrying amount of investments in
affiliates for financial and income tax reporting, which are no longer
applicable as a result of the formation of the Company in Bermuda.
7. SHAREHOLDERS' EQUITY
Series A Convertible Preferred Stock: The Company has authorized
150,000,000 shares of $.01 par value Series A convertible preferred stock. At
December 31, 1996, 45,896,977 shares were issued and outstanding. Significant
terms of the Series A Convertible Preferred Stock 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 sales to an unaffiliated
third party.
F-14
64
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHAREHOLDERS' EQUITY -- (CONTINUED)
Series B Preferred Stock: The Company has 750,000 authorized and unissued
shares of $.01 par value Series B Preferred Stock. The Series B Preferred Stock
will, if issued, be junior to any other series of preferred stock which may be
authorized and issued.
Common Stock: The Company has 750,000,000 authorized shares of $.01 par
value common stock. There were 191,092,308 and 12,000 shares issued and
outstanding at December 31, 1996 and March 31, 1996, respectively.
Stock Plans: In April 1996, the Company established the 1996 Stock Option
Plan. An aggregate of 12,000,000 shares of common stock were reserved for
issuance. Under this plan, options are granted at the discretion of the
Company's Board of Directors to employees of the Company and its affiliates.
Such options become exercisable as determined by the Board, generally over five
years, and generally expire no more than 10 years from the date of the grant.
In April 1996, the Company established the Common Stock Purchase Plan for
Non-Employee Directors. Under the terms of the plan, each non-employee director
of Loral is entitled to make an election to defer up to 100% of such director's
annual fees and have such amounts credited to a deferral account maintained
under the plan. The balance in the deferral account will be used to purchase
Loral common stock. Participation in the plan is voluntary, and all amounts are
fully vested. 200,000 shares of Loral common stock were reserved for issuance
under this plan. As of December 31, 1996, no shares have been issued under this
plan.
As discussed in Note 2, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related interpretations. Accordingly, no compensation expense
has been recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method.
Under SFAS 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1996: expected life, 6 months following vesting; stock
volatility, 25%; risk free interest rate, 6.25%; and no dividends during the
expected term. The Company's calculations are based on a multiple option
valuation approach and forfeitures are recognized as they occur. If the computed
fair values of the 1996 awards, including stock-based compensation awards to
employees of the Company's affiliates, had been amortized to expense over the
vesting period of the awards, pro forma net income would have decreased by
$4,229,000 ($.02 per share) to $4,648,000 ($.02 per share) for the nine months
ended December 31 1996.
A summary of the status of the Company's stock option plans as of December
31, 1996 and changes during the period then ended is presented below:
WEIGHTED-
AVERAGE
SHARES EXERCISE
(000) PRICE
--------- ---------
Outstanding at March 31, 1996.................................. -- $ --
Granted (weighted average fair value $2.93 per share).......... 6,412,000 10.60
Exercised...................................................... -- --
Forfeited...................................................... 500 10.50
---------
Outstanding at December 31, 1996............................... 6,411,500 10.60
=========
Options exercisable at December 31, 1996....................... 1,200,000 10.50
F-15
65
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHAREHOLDERS' EQUITY -- (CONTINUED)
The weighted average remaining contractual life of options outstanding as
of December 31, 1996 was 9.3 years. All options granted during the year were
non-qualified stock options. As of December 31, 1996, 5,588,500 shares of common
stock were available for future grant under the Plan.
8. PENSIONS AND OTHER EMPLOYEE BENEFITS
Pensions: In April 1996, the Company established a noncontributory pension
plan and a supplemental retirement plan. Eligibility for participation in these
plans vary and benefits are based on members' compensation and years of service.
In connection with the Distribution, Loral assumed the obligations of such
members previously employed by Old Loral, in exchange for plan assets as
defined. The Company's funding policy is to fund the noncontributory pension
plan in accordance with the Internal Revenue Code and regulations thereon and to
fund the supplemental retirement plan on a pay-as-you-go basis. No contributions
were made for the nine months ended December 31, 1996. Plan assets are generally
invested in U.S. government and agency obligations and listed stocks and bonds.
Pension cost for the nine months ended December 31, 1996 includes the
following components (in thousands):
Service cost-benefits earned during the period.............................. $ 268
Interest cost on projected benefit obligation............................... 1,410
Actual return on plan assets................................................ (499)
Net amortization and deferral............................................... (77)
------
Total pension cost.......................................................... $1,102
======
The following presents the plan's funded status and amounts recognized in
the balance sheet at December 31, 1996 (in thousands):
Actuarial present value of benefit obligations:
Vested benefits.......................................................... $27,831
======
Accumulated benefits..................................................... $27,845
Effect of projected future salary increases.............................. 694
------
Projected benefits....................................................... 28,539
Plan assets at fair value.................................................. 9,450
------
Projected benefit obligation in excess of plan assets...................... 19,089
Unrecognized net gain...................................................... 445
------
Pension liability.......................................................... $19,534
======
The principal actuarial assumptions were:
Discount rate.............................................................. 7.75%
Rate of increase in compensation levels.................................... 4.50%
Expected long-term rate of return on plan assets........................... 9.50%
Postretirement Health Care and Life Insurance Benefits: In addition to
providing pension benefits, the Company provides certain health care and life
insurance benefits for retired employees and dependents. Participants are
eligible for these benefits when they retire from active service and meet the
eligibility requirements for the Company's pension plan. These benefits are
funded primarily on a pay-as-you-go basis with the retiree generally paying a
portion of the cost through contributions, deductibles and coinsurance
provisions.
F-16
66
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED)
Postretirement health care and life insurance costs for the nine months
ended December 31, 1996 include the following components (in thousands):
Service cost - benefits earned during the period............................... $13
Interest cost on accumulated postretirement benefit obligation................. 9
---
Total postretirement health care and life insurance costs...................... $22
===
At December 31, 1996, the total accumulated postretirement benefit
obligation was $178,000. Actuarial assumptions used in determining the
accumulated postretirement benefit obligation include a discount rate of 7.75%
at December 31, 1996, and an assumed health care cost trend rate of 10.59%
decreasing gradually to an ultimate rate of 5.50% by the year 2004. Changing the
assumed health care cost trend rate by 1% in each year would not be significant.
Employee Savings Plan: In April, 1996 the Company adopted the employee
savings plan which provides that the Company match the contributions of
participating employees up to a designated level. Under this plan, the matching
contributions in cash for the nine months ended December 31, 1996 were $55,000.
9. FINANCIAL INSTRUMENTS
The Company's financial instruments recorded on the balance sheet at
December 31, 1996 include cash and cash equivalents and Convertible Preferred
Equivalent Obligations. Due to their short maturity, the fair value of cash and
cash equivalents approximates carrying value. The fair value of the Company's
Convertible Preferred Equivalent Obligations, based on quoted market prices, was
approximately $681 million.
10. SUBSEQUENT EVENT
On March 14, 1997, Loral purchased Skynet from AT&T for $478 million in
cash, subject to a dollar-for-dollar adjustment to the extent that Skynet's net
assets delivered on the closing date, measured in accordance with the Asset
Purchase Agreement, are more or less than $418 million. The Company used
existing cash to initially fund the transaction. Skynet is a leading U.S.
satellite communications service provider that owns the Telstar satellite
network.
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
--------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED DECEMBER 31, 1996
Revenues................................ $ 1,538 $ 1,837 $ 1,713
Income before income taxes and equity in
net loss of affiliates................ 5,998 4,422 6,078
Net income.............................. 1,301 2,953 4,623
Earnings per share...................... 0.01 0.01 0.02
Market Price
High.................................. 18 1/2 16 5/8 19 5/8
Low................................... 10 1/2 11 1/8 15 1/4
QUARTER ENDED
--------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
--------- ------------- ------------- ------------
YEAR ENDED MARCH 31, 1996
Revenues................................ $ 857 $ 1,589 $ 1,395 $ 1,767
Loss, before income taxes and equity in
net loss of affiliates................ (2,377) (2,153) (1,458) (1,949)
Net income (loss)....................... (4,016) (4,778) (6,461) 1,470
Earnings (loss) per share............... (.02) (.03) (.04) .01
F-17
67
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 December 31, 1996 and March 31,
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for the nine months ended December 31, 1996 and for each
of the two 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 December 31, 1996 and March 31, 1996, and the results of
their operations and their cash flows for the nine months ended December 31,
1996 and for each of the two years in the period ended March 31, 1996 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Jose, California
February 24, 1997
(March 14, 1997 as to the
fourth paragraph of
Note 4)
F-18
68
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 19,181 $ 126,863
Contracts in process, net.......................................... 376,847 251,271
Inventories........................................................ 74,572 36,582
Deposits and other current assets.................................. 50,910 11,698
---------- --------
Total current assets............................................ 521,510 426,414
Property, plant and equipment, net................................... 166,786 158,239
Cost in excess of net assets acquired, less amortization............. 227,604 232,662
Long-term receivables................................................ 90,005 63,127
Investments.......................................................... 15,000 6,284
Prepaid pension costs and other assets............................... 38,159 21,951
---------- --------
$1,059,064 $ 908,677
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 122,549 $ 132,640
Accrued payroll.................................................... 25,515 24,157
Customer advances.................................................. 163,819 126,318
Income taxes payable............................................... 3,052 3,529
Deferred income taxes.............................................. 54,360 45,364
Other current liabilities.......................................... 8,634 7,227
---------- --------
Total current liabilities....................................... 377,929 339,235
Long-term debt....................................................... 127,586 65,052
Deferred income taxes................................................ 37,787 20,944
Postretirement and other liabilities................................. 34,879 33,463
Minority interest in ISTI............................................ 1,990 2,115
Commitments and contingencies (Notes 6, 8 and 9).....................
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
Retained earnings (accumulated deficit)............................ 12,225 (18,800)
---------- --------
Total shareholders' equity...................................... 478,893 447,868
---------- --------
$1,059,064 $ 908,677
========== ========
See notes to consolidated financial statements.
F-19
69
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
NINE MONTHS
ENDED YEARS ENDED MARCH 31,
DECEMBER 31, -------------------------
1996 1996 1995
------------ ---------- --------
Revenues.............................................. $1,017,653 $1,121,619 $633,717
Costs and expenses.................................... 953,496 1,087,213 605,932
---------- -------- --------
Gross profit.......................................... 64,157 34,406 27,785
Amortization of cost in excess of net assets
acquired............................................ 5,058 6,744 6,744
Management fee........................................ 5,088 5,608 3,169
---------- -------- --------
Operating income...................................... 54,011 22,054 17,872
Interest income....................................... 9,179 9,652 4,538
Interest expense...................................... 3,098 3,301 3,214
---------- -------- --------
Income before income taxes, minority interest and
equity in net loss of affiliate..................... 60,092 28,405 19,196
Provision for income taxes............................ 27,643 15,180 11,946
---------- -------- --------
Income before minority interest and equity in net loss
of affiliate........................................ 32,449 13,225 7,250
Minority interest in losses of ISTI................... 125 151 360
Equity in net loss of Globalstar, net of tax
benefit............................................. (1,549) (1,009) (2,056)
---------- -------- --------
Net income............................................ $ 31,025 $ 12,367 $ 5,554
========== ======== ========
See notes to consolidated financial statements.
F-20
70
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND FOR THE YEARS ENDED MARCH 31,
1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK RETAINED
------------------- EARNINGS
SHARES (ACCUMULATED
ISSUED AMOUNT DEFICIT) TOTAL
------ -------- ----------- --------
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
Net income....................................... -- -- 31,025 31,025
----- -------- -------- --------
Balance December 31, 1996........................ 4,000 $466,668 $ 12,225 $478,893
===== ======== ======== ========
See notes to consolidated financial statements.
F-21
71
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE YEARS ENDED MARCH 31,
MONTHS ENDED ----------------------
DECEMBER 31, 1996 1996 1995
----------------- -------- ---------
Cash flows from operating activities:
Net income......................................... $ 31,025 $ 12,367 $ 5,554
Depreciation and amortization...................... 23,242 29,993 29,468
Deferred income taxes.............................. 26,673 10,237 11,507
Minority interest in losses of ISTI................ (125) (151) (360)
Equity in net loss of LQSS......................... 1,549 1,009 2,056
Changes in operating assets and liabilities:
Contracts in process, including long-term
receivables................................... (152,454) (58,092) 2,293
Inventories..................................... (37,990) (26,729) 9,919
Deposits and other current assets............... (39,212) 8,431 (13,359)
Prepaid pension cost and other assets........... (16,208) 1,450 2,687
Accounts payable and other current
liabilities................................... (7,803) 79,450 27,539
Customer advances............................... 37,501 10,368 39,685
Postretirement and other liabilities............ 317 (537) (1,150)
-------- --------- ---------
Net cash (used in) provided by operating
activities......................................... (133,485) 67,796 115,839
-------- --------- ---------
Investing activities:
Capital expenditures............................... (26,731) (24,167) (23,386)
Investment in ABCN................................. (10,000) -- --
Investment in Globalstar........................... -- -- (3,600)
Investment in Orion................................ -- -- (5,000)
-------- --------- ---------
Net cash used in investing activities................ (36,731) (24,167) (31,986)
-------- --------- ---------
Financing activities:
Proceeds from borrowings........................... 290,408 100,740 151,791
Repayment of debt.................................. (227,874) (69,728) (210,000)
-------- --------- ---------
Net cash provided by (used in) financing
activities......................................... 62,534 31,012 (58,209)
-------- --------- ---------
Net (decrease) increase in cash and cash
equivalents........................................ (107,682) 74,641 25,644
Cash and cash equivalents, beginning of period....... 126,863 52,222 26,578
-------- --------- ---------
Cash and cash equivalents, end of period............. $ 19,181 $126,863 $ 52,222
======== ========= =========
Supplemental information:
Interest paid, net of amounts capitalized.......... $ 2,562 $ 2,440 $ 2,099
======== ========= =========
Income taxes paid.................................. $ 1,449 $ 1,501 $ 439
======== ========= =========
See notes to consolidated financial statements.
F-22
72
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 Space & Communications Ltd. ("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. At December 31,
1996, Loral owned 51% of the common stock of SS/L and has agreed to increase its
ownership to 100% by acquiring the remaining 49% held by the Alliance Partners
(See Note 9). SS/L has operated 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. All significant intercompany balances
and transactions have been eliminated. The investment in Globalstar is accounted
for on the equity method; intercompany profit is eliminated based on ownership
interests.
Change in Fiscal Year-end:
In 1996, SS/L changed its fiscal year-end to December 31 from March 31. The
accompanying financial statements include audited financial statements for the
nine month transition period ended December 31, 1996.
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.
A significant portion of SS/L's revenue is associated with long-term
contracts which require significant estimates. These estimates include
forecasting costs and schedules, estimating contract revenue related to contract
performance (including orbital incentives) and the potential for component
obsolescence in connection with long-term procurements.
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 8%, 10% and 23% of revenues for
the nine months ended December 31, 1996 and for the years ended March 31, 1996
and 1995, respectively. Sales to foreign customers, primarily in Asia,
represented 25%, 27% and 15% of revenues for the nine months ended
F-23
73
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
December 31, 1996 and for the years ended March 31, 1996 and 1995, respectively.
For the nine months ended December 31, 1996 two commercial customers represented
28% and 15% of revenues. For the year ended March 31, 1996, two commercial
customers represented 30% and 13% of revenues. Four commercial customers
represented 23%, 20%, 15% and 13% of revenues for the year ended March 31, 1995.
Inventories:
Inventories consist principally of common subassemblies not specifically
identified to contracts in process, and are valued at the lower of cost or
market. Cost is determined using the first-in-first-out (FIFO) or average cost
method.
Revenue Recognition:
Revenue under long-term fixed-price contracts is recognized using the
cost-to-cost percentage-of-completion method. Revenue includes estimated orbital
incentives discounted to present value at the launch date. Costs include the
development effort required for the production of high-technology satellites,
non-recurring engineering and design efforts in early periods of contract
performance, as well as the cost of qualification testing requirements.
Revenue under cost-reimbursable type contracts is recognized as costs are
incurred; incentive fees are estimated and recognized over the contract term.
Contracts with the U.S. government are subject to termination by the U.S.
government for convenience or for default. Other government contract risks
include dependence on future appropriations and administrative allotment of
funds and changes in government policies. Costs incurred under U.S. government
contracts are subject to audit. Management believes the results of such audits
will not have a material effect on 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.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," SS/L accounts for stock-based awards
to employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
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.
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"),
establishes the accounting standards for the impairment of long-lived assets and
certain intangible assets. SS/L adopted SFAS 121 in the nine months
F-24
74
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ended December 31, 1996 and such adoption did not have any impact on its
financial position or results of operations.
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.
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
$41,882,000 and $36,825,000 at December 31, 1996 and March 31, 1996,
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 nine months ended December 31, 1996 and
for the two 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.
2. CONTRACTS-IN-PROCESS:
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
(IN THOUSANDS)
U.S government contracts:
Amounts billed............................................. $ 11,880 $ 11,374
Unbilled contract receivables.............................. 11,828 12,927
-------- --------
23,708 24,301
-------- --------
Commercial contracts:
Amounts billed............................................. 145,447 122,313
Unbilled contract receivables.............................. 207,692 104,657
-------- --------
353,139 226,970
-------- --------
$376,847 $ 251,271
======== ========
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.
F-25
75
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. CONTRACTS-IN-PROCESS: (CONTINUED)
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 expected to be collected beyond
one year to long term. During the nine months ended December 31, 1996 and the
year ended March 31, 1996, $26,878,000 and $10,227,000, respectively, were
reclassified to long-term receivables. Long-term receivable balances related to
satellite orbitals at December 31, 1996 are scheduled to be received as follows
(in thousands):
1998............................................................... $ 11,367
1999............................................................... 11,413
2000............................................................... 10,793
2001............................................................... 10,783
Thereafter......................................................... 45,649
-------
$ 90,005
=======
Selling, general and administrative expenses for the nine months ended
December 31, 1996 and the years ended March 31, 1996 and 1995 were $45,231,000,
$40,273,000 and $31,163,000 and include independent research and development
costs of $16,274,000, $11,171,000 and $9,471,000, respectively.
3. PROPERTY, PLANT AND EQUIPMENT:
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
(IN THOUSANDS)
Land......................................................... $ 22,300 $ 22,300
Buildings and improvements................................... 65,448 58,721
Machinery, equipment, furniture and fixtures................. 178,137 167,406
Leasehold improvements....................................... 5,780 5,317
Construction-in-process...................................... 22,054 15,788
-------- --------
293,719 269,532
Accumulated depreciation..................................... (126,933) (111,293)
-------- --------
$166,786 $ 158,239
======== ========
Depreciation and amortization expense was $18,184,000, $23,249,000 and
$22,724,000 and capitalized interest costs were $97,000, $127,000 and $100,000
for the nine months ended December 31, 1996 and the years ended March 31, 1996
and 1995, respectively.
4. FINANCING ARRANGEMENTS:
Foreign currency exchange facilities:
At December 31, 1996 and March 31, 1996, SS/L had foreign currency exchange
contracts (forwards and swaps) with several banks to purchase and sell foreign
currencies, primarily Japanese yen, aggregating $251,379,000 and $246,483,000,
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 $215,625,000 and
$217,382,000 at December 31, 1996 and March 31, 1996, respectively. At December
31, 1996, deferred gains on forward contracts to sell foreign currencies,
primarily
F-26
76
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS: (CONTINUED)
yen, were $25,296,000 and deferred losses on forward contracts to purchase
foreign currencies, primarily yen, were $10,458,000. At March 31, 1996, deferred
gains on forward contracts to sell yen were $23,995,000 and deferred losses on
forward contracts to purchase foreign currency, 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 December 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....................................... $ 96,690 $ 87,513 $ 54,605 $ 45,292
2 to 5.................................. 19,873 18,592 62,435 49,933
6 to 10................................. -- -- 17,776 14,295
-------- -------- -------- --------
$116,563 $106,105 $134,816 $109,520
======== ======== ======== ========
Debt
Long-term debt consists of:
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
(IN THOUSANDS)
Revolving credit agreement
(weighted average annual interest rate of 8.25%)........... $ 59,000 $ 7,000
Note purchase facility
(weighted average annual interest rate of 4.26%)........... 49,276 25,868
Export -- Import credit facility
(weighted average annual interest rate of 5.63% and 5.8%,
respectively).............................................. 19,310 32,184
------------ ---------
$127,586 $65,052
========== =======
SS/L has a $250,000,000 revolving credit facility, as amended, ("the
Revolving Credit Agreement") with a group of banks, which provides for
borrowings and letters of credit through January 1, 1999 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 the London Interbank Offer Rate
("LIBOR"). SS/L pays a commitment fee on the unused portion of the Revolving
Credit Agreement. 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.
F-27
77
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS: (CONTINUED)
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 annual rate of 4.26% and is payable semiannually. All borrowings under
this facility reduce the amount available under SS/L's Revolving Credit
Agreement.
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 December 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 LIBOR less 1/4% and is payable semiannually on May 1 and November 1.
The aggregate maturities of long-term debt for the calendar years 1998
through 2001 are as follows: $2,146,000, $61,146,000, $51,422,000 and
$2,146,000.
SS/L has other outstanding letters of credit of approximately $42,562,000
at December 31, 1996.
5. INCOME TAXES:
The components of the provision for income taxes are as follows:
YEARS ENDED MARCH 31,
NINE MONTHS ENDED ---------------------
DECEMBER 31, 1996 1996 1995
------------------ --------- -------
(IN THOUSANDS)
Current:
Federal...................................... $ 683 $ 1,836 $ --
State, local & foreign....................... 287 3,107 --
------- ------- -------
970 4,943 --
Deferred, principally federal.................. 26,673 10,237 11,946
------- ------- -------
Total........................................ $ 27,643 $15,180 $11,946
======= ======= =======
The provision for income taxes excludes a deferred tax benefit of $834,000,
$544,000 and $1,107,000 for the nine months ended December 31, 1996 and the
years ended March 31, 1996 and 1995, respectively, related to SS/L's share of
Globalstar, L.P. losses (see Note 6).
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:
YEARS ENDED MARCH 31,
NINE MONTHS ENDED ---------------------
DECEMBER 31, 1996 1996 1995
------------------ --------- -------
(IN THOUSANDS)
Provision at statutory federal income tax
rate......................................... $ 21,032 $ 9,942 $ 6,719
State income taxes, net of federal income tax
benefit...................................... 4,042 2,219 1,767
Non-deductible goodwill amortization........... 1,770 2,360 2,360
Losses of ISTI................................. 229 330 875
Non-deductible meals, entertainment and
lobbying expense............................. 370 208 275
Other.......................................... 200 121 (50)
------- ------- -------
Total provision for income taxes..... $ 27,643 $15,180 $11,946
======= ======= =======
F-28
78
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES: (CONTINUED)
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 December 31, 1996, the reported deferred tax liability is net of future
tax benefits of $7,288,000 arising from net operating loss carryforwards which
expire beginning in 2008. 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:
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
(IN THOUSANDS)
Deferred tax assets:
Postretirement benefits other than pensions................ $ 13,849 $13,719
Net operating loss carryforwards........................... 7,288 6,864
Compensation and benefits.................................. 3,842 4,681
Other, net................................................. 3,464 4,376
------- -------
28,443 29,640
Deferred tax liabilities:
Income recognition on long-term contracts.................. 86,761 60,315
Property, plant and equipment.............................. 25,059 26,869
Pension costs.............................................. 8,770 8,764
------- -------
120,590 95,948
------- -------
Net deferred income tax liability............................ $ 92,147 $66,308
======= =======
6. INVESTMENTS:
In March 1994, SS/L purchased 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 ordinary partnership interests in Globalstar, L.P. ("Globalstar"),
which represents a 38.3% interest in the ordinary partnership interests of
Globalstar at December 31, 1996 and March 31, 1996. At December 31, 1996, SS/L
and Loral had an effective 4.2% and 31.7% interest, respectively, in
Globalstar's ordinary partnership interests. Globalstar was formed to design,
construct and operate a worldwide, low-earth-orbit satellite-based digital
telecommunications system. SS/L's investment has been reduced by $2,383,000,
$1,553,000 and $3,163,000 for the nine months ended December 31, 1996 and the
years ended March 31, 1996 and 1995, respectively, to reflect the pretax effect
of its proportionate share of Globalstar's losses.
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. In addition, Globalstar has agreed to
purchase from SS/L eight additional spare satellites at a cost of approximately
$175 million. 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 nine months ended
December 31, 1996 and the
F-29
79
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS: (CONTINUED)
years ended March 31, 1996 and 1995 was $280,627,000, $336,977,000, and
$97,258,000, respectively. Billed and unbilled receivables from Globalstar were
$22,572,000 and $130,694,000 and $10,082,000 and $72,535,000 at December 31,
1996 and March 31, 1996, 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 December 31 and March 31, 1996, $130.7 million and $61.6 million,
respectively, was due under this arrangement, of which $72.0 million and $33.8
million, respectively, of the vendor financing receivable was interest bearing.
SS/L has guaranteed approximately $11,700,000 of Globalstar's obligation
under a $250,000,000 credit agreement. In return for providing such guarantee,
SS/L received warrants to purchase 195,094 shares of Globalstar
Telecommunications Limited ("GTL") common stock at $26.50 per share. On February
12, 1997, SS/L agreed to exercise these warrants in connection with arrangements
reached by GTL with the other warrant holders.
In April 1994, SS/L purchased common stock representing a five percent
interest in Orion Network Systems, Inc. for $5,000,000. In May 1996, SS/L
purchased common stock representing a 4.8% interest in Asia Broadcasting and
Communications Network Public Company Limited for $10 million. At December 31,
1996, the carrying value of these investments approximated market value. The
investments are 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 $5,088,000, $5,608,000
and $3,169,000 for the nine months ended December 31, 1996 and the years ended
March 31, 1996 and 1995, 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 $2,695,000, $3,427,000 and
$3,287,000 for the nine months ended December 31, 1996 and for the years ended
March 31, 1996 and 1995, respectively.
For the nine months ended December 31, 1996, SS/L was billed $10,066,000
for certain operational, executive, administrative, financial, legal and other
services provided by Loral. SS/L was billed for certain operational, executive,
administrative, financial, legal and other services provided by Lockheed Martin
and Old Loral, and SS/L charged Lockheed Martin and Old Loral certain overhead
costs. Net costs billed by Lockheed Martin for the nine months ended December
31, 1996 were $5,154,000. Net costs billed by Old Loral were $7,066,000 and
$8,518,000 for the years ended March 31, 1996 and 1995, respectively.
F-30
80
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS: (CONTINUED)
In connection with contract performance, SS/L provided services to and
acquired services from Lockheed Martin for the nine months ended December 31,
1996 and Old Loral for the years ended March 31, 1996 and 1995. A summary of
such transactions and balances is as follows:
NINE MONTHS ENDED YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1995
----------------- -------- -------
(IN THOUSANDS)
Revenue from services sold.................... $ 3,174 $ 1,096 $ 1,103
Cost of purchased services.................... 124,275 28,228 27,631
Balances at year end:
Receivable.................................. $ 1,650 $ 430 $ 724
Payable..................................... 3,572 15,823 7,272
-------- ------- -------
Net payable................................... $ 1,922 $ 15,393 $ 6,548
======== ======= =======
SS/L's sales to, purchases from, and balances with the Alliance partners
are as follows:
NINE MONTHS ENDED YEAR ENDED MARCH 31,
DECEMBER 31, --------------------
1996 1996 1995
----------------- -------- -------
(IN THOUSANDS)
Revenue from services sold.................... $55,019 $ 32,561 $ 3,073
Cost of purchased services.................... 150,608 249,092 85,489
Balances at year end:
Receivable.................................. $ 8,526 $ 15,066 $ 840
Payable..................................... 41,335 38,257 19,521
Certain employees of SS/L participate in Loral's 1996 Stock Option Plan.
Under this plan, options are granted at the discretion of Loral's Board of
Directors to employees of Loral and its affiliates. Such options become
exercisable as determined by the Board, generally over five years, and generally
expire no more than 10 years from the date of grant. For the nine months ended
December 31, 1996 Loral granted certain key employees of SS/L options to
purchase 1,474,000 shares of Loral common stock at a weighted average price of
$10.67 per share (weighted average fair value of $2.95 per share.) No options
were exercised, and at December 31, 1996, options to purchase 1,473,500 shares
were outstanding, none of which were exercisable.
For the years ended March 31, 1996 and 1995, SS/L employees were eligible
to participate in Old Loral's stock option plans. At March 31, 1996 and 1995,
options to purchase 466,304 and 445,788 shares of Old Loral common stock were
outstanding, respectively (adjusted for a two for one stock split in the fiscal
year ended March 31, 1996.) All options were exercised in connection with the
Distribution.
For the years ended March 31, 1996 and 1995, SS/L had agreed to pay Old
Loral any difference between the market value of Old 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 Old Loral for any tax benefit resulting from
shares granted in excess of that amount. For the years ended March 31, 1996 and
1995, $4,510,000 and $726,000, respectively, of compensation expense was accrued
for the excess of market value of Old Loral stock over exercise prices for
options exercisable subject to the authorized limitation.
As described in Note 1, SS/L accounts for its stock-based awards using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and its related
interpretations. SFAS No. 123, "Accounting for Stock-Based Compensation"
requires the disclosure of pro forma net income had SS/L adopted the fair value
method. SFAS No. 123 requires that equity instruments granted to an employee by
a principal stockholder be included as part of the disclosure. The
F-31
81
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS: (CONTINUED)
pro forma incremental effect on net income required to be disclosed under SFAS
No. 123 is not material to SS/L's results of operations for the nine months
ended December 31, 1996 and the year ended March 31, 1996.
8. COMMITMENTS AND CONTINGENCIES:
At December 31, 1996, SS/L was party to various noncancellable real estate
leases with minimum aggregate rental commitments payable as follows (in
thousands):
1997............................................................... $ 9,875
1998............................................................... 8,574
1999............................................................... 7,776
2000............................................................... 7,284
2001............................................................... 6,848
Thereafter......................................................... 22,954
-------
$ 63,311
=======
Leases covering major items of real estate contain renewal and/or purchase
options which may be exercised by SS/L. Rent expense was $7,838,000, $6,440,000
and $4,805,000 for the nine months ended December 31, 1996 and the years ended
March 31, 1996 and 1995, 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 $1,014,429,000 at December 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.
9. SS/L SHAREHOLDERS
Loral has made a strategic decision to increase its ownership of SS/L to
100%. The first step in implementing this decision was the acquisition by Loral
in August 1996 of the 18.3% interest in SS/L owned by certain partnerships
affiliated with Lehman Brothers (the "Lehman Partnerships") in exchange for
7,500,000 newly issued shares of common stock of the Company, 267,256 shares of
common stock of GTL previously held by the Company and $4 million in cash. As a
result of this transaction, the Company increased its interest in SS/L from
32.7% to 51%. On February 12, 1997, Loral completed negotiations with SS/L's
Alliance Partners to acquire their respective ownership interests in SS/L for
$374 million of which $93 million will be paid in cash and the balance in Loral
common stock and Loral convertible preferred equivalent obligations. Partners
exchanging SS/L common stock for Loral common stock or convertible preferred
equivalent obligations will retain representation on the SS/L Board of Directors
and continue their strategic operating relationships with SS/L. Beginning in
1997, the financial position and results of operations of SS/L will be
consolidated in the financial statements of Loral.
10. 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. SS/L's funding policy is generally to contribute in accordance with
cost accounting standards that affect government contractors, subject to the
Internal Revenue
F-32
82
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS: (CONTINUED)
Code and regulations thereon. No contributions were made for the nine months
ended December 31, 1996. Contributions for the years ended March 31, 1996 and
1995 were $3,990,000 and $58,000, 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:
YEARS ENDED MARCH 31,
NINE MONTHS ENDED ---------------------
DECEMBER 31, 1996 1996 1995
----------------- -------- --------
(IN THOUSANDS)
Service cost -- benefits earned during the
period...................................... $ 3,808 $ 3,676 $ 3,950
Interest cost on projected benefit
obligation.................................. 8,205 10,070 9,025
Actual loss (return) on plan assets........... (9,934) (27,838) 372
Net amortization and deferral................. 574 18,110 (10,672)
-------- -------- --------
Net pension costs............................. $ 2,653 $ 4,018 $ 2,675
======== ======== ========
The following table sets forth the Plan's funded status:
DECEMBER 31, 1996 MARCH 31, 1996
----------------- --------------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefits................................. $ 130,363 $128,032
======== =======
Accumulated benefits............................ $ 134,507 $129,290
Effect of projected future salary increases..... 16,981 17,711
-------- -------
Projected benefits.............................. 151,488 147,001
Plan assets at fair value......................... 167,635 140,934
-------- -------
Plan assets in excess of (less than) projected
benefit obligation.............................. 16,147 (6,067)
Unrecognized net prior service cost............... 60 63
Unrecognized net loss............................. 5,183 27,347
-------- -------
Prepaid pension cost included in other assets in
the accompanying balance sheet.................. $ 21,390 $ 21,343
======== =======
The principal actuarial assumptions are as
follows:
Discount rate................................... 7.75% 7.50%
Rate of increase in compensation levels......... 4.50% 4.50%
Expected long-term rate of return on plan
assets....................................... 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.
F-33
83
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS: (CONTINUED)
Postretirement health care and life insurance costs include the following
components:
YEARS ENDED MARCH
NINE MONTHS 31,
ENDED -------------------
DECEMBER 31, 1996 1996 1995
----------------- ------- -------
(IN THOUSANDS)
Service cost -- benefits earned during the
period........................................ $ 622 $ 405 $ 386
Interest cost on accumulated postretirement
benefit obligation............................ 1,599 1,549 1,445
Net amortization and deferrals.................. (916) (1,316) (1,481)
------- ------- -------
Total postretirement health care and life
insurance costs............................... $ 1,305 $ 638 $ 350
======= ======= =======
The following table reconciles the amounts recognized in the balance sheet:
DECEMBER 31, 1996 MARCH 31, 1996
----------------- --------------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees........................................ $15,260 $ 13,539
Fully eligible plan participants................ 3,517 3,229
Other active plan participants.................. 10,541 6,031
------- -------
Total accumulated postretirement benefit
obligation...................................... 29,318 22,799
Fair value of assets.............................. (2,055) (1,868)
------- -------
Unfunded accumulated postretirement benefit
obligation...................................... 27,263 20,931
Unrecognized prior service gain related to plan
amendments...................................... 12,742 13,696
Unrecognized net (loss) gain...................... (6,225) (1,164)
------- -------
Accrued postretirement health care and life
insurance costs................................. $33,780 $ 33,463
======= =======
The principal assumptions used in determining the pension benefit
obligation are as follows:
Discount rate..................................... 7.75% 7.50%
Rate of increase in compensation levels........... 4.50% 4.50%
Present healthcare cost trend rate................ 10.59% 10.59%
Ultimate trend rate by the year 2004.............. 5.50% 5.50%
Changing the assumed health care cost trend rate by 1% in each year would
change the accumulated postretirement benefit obligation by approximately
$3,224,000 and the aggregate service and interest cost components for the nine
months ended December 31, 1996 by approximately $325,000.
Employee Savings Plan:
SS/L employees participate in the Loral 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 cash contributions were $2,859,000, $2,852,000
and $2,976,000 for the nine months ended December 31, 1996 and the years ended
March 31, 1996 and 1995, respectively.
F-34
84
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 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
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.
F-35