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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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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 27, 1998, 201,074,069 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
$5.0 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1998 definitive proxy statement are
incorporated by reference into Part III.
The financial statements required by Rule 3.09 of Regulation S-X of the
registrant's significant investee, Globalstar, L.P., are incorporated by
reference herein from the Annual Report on Form 10-K filed by Globalstar
Telecommunications Limited and Globalstar, L.P.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Loral Space & Communications Ltd. and subsidiaries ("Loral" or the
"Company") is one of the world's leading satellite communications companies,
with substantial interests in the design, manufacture and operation of
geosynchronous ("GEO") and low-earth-orbit ("LEO") satellite systems. Loral also
provides a broad array of satellite-based services. Since its formation in 1996,
Loral has assembled the building blocks essential to the creation of a seamless,
global networking capability for the information age.
Through a series of acquisitions commencing in August 1996 and concluding
in June 1997, Loral implemented its strategic decision to increase its ownership
in Space Systems/Loral, Inc. ("SS/L") to 100%. SS/L, one of the world's leading
satellite manufacturers, draws on a 40-year heritage, with more than 630 years
of cumulative on-orbit experience, and provides Loral with visibility into
emerging and new satellite-based technologies and applications.
In addition to SS/L's satellite manufacturing business, through a series of
strategic acquisitions, Loral has established itself as one of the world's
leading providers of satellite-based services. In March 1997, Loral acquired
Skynet Satellite Services ("Skynet"), a leading domestic satellite service
provider, from AT&T for $462.1 million in cash. Skynet owns and operates the
Telstar satellite network, which provides coverage over the continental United
States, Hawaii, Alaska, Puerto Rico and the U.S. Virgin Islands. With the launch
of additional Telstar satellites, Skynet intends to become a worldwide satellite
communications service provider.
In December 1997, a joint venture in which Loral holds a 65% economic
interest, completed the acquisition from the Mexican government of a 75%
interest in Satelites Mexicanos, S.A. de C.V. ("SatMex"). SatMex, which owns and
operates three geosynchronous communications satellites, is the dominant
satellite communications company currently providing services in Mexico and
intends to expand its services to become a leading provider of satellite
services throughout Latin America.
Most recently, on March 20, 1998, Loral acquired Orion Network Systems,
Inc. ("Orion"). Orion, a rapidly growing provider of satellite-based
communications services, focuses primarily on three businesses -- private
communications network services, Internet services and video distribution and
other satellite transmission services. Orion currently owns and operates one GEO
satellite and is constructing two additional GEO satellites to be launched in
the fourth quarter of 1998 and the second quarter of 1999. The footprints of
these satellites will, in the aggregate, cover over 85% of the world's
population.
In addition, Loral is developing CyberStar, a proposed worldwide high-speed
broadband data communications system. CyberStar plans to offer business and home
users worldwide a variety of low-cost, interactive multimedia communications
services via high speed digital signals. Initially, CyberStar intends to offer
service in the United States using leased capacity on Skynet's Telstar 5
satellite, and plans in the future to migrate its service to a worldwide system
of three GEO satellites.
Loral manages and currently owns, directly and indirectly, approximately
40% (38% on a fully diluted basis) of Globalstar, L.P. ("Globalstar").
Globalstar will operate a worldwide, LEO satellite-based digital
telecommunications system (the "Globalstar System(TM)") that is scheduled to
commence service in early 1999. The Globalstar System is designed to enable
local service providers to offer low-cost, high quality wireless voice telephony
and data services in virtually every populated area of the world. Loral,
together with partners, will act as the Globalstar service provider in Canada,
Mexico and Brazil.
In February 1998, Loral announced a strategic partnership with Alcatel
Alsthom of France to jointly build and operate Europe*Star, a multiple
geostationary satellite system that will provide broadcast and
telecommunications services to Europe, Southeast Asia, the Middle East, South
Africa and India. Europe*Star will become part of the Skynet global alliance
which intends to offer an integrated, worldwide portfolio of satellite capacity,
under the Skynet brand name.
Loral is pursuing additional satellite-based communications service
opportunities throughout the world. For instance, in August 1997, SS/L
established a joint venture with Mabuhay Philippines Satellite Corporation to
provide satellite-based services to the Philippines. Loral owns approximately
12% of CD Radio, Inc., a company that will provide digital audio radio service
to automobiles by satellite.
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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.
The following table presents a brief description of the orbital slots that
the Company and its affiliates are authorized to use. All satellite systems are
subject to international frequency coordination requirements and must obtain
appropriate authority ("landing rights") to provide service in a given
territory.
ORBITAL FREQUENCY/
SATELLITE LOCATION TRANSPONDERS COVERAGE AREA
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Loral Skynet(1) Telstar 303(2) 120 degreesW.L. 18 C-band (36 North America
MHz)
Telstar 4 89 degreesW.L. 24 C-band (36 North America
MHz) 16 Ku-band
(54 MHz)
Telstar 5(3) 97 degreesW.L. 24 C-band (36 North America
MHz), 28 Ku-band
(24 x 27 MHz, 4 x
54 MHz)
Telstar 6 93 degreesW.L. C- and Ku-band North America
Telstar 7 129 degreesW.L. C- and Ku-band North America,
including Alaska
Telstar 8 77 degreesW.L. C- and Ku-band North America
Telstar 9 69 degreesW.L. C- and Ku-band North America
SatMex Morelos II 116.8 degreesW.L. C-band (12 x 36 Mexico Domestic
MHz, 6 x 72 MHz),
Ku-band (4 x 108
MHz)
SatMex 5(4) 116.8 degreesW.L. C-band (24 x 36 Americas
MHz), Ku-band (24
x 36 MHz)
Solidaridad 1 109.2 degreesW.L. C-band (12 x 36 Mexico & Portions of
MHz, 6 x 72 MHz), Latin America
Ku-band (16 x 54
MHz)
Solidaridad 2 113.0 degreesW.L. C-band (12 x 36 Mexico & Portions of
MHz,6 x 72 MHz), Latin America
Ku-band (16 x 54
MHz)
Loral Orion(5) Orion 1 37.5 degreesW.L. Ku-band (28 x 54 Europe, SE Canada,
MHz, 6x36 MHz) U.S., East of the
Rockies and parts of
Mexico.
Orion 2(6) 12 degreesW.L. Ku-band Eastern U.S., SE
Canada, Europe, CIS,
Middle East, North
Africa and Latin
America, S. Africa
Orion 3 139 degreesE.L. C- and Ku-band China, Japan, Korea,
India, Hawaii, SE
Asia, Australia, New
Zealand, Eastern
Russia, Oceana
47 degreesW.L. Ku-band Americas, Europe &
Africa
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ORBITAL FREQUENCY/
SATELLITE LOCATION TRANSPONDERS COVERAGE AREA
------------------- ------------------ ----------------- --------------------
135 degreesW.L.(6) Ku-band North America,
Hawaii, Puerto Rico,
U.S. Virgin Islands
144 degreesE.L. C- and Ku band China, Japan, Korea,
India, Hawaii, SE
Asia, Australia, New
Zealand, Eastern
Russia, Oceana
89 degreesW.L. Ka-band Americas
78 degreesE.L. Ka-band Russia, India,
China, Europe,
Africa, CIS,
Australia, Asia
81 degreesW.L. Ka-band Americas
126.5 degreesE.L. Ka-band Asia, Russia,
Australia, Oceana
CyberStar
115 degreesW.L. Ka-band (spot North America
beams)
93 degreesW.L. Ka-band (spot North and South
beams) America(7)
105.5 degreesE.L. Ka-band (spot Asia-Pacific
beams)
Globalstar(8)
56 satellites, LEO 1610-1621.35 MHz, Global
2483.5-2500 MHz,
feeder links in
C-band
R/L DBS
61.5 degreesW.L. 11-Odd numbered Eastern United
DBS channels 1-21 States
166 degreesW.L. 11-Odd numbered Western United
DBS channels 1-21 States
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(1) In addition to the orbital slots listed in the table above, Loral has
applications pending at 77 degreesW.L. for use of the Extended C/Ku-band
frequencies, at 81 degreesW.L. for use of Ku/Extended Ku-band frequencies
and at 135 degreesW.L., 115 degreesW.L., 95 degreesW.L. and 58 degreesW.L.
for use of the V-band frequency. In addition, Loral has International
Telecommunication Union filings at 3.5 degreesE.L., 11 degreesE.L., 30
degreesE.L., 80 degreesE.L., 105.5 degreesE.L. and 135 degreesE.L. for use
of the V-band frequency.
(2) Currently operating in inclined orbit beyond its designed life. Subject to
FCC approval, can be expected to continue to generate modest revenues for
approximately one year.
(3) This satellite is licensed pursuant to a grant of special temporary
authority that expires May 18, 1998. Prior to that date, Loral anticipates
that the FCC will grant a permanent authorization or extend the temporary
authority.
(4) SatMex 5 is under construction and is scheduled for launch in the fourth
quarter of 1998 to replace Morelos II.
(5) In addition to the orbital slots listed in the table above, Loral Orion has
applications pending at 126 degreesE.L. for use of the Ku/Extended Ku/C and
Extended C-band frequencies and at 139 degreesE.L., 15 degreesW.L. and 67
degreesW.L. for use of the Ka-band frequency.
(6) These satellites are conditionally licensed by the FCC, subject to an
appropriate showing of Loral's financial capability to construct, launch and
operate the satellites.
(7) The FCC license does not describe a particular coverage area.
(8) In addition to the constellation in the table above, Globalstar has
applications pending for an 80 satellite LEO system using the V-band
frequency and for a second generation Globalstar system comprised of 64 LEO
satellites and four GEO satellites (at 80 degreesW.L., 10 degreesE.L., 100
degreesE.L. and 170 degreesE.L.) using the 2 GHz frequency.
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Loral was formed to effectuate the distribution (the "Distribution") of the
space and telecommunications businesses of Loral Corporation ("Old Loral") to
shareholders of Old Loral in connection with the merger (the "Merger") of Old
Loral into a subsidiary of Lockheed Martin Corporation ("Lockheed Martin"). The
Distribution was made on April 23, 1996.
SPACE SYSTEMS/LORAL
SS/L is a worldwide leader in the design, manufacture and integration of
telecommunications, weather and direct broadcast satellites with 40 years of
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.
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 CD Radio,
Chinasat, Globalstar, MCI, PanAmSat, Loral Skynet and TCI. SS/L has a broad
range of technical 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 630 years of service in
space.
SS/L has a history of technical innovation that includes the first
three-axis stabilized satellites, bipropellant propulsion systems for commercial
satellites that permit significant increases in the satellites' payload and
extend the satellites' on-orbit lifetime, rechargeable nickel-hydrogen batteries
with a life span of 10 years or more, the use of advanced composites to
significantly enhance satellite performance at lighter weights and the first
communications satellite with more than ten kilowatts of power. SS/L also
created the first multi-mission geostationary satellite and was the first U.S.
company to exchange space technology with Russia's space industry, obtaining
exclusive rights outside the former Eastern bloc to an electric propulsion
subsystem that is five times as efficient as bipropellant propulsion systems.
Since 1990, SS/L has shortened delivery schedules significantly, increased
spacecraft reliability and increased spacecraft power.
In March and June 1997, Loral acquired the remaining 49% of the common
stock of SS/L held by four international aerospace and communications companies
(the "Alliance Partners") for $374 million paid in cash and Loral securities.
SS/L and three of 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 supply satellite payloads
in support of Aerospatiale's prime contract under the Eutelsat, Thaicom and
Sirius programs.
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 extensive, including
its efforts in 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
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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 was introduced in 1997.
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.
SKYNET
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.
Skynet's customers include, among others, the ABC and Fox television
networks. As a result, local affiliates of these networks have antennas pointed
at Skynet's satellites. This configuration creates a "neighborhood" attractive
to other users requiring similar distribution channels, giving Skynet a
competitive advantage in serving both television networks and television
programming syndicates. Other Skynet customers include third party resellers,
such as sports syndicators, who contract with major television programmers and
distance learning providers.
Skynet currently has two high-powered satellites in orbit. Telstar 4, which
was placed in service in November 1995, is equipped with 24 C-band and 24
Ku-band transponders and provides coverage over the continental United States,
Hawaii, Alaska, Puerto Rico and the U.S. Virgin Islands. The 52-transponder
Telstar 5, built by SS/L, was successfully launched in May 1997 and placed into
service on July 1, 1997. Telstar 5 provides coverage over the continental United
States, Puerto Rico, the Caribbean and into Canada and Latin America. In
addition, Telstar 303, which has exceeded its 10-year design life, is now in
inclined orbit and generates modest revenues from customers that have tracking
antennas or do not require continuously-available service.
Skynet plans to construct, launch and operate four 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 6, which is being built by SS/L, will
have 24 C-band and 28 Ku-band transponders and is scheduled to be launched and
placed into service in the second half of 1998. Telstar 7, which is also under
construction by SS/L, will have 24 C-band and 32 Ku-band transponders and is
scheduled for launch in the first quarter of 1999. Telstar 8, which is expected
to have 24 C-band and 32 Ku-band transponders, and
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Telstar 9, which is expected to have 24 C-band and 28 Ku-band transponders, are
currently scheduled for delivery and launch in 2001 and 2000, respectively.
In addition to providing transponder capacity in the domestic U.S. market,
Skynet plans to offer satellite services worldwide. Skynet is coordinating the
formation of a global alliance among Skynet, SatMex, Orion and Europe*Star. This
alliance will offer an integrated, worldwide portfolio of satellite capacity
under the Skynet brand name and will employ, among other things, a complementary
marketing strategy to provide customers with "one stop shopping" for local,
regional and global satellite services.
SATMEX
In connection with the privatization by the Federal Government of Mexico
(the "Mexican Government") of its fixed satellite services business, Loral and
Telefonica Autrey, S.A. de C.V. ("Telefonica Autrey") formed a joint venture,
Firmamento Mexicano, S. de R.L. de C.V. ("Holdings"). On November 17, 1997,
Holdings acquired 75% of the outstanding capital stock of SatMex for $646.8
million. The purchase price was financed by a Loral equity contribution of $94.6
million, a Telefonica Autrey equity contribution of $50.9 million and debt
issued by Holdings. As part of the acquisition, Holdings issued a $125.1 million
seven year obligation bearing interest at 6.03% to the Mexican Government (the
"Government Obligation") in consideration for the assumption by SatMex of the
debt incurred by Holdings in connection with the acquisition. The debt of SatMex
and Holdings is non-recourse to Loral and Telefonica Autrey. However, Loral and
Telefonica Autrey have agreed to maintain assets in a collateral trust in an
amount equal to the value of the Government Obligation through December 30, 2000
and, thereafter, in an amount equal to 1.2 times the value of the Government
Obligation until maturity. Loral has a 65% economic interest in Holdings and a
49% indirect economic interest in SatMex. SatMex is the dominant provider of
fixed satellite services in Mexico and provides broadcasting and
telecommunications capacity to approximately 180 customers.
SatMex provides satellite transmission capacity to broadcasting customers
for network and cable television programming, direct-to-home television service
and on-site transmission of live news reports, sporting events and other video
feeds. SatMex also provides satellite transmission capacity to
telecommunications service providers for public telephone networks in Mexico and
elsewhere and corporate customers for their private business networks with data,
voice and corporate video applications. SatMex has landing rights to provide
broadcasting and telecommunications transmission capacity in 15 nations in the
region, including the United States. SatMex's broadcasting customers include
Televisa, MVS Mutivision and Television Azteca, and its telecommunications
services customers include Telmex, Bancomer, Pemex, Cemex and the Mexican
subsidiaries of Ford and Chrysler.
SatMex believes that it has one of the largest aggregate satellite
capacities dedicated primarily to the Latin American region, with 132 36 MHz
transponder-equivalents currently in operation. SatMex's three satellites
(Solidaridad 1, Solidaridad 2 and Morelos II) are in geostationary orbit at
109.2 WL, 113.0 WL and 116.8 WL, respectively, with aggregate footprints
covering Mexico, the southern and eastern United States, Central America, the
Caribbean and most of South America. SatMex holds 20-year concession titles to
operate in these three orbital locations at certain C- and Ku-band frequencies
expiring October 22, 2017. The concession titles are renewable thereafter,
subject to certain conditions, for an additional 20-year term without additional
payment. In addition, SatMex operates two satellite control centers.
SatMex has contracts for the construction and launch of SatMex 5, the
replacement for Morelos II, which is scheduled to launch in the fourth quarter
of 1998. SatMex 5 has been designed to increase SatMex's total capacity to 144
36 MHz transponder-equivalents, with a substantial increase in power and an
extension of SatMex's footprint to include substantially all of the continental
United States and the Caribbean, as well as all of Latin America, other than
certain remote regions of Brazil.
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ORION
On March 20, 1998, Loral acquired Orion in exchange for Loral common stock.
Loral issued 17.9 million shares of its common stock and assumed existing Orion
options and warrants to purchase 1.9 million shares of Loral common stock
representing an aggregate purchase price of $467.0 million.
Orion is a rapidly growing provider of a satellite-based communications
services, focused primarily on private communications network services, Internet
services and video distribution and other satellite transmission services. Orion
provides multinational corporations with private communications networks
designed to carry high-speed data, fax, video teleconferencing, voice and other
specialized services. The Orion satellite's coverage reaches all locations
within its footprint, enabling the delivery of high-speed data to customers in
emerging markets and remote locations which lack the necessary infrastructure to
support these services. Orion also offers high speed Internet access and
transmission services to companies outside the United States seeking to avoid
"last mile" terrestrial connections and to bypass congested regional Internet
network routes. In addition, Orion provides satellite capacity for video
distribution, satellite news gathering and other satellite services primarily to
broadcasters, news organizations and telecommunications service providers. Orion
provides its services directly to customer premises using VSATs.
Orion believes that demand for satellite-based communications services will
continue to grow due to the expansion of businesses beyond the limits of wide
bandwidth terrestrial infrastructure, accelerating demand for high speed data
services, growing demand for Internet and intranet services, especially outside
the United States, increased size and scope of television programming
distribution, worldwide deregulation of telecommunications markets and
continuing technological advancement. Satellites are able to provide reliable,
high bandwidth services anywhere in their coverage areas, and Orion believes
that it is well positioned to satisfy market demand for these services.
Orion commenced operations of Orion 1, a high power Ku-band satellite with
34 Ku-band transponders, in January 1995. Orion 1 provides coverage of 34
European countries, much of the United States and parts of Canada, Mexico and
North Africa. Through arrangements with local ground operators, Orion currently
has the ability to deliver network services to and among points in 27 European
countries, portions of the United States and a limited number of Latin American
countries. As of December 31, 1997, Orion serviced 301 customers through 682
sites in service.
Orion 2, which will be a high power satellite with 30 Ku-band transponders,
will expand Orion's European coverage and extend coverage to portions of the
Commonwealth of Independent States, Latin America and the Middle East. Orion 2
will significantly increase Orion's pan-European capacity, currently the area of
strongest demand for Orion's services. Orion recently commenced selling services
in certain areas of Latin America. Orion 2 is scheduled to be launched in the
second quarter of 1999.
Orion 3, which will be a high power satellite with 33 Ku-band transponders
and 10 C-Band transponders, will cover broad areas of the Asia Pacific region,
including China, Japan, Korea, India, Southeast Asia, Australia, New Zealand,
Eastern Russia and Hawaii. Orion 3's footprint will provide Orion with the
ability to distribute programming from the United States via Hawaii to most of
the Asia Pacific region. Orion has already taken a number of steps to establish
an early market presence in Asia, and has entered into an $89 million lease for
eight of Orion 3's transponders. Orion 3 is scheduled to be launched in the
fourth quarter of 1998.
In the aggregate, the footprints of Orion 1, Orion 2 and Orion 3 will cover
over 85% of the world's population.
CYBERSTAR
Loral is developing CyberStar, a proposed worldwide high-speed broadband
data communications system. CyberStar plans to offer business and home users
worldwide a variety of low-cost, interactive multimedia communications services
via high speed digital signals. Initially, CyberStar intends to offer service in
the United States using leased Ku-band transponder capacity on Skynet's Telstar
5 satellite. CyberStar's
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satellite-based services will include high speed Internet access, data
broadcasting, broadband interconnection, intranet muticasting, real-time
streaming and other data services. CyberStar service, expected to commence in
the second half of 1998, will be delivered to consumers, businesses and private
networks worldwide through a network of local and regional service providers.
In the future, CyberStar intends to offer services through a dedicated
worldwide constellation of three geostationary satellites utilizing the Ka-band.
CyberStar holds FCC licenses to orbital slots covering North and South America,
Asia, Europe and the Middle East.
GLOBALSTAR
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. 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 user terminals, including hand-held and vehicle-mounted units similar
to today's cellular telephones, fixed telephones similar either to phone booths
or ordinary wireline telephones, and data terminals and facsimile machines.
Dual-mode and tri-mode Globalstar user terminals will provide access to both the
Globalstar System and the subscriber's land-based cellular service. Each
Globalstar user terminal 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 27, 1998, each of the elements of the Globalstar
System -- space and ground segments, digital communications technology, user
terminal supply, service provider arrangements and licensing -- is on schedule
to commence commercial operations in early 1999 following the launch of 44
satellites in 1998. The remaining 12 satellites, including eight in-orbit
spares, will be launched in early 1999.
Space Segment. On February 14, 1998, Globalstar launched its first
four satellites. The next four Globalstar satellites, which will be
launched on a Boeing Delta II launch vehicle, are at the Cape Canaveral
launch site and are expected to be launched in late April 1998. In
addition, satellite and major subsystem assembly, integration and testing
necessary for the first launch on an Ukranian Zenit launch vehicle are
underway. Production is proceeding for the remaining satellites to meet
scheduled launch dates. Globalstar's 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. Globalstar purchased 38 gateways under contracts
totaling approximately $340 million. Globalstar has entered into contracts
and discussions to resell such gateways to its partners and service
providers. The first four Globalstar gateways, which are to be located in
Australia, France, South Korea and the United States, are completed. 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.
Construction of the remaining 34 gateways is proceeding on schedule for the
initiation of commercial service in 1999. In addition, Globalstar's
satellite operations control center facility has been completed.
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Digital Communications Technology. Qualcomm's CDMA technology has now
been successfully deployed in South Korea, Hong Kong and cities in the
United States supporting terrestrial personal communications services 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, gateways and handsets.
User Terminal Supply. Qualcomm/Sony and two other manufacturers,
Ericsson and TELITAL, are developing Globalstar's user terminals and
production orders were issued in the fourth quarter of 1997. In December
1997, an order for 40,000 fixed access terminals totaling $84 million was
placed with Ericsson. Globalstar expects to recover this cost through the
resale of these terminals to vendors.
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. Globalstar believes that
these relationships with in-country service providers will facilitate the
granting of local regulatory approvals -- particularly where the service
provider and the licensing authority are one and the same -- as well as
provide local marketing and technical expertise.
Licensing. In January 1995, the 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
Radiocommunications Conference ("WRC95") allocated feeder link spectrum on
an international basis for mobile satellite services ("MSS") systems such
as Globalstar, and in November 1996 the FCC authorized Globalstar's feeder
links.
Globalstar's current budgeted expenditures for the cost for the design,
construction and deployment of the Globalstar System, including working capital,
cash interest on borrowings and operating expenses are approximately $2.7
billion. Globalstar has raised or received commitments for approximately $2.6
billion in equity, debt and vendor financing.
In addition, Globalstar has agreed to purchase from SS/L eight additional
spare satellites at a cost of $175 million. Further, in order to accelerate the
deployment of gateways around the world, Globalstar has agreed to finance
approximately $80 million of the cost of up to 32 of the initial 38 gateways.
Globalstar expects to recover this financing upon resale of such gateways to its
partners and service providers.
The Globalstar System has been designed to address the substantial and
growing demand for telecommunications services worldwide, particularly in
developing countries. More than three 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 1996 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:
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; 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 user terminals; lower average wholesale prices
than other proposed MSS systems and gateways installed in most major countries,
minimizing tail charges (i.e. amounts charged by
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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.
CUSTOMERS
Sales to foreign customers, primarily Asia, represented 30% of revenues in
1997. Sales to the U.S. government represented 7% of revenues for 1997 and sales
to Globalstar represented 31% of revenues for 1997.
BACKLOG
At December 31, 1997, funded backlog was approximately $1.8 billion
including $188 million of intercompany backlog. Approximately 47% of funded
backlog, excluding intercompany backlog, at December 31, 1997 is expected to be
recognized as revenues in 1998.
RESEARCH AND DEVELOPMENT
For the year ended December 31, 1997, the Company expended approximately
$56.8 million for company sponsored research and development projects.
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 130 patents in the United States and
213 patents abroad and has applications for 59 patents pending in the United
States and 162 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 1998 and 2016.
In connection with the Globalstar System, Globalstar's design and
development efforts have yielded nine patents issued and 30 patents pending in
the United States, as well as 13 patents issued and 152 patents pending
internationally for various aspects of communications satellite system design
and implementation of CDMA technology relating to the Globalstar System.
Qualcomm has obtained 149 issued patents and 380 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
SS/L or Globalstar will be issued. Moreover, because the U.S. patent application
process is confidential, there can be no assurance that third parties, including
competitors of SS/L and Globalstar, do not have patents pending that could
result in issued patents which SS/L or Globalstar would infringe. In such an
event, SS/L or Globalstar 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.
EMPLOYEES
As of December 31, 1997, the Company had approximately 3,300 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.
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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.
RISKS OF OPERATIONS IN THE SPACE ENVIRONMENT
Satellites operate in a distant, hostile environment. Despite costly high
reliability parts and significant on ground testing to assure reliability for
their designed lives, satellites remain vulnerable to complete or partial
failure or degradation from hazards which include space debris, solar and other
astronomical events, acts of war and component failure. Repair of satellites in
space is not practicable. In addition, a number of factors affect the useful
lives of Globalstar's, Skynet's, SatMex's and Orion'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").
The first-generation Globalstar 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 useful life. Globalstar anticipates using funds
from operations to develop a second generation of satellites. If sufficient
funds from operations are not available and Globalstar is unable to obtain
financing for the second-generation constellation, Globalstar will not be able
to deploy a second-generation constellation to replace first-generation
satellites at the end of their useful lives.
In November 1995, an Orion 1 component supporting nine transponders serving
the European portion of Orion 1's footprint experienced an anomaly that resulted
in a service interruption lasting approximately two hours. Full service was
restored using redundant equipment. These transponders generate a majority of
Orion's revenues. Orion believes, based on Orion's own investigations and the
manufacturer's, and based upon advice from Orion's engineering consultant that
because the redundant component is functioning in accordance with specifications
and the performance record of similar components is strong, the anomalous
behavior is unlikely to affect the expected performance of the satellite over
its useful life. There has been no further effect on Orion's ability to service
customers. However, if the currently operating component fails, Orion 1 would
experience a significant loss of usable capacity, resulting in lost service and
a corresponding adverse effect on Orion's results of operations.
In 1994 and 1997 (prior to the acquisition by Loral), Skynet experienced
the 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.
Certain of SS/L's contracts provide that a portion of the total contract
price is payable in the form of "incentive" payments earned during the life of
the satellite in orbit as its mission is performed. Although SS/L generally
receives the present value of such incentive payments in the event of launch
failure or one caused by customer error, it forfeits such revenues if the loss
is caused by system failure or an error on its part. While insurance against
loss of such payments 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.
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 that exposure. However,
SS/L cannot predict whether, and there can be no assurance that, insurance
against launch failure and loss of incentive payments will continue to be
available on reasonable terms.
LAUNCH RISK AND VEHICLE ACCESS
About 15% of commercial satellite launches have historically resulted in
loss before the payload reaches its planned orbit ("hot failures"). While Loral
ordinarily obtains insurance against loss due to hot failures, such events can
nevertheless disrupt and delay business schedules and cause substantial
uninsured losses above and beyond the insured cost of the lost satellite.
Loral's ability to place satellites in orbit, and SS/L's ability to perform its
on-orbit delivery contracts depend on the availability of launch vehicles and
the requisite insurance. Launch slots are limited, and the launch insurance
market has been subject to considerable fluctuation. Different launch facilities
and vehicles have different success records, but Loral, for business or
scheduling reasons does not always use, or have available to it, the most
successful facilities and vehicles for its
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launches. The cost and availability of launch insurance varies from time to time
so there is no assurance that such insurance will shield every future loss.
Moreover, the availability of launches 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. Changes in governmental policies or
political leadership in the United States, Russia, Kazakhstan or China could
affect Loral's ability to launch from these countries.
LEVERAGE
Many of the Loral businesses are capital intensive, requiring high initial
investments in the expectation of future revenues requiring relatively low
marginal costs. At December 31, 1997, Loral's outstanding debt was $435.4
million. In addition, Loral had outstanding at December 31, 1997 Series C
Convertible Redeemable Preferred Stock having a redemption value of $745.5
million, which may be payable at Loral's option in cash, common stock of Loral
or a combination thereof. On November 14, 1997, the Company, through its wholly
owned subsidiary Loral SpaceCom Corporation, entered into an $850 million credit
facility with a group of banks. SS/L will also require continuous investment to
maintain its technological position and the fixed satellite service businesses
are at the beginning of a planned expansion. At December 31, 1997, Loral had a
ratio of earnings to fixed charges of 1.9:1.
Orion has approximately $747.1 million of publicly-traded debt outstanding.
Such debt is non-recourse to Loral.
A significant portion of the SatMex purchase price was financed with debt,
including the Government Obligation. The debt of SatMex and Holdings is
non-recourse to Loral and Telefonica Autrey. However, Loral and Telefonica
Autrey have agreed to maintain assets in a collateral trust in an amount equal
to the value of the Government Obligation through December 30, 2000 and,
thereafter, in an amount equal to 1.2 times the Government Obligation until
maturity. Loral has a 65% economic interest in Holdings and a 49% indirect
economic interest in SatMex.
Globalstar is still in the development stage. At December 31, 1997,
Globalstar had outstanding long-term indebtedness of $1.1 billion. The
outstanding Globalstar debt is non-recourse to Loral.
Loral is subject to substantial financial risks in the face of possible
delays or reductions in revenue realization, unforeseen capital requirements or
unanticipated expenses attributable to the factors described in this document.
Such risks could result not only in adverse financial results due to ongoing
debt service charges, but also in the necessity for additional financing which
could result in increased debt and debt service costs, potential dilution of
equity interests resulting from issuances of debt or equity, rights to
distributions senior to those of the holders of Loral common stock, and
covenants restricting distributions to holders of Loral common stock.
OBSOLESCENCE DUE TO RAPID TECHNOLOGICAL CHANGE
In common with all high technology enterprises, Loral's businesses are
subject to obsolescence due to new technological developments. The rapid pace of
technological change exposes Loral to risk of loss due to the deployment of
superior technologies by competitors. Loral is also dependent upon technologies
developed by third parties to implement key aspects of its strategy to integrate
its satellite systems with terrestrial networks. SS/L, Skynet, SatMex, Orion and
Globalstar, in particular, are susceptible to such risks. As land-based
telecommunications services expand, demand for certain types of satellite-based
services may be reduced. New technology used by competitors could render Skynet,
Globalstar, SatMex or Orion less competitive by satisfying consumer demand in
alternative ways or through the use of incompatible telecommunications
standards. In addition, SS/L's success depends on its ability to introduce
innovative new products and services on a cost-effective and timely basis.
THE GLOBALSTAR SYSTEM
The Globalstar System will consist of 56 satellites (including eight
in-orbit spares) in low earth orbit together with ground facilities in numerous
remote and sometimes primitive regions. Its operating facilities
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will be in more than 100 countries, many of which are based on emerging
economies, eventually connecting hundreds of thousands of mobile and fixed
telephone handsets. While Loral believes that each component of the Globalstar
System, and the Globalstar System as a whole, is capable of performing as
designed, no such complex, dispersed space/earth communications network has ever
been operated commercially. Until the Globalstar System has operated as a whole
in its actual space/earth environment, there can be no assurance that losses due
to delays, failures and unforeseen additional costs will not occur. Globalstar's
financial objectives are, in part, based on estimates as to the potential market
for Globalstar System services and the price that users will be willing and able
to pay, which cannot be practically validated until commercial operations have
begun. There can be no assurance that such economic assumptions are justified.
Globalstar is scheduled to begin commercial operations in early 1999.
Successful commencement of operations will require successful implementation of
each of the elements of the Globalstar System -- space and ground segments,
digital communications technology, user terminal supply, service provider
arrangements and licensing. Globalstar launched four satellites on February 14,
1998 and expects to launch an additional 40 satellites during 1998 and 12
satellites, including eight in-orbit spares, in early 1999. However, there can
be no assurance that schedule delays will not occur.
Loral's equity in net loss attributable to its interest in Globalstar for
the year ended December 31, 1997 was $42.5 million as compared to $18.1 million
for the nine months ended December 31, 1996. Globalstar is expending significant
funds for the construction, testing and deployment of the Globalstar System and
such losses are expected to continue through commencement of revenue generating
service operations.
COMPETITION
Each of Loral's businesses is subject to intense competition from entities,
including several of the world's largest corporations, as well as governments
and quasi-governmental organizations, which are larger and which may bring
greater financial and operating resources to bear in competing as to marketing,
regulation and technology. Loral competes for customers and for local regulatory
approval in jurisdictions in which both Loral and a competing party may wish to
operate. In addition, Loral competes for allocation of scarce frequency
assignments and geosynchronous orbital slots. Competition comes not only from
entities carrying on the same activities as Loral, but from others using
alternative technologies such as terrestrial telecommunications and cable
television, which themselves are constantly pursuing advanced technologies in
order to enhance their competitive positions. In addition, as Loral expands into
international markets, it will have to compete with international operators
including Intelsat and PanAmSat. To the extent that these entities offer
products and services which are more sophisticated, efficient or reliable than
those of Loral, there could be a material adverse effect on the financial
condition or results of operations of Loral.
COMPETITIVE BIDDING
SS/L generally obtains its contracts through 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 result in profitability
for SS/L. SS/L has in the past submitted bids which would result in minimal or
no profit due to a high level of non-recurring engineering costs. Such contracts
are generally bid with the expectation of more profitable follow-on contracts as
to which there is generally no advance assurance. To the extent that actual
costs exceed the projected costs on which bids or contract prices were based,
SS/L's profitability could be adversely affected.
REGULATION
Loral's activities, particularly the Globalstar System, Skynet, SatMex and
Orion, are subject to licensing and regulation by authorities in more than 100
jurisdictions, including the United States, the International Telecommunications
Union ("ITU") and the Commission of the European Union. Regulated activity
includes the occupation of orbital positions ("orbital slots"), the pricing and
quality of services, the use of frequency bands, competitive behavior, the
export of space-related products and services (which frequently require licenses
from the Department of State or the Department of Commerce), and other matters
essential
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to conduct of the business. The regulatory authorities, depending on the
location, often have broad discretion over such activities, including frequently
the power to modify, withdraw or impose charges or conditions upon, or delay the
grant of, the rights required for the conduct of the business. In particular, in
determining whether to grant Loral authorization, the FCC must evaluate whether
certain FCC standards and financial qualification requirements are met. Many of
the licenses Loral holds or has applied for have been contested by third
parties, including competitors, which increase the risk of regulatory decisions
adverse to Loral. In particular, two of Loral's Ka-band orbital slots for
CyberStar are in positions that are subject to prior claims of parties from
other countries. While regulation is an expected incident of international
telecommunications business, and Loral expects to obtain the rights and licenses
which it requires under satisfactory conditions, the broad reach of the
Globalstar System, the expansion of Skynet's operations beyond the domestic U.S.
market, the expansion of SatMex's Latin American presence, the proposed launch
and operation of Orion 2 and Orion 3 and the development of other satellite
services businesses, by becoming subject to such a large number of diverse
regulatory regimes and political systems, entail unusual risks of unforeseen
costs, delays and other burdens on planned performance. In addition, as part of
the regulatory process for orbital slot allocation of its satellites, Loral is
required to engage in frequency coordination with other satellite operators.
Although the Loral Group has in the past been able to coordinate its existing
satellites, there can be no assurance that satisfactory coordination will be
achieved in the future for any of Loral's satellites.
Orion has begun construction of Orion 2 and Orion 3 before completion of
the required consultation with Intelsat and Eutelsat, receipt of final authority
from the FCC (in the case of Orion 2) and completion of the ITU coordination
process. Failure to obtain one or more necessary approvals on time would have an
adverse effect on Orion's business or results of operations.
POTENTIAL CONFLICTS OF INTEREST; LACK OF FULL CONTROL
Loral has financed the development and acquisition of certain of its assets
which it does not own completely through complex financial and governance
arrangements.
Loral is the managing general partner of Globalstar, but its governance
rights are limited by rights of other partners and fiduciary duties that could
result in Globalstar actions that are not in Loral's own best interests. In
accordance with Mexican law, voting control of SatMex must be held by Mexican
nationals. While Loral's investment will be protected by contractual rights and
it is anticipated that SatMex will be managed in close coordination with the
activities of Skynet, there can be no assurance that SatMex will be managed as
it would be if it were a controlled subsidiary of Loral.
Conflicts of interest may arise as a result of such arrangements and
because some of Loral's businesses may compete with one another and are or may
become customers of SS/L.
Both Skynet and Orion own or are building satellites whose footprints
overlap with those of SatMex's present and proposed satellites and will
therefore compete directly with SatMex for customers in some of its markets.
Although Skynet and Orion will adopt a marketing policy which will provide for
cross-selling of capacity with SatMex and a process for allocating opportunities
between the companies, situations may arise where SatMex and Loral will have a
conflict. This conflict will become particularly acute if there is an oversupply
of capacity in their markets.
Partners and affiliates of Globalstar, including companies affiliated with
Loral, will be among Globalstar's service provider customers and may therefore
have conflicts with Globalstar and/or Loral as to service provider agreements.
RISKS OF CONDUCTING INTERNATIONAL BUSINESS
Operations in numerous countries outside the United States carry
substantial managerial, operational, legal and political uncertainties apart
from the technical risks of initiating a previously untried telecommunications
system. Such operations are subject to changes in government regulations and
telecommunications standards, tariffs or taxes and other trade barriers. In
addition, Loral's agreements relating to local operations may be enforceable
only in foreign jurisdictions so that it may be difficult for Loral to enforce
its rights. Also,
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limited availability of U.S. currency in local markets may prevent a service
provider from making payments in U.S. dollars and exchange rate fluctuations may
adversely affect Globalstar's, SatMex's and Orion's revenues. In connection with
delayed payment in 1997 by two Asian customers for three satellites, SS/L
stopped work, reduced backlog by $291 million, which will reduce future sales,
and recorded a charge of $23 million. If the current programs for these three
satellites are not restarted, the satellites will be sold to other customers.
YEAR 2000 ISSUE
The Company is evaluating the potential effect of the year 2000 on its
information processing systems. It is not known at this time what modifications,
if any, will be required. All costs associated with any modification will be
expensed as incurred.
RELIANCE ON KEY PERSONNEL
The success of Loral is partially dependent upon the ability of Loral to
attract and retain highly qualified personnel. Except for Mr. Bernard L.
Schwartz, Loral's Chairman and Chief Executive Officer, none of the officers of
Loral has an employment contract with Loral nor does Loral expect to maintain
"key man" life insurance. The loss of any of these individuals and the
subsequent effect on business relationships could have an adverse effect on the
business or results of operations of Loral.
DEPENDENCE ON SS/L
Currently, SS/L generates a significant portion of Loral's revenue and
operating income. Loral intends to capitalize on SS/L's capabilities, market
position and advanced technologies to identify and develop additional
space-based communications services opportunities. There can be no assurance
that current or future satellite-based ventures entered into by Loral will
result in revenues or operating income that will materially reduce its
dependence on SS/L.
SS/L has historically derived a large portion of its total revenues from a
limited number of customers, and its revenues and operating results may be
adversely affected in the event completed or canceled contracts are not promptly
replaced.
The financial results of long-term fixed-price contracts are recognized
using the cost-to-cost percentage of completion method. Loral's statement of
operations reflects revisions in revenue and profit estimates in the period in
which the conditions that require the revision become known and can be
estimated. Adjustments for profits and 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, contract
revenues related to contract performance (including revenues from orbital
payments) and the potential for component obsolescence in connection with
long-term procurements.
In 1997, two in-orbit satellites built by SS/L experienced solar array
circuit failures. One of the customers has asserted that, in light of the
failures and uncertainty as to further failures, it has not accepted the
satellite. Loral believes that the customer was contractually required to accept
the satellite at completion of in-orbit testing and that risk of loss has passed
to the customer. In addition, another customer has requested that SS/L structure
an arrangement whereby a satellite under construction would be sold to another
customer. Management believes that these matters will not have a material
adverse effect on the financial condition or results of operations of Loral.
ITEM 2. PROPERTIES
The Company maintains office space, manufacturing and telemetry, tracking
and control facilities primarily in the United States. SS/L's research,
production and testing facilities are carried on in SS/L-owned facilities
covering approximately 562,000 square feet on 29.4 acres in Palo Alto,
California. In addition, SS/L leases 772,000 square feet of space from various
third parties. Skynet owns two telemetry, tracking and control stations located
in Hawley, Pennsylvania and Three Peaks, California and leases 26,000 square
feet of office space. Orion leases approximately 50,000 square feet for office
space and its satellite operations center. Management believes that the
facilities are sufficient to allow the Company to conduct its operations.
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ITEM 3. LEGAL PROCEEDINGS
CCD Lawsuits. On September 12, 1991, Loral Fairchild Corp. ("Loral
Fairchild"), a subsidiary of Old 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, and a verdict was rendered
in favor of Loral Fairchild.
Environmental Regulation. Operations at SS/L, Skynet, Orion, 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
---- ---
YEAR ENDING DECEMBER 31, 1997
Quarter ended March 31, 1997........................... $19 1/2 $14 1/8
Quarter ended June 30, 1997............................ 17 1/2 13
Quarter ended September 30, 1997....................... 21 14 1/16
Quarter ended December 31, 1997........................ 24 1/4 19
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 the Series A Convertible Preferred Stock.
As required, Loral is currently paying dividends on its 6% Series C Convertible
Redeemable Preferred Stock. The credit facility maintained by the Company's
wholly owned subsidiary, Loral SpaceCom Corporation ("Loral SpaceCom") restricts
the ability of Loral SpaceCom to transfer cash or pay dividends to its parent
(see Note 7 to Loral's consolidated financial statements).
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At February 27, 1998, there were approximately 6,800 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 financial
information as of and for the three years in the period ended March 31, 1996,
represents the space and communications operations of Old Loral.
LORAL SPACE & COMMUNICATIONS LTD.
(In thousands except per share data)
YEARS ENDED MARCH 31,(1)
YEAR ENDED NINE MONTHS ENDED -----------------------------
DECEMBER 31, 1997(1) DECEMBER 31, 1996(1) 1996 1995 1994
-------------------- -------------------- -------- -------- -------
STATEMENT OF OPERATIONS DATA:
Revenues..................... $1,312,591
Management fee from
affiliate.................. $ 5,088 $ 5,608 $ 3,169 $ 2,981
Operating income (loss)...... 13,552 (12,201) 2,587 (33) 398
Equity in net income (loss)
of affiliates(1)(2)........ (47,273) (4,709) (8,628) (8,988) 1,174
Net income (loss)............ 40,004 8,877 (13,785) (7,873) (3,694)
Preferred dividends and
accretion(3)............... (26,315)
Net income (loss) applicable
to common shareholders..... 13,689 8,877 (13,785) (7,873) (3,694)
Earnings (loss) per share --
basic and diluted.......... .06 .04 (.08) N/A N/A
CASH FLOW DATA:
Used in operating
activities................. $ 230,248 $ 3,003 $ 1,319 $ 8,439 $ 587
Used in investing
activities................. 1,022,772 1,962 115,031 92,055 25,288
Provided by (used in) equity
transactions............... (18,097) 602,413 116,362 100,494 25,875
Provided by financing
transactions............... 316,912 583,292
Dividends paid per common
share...................... N/A N/A N/A
DECEMBER 31, MARCH 31,
----------------------- ------------------------------
1997 1996 1996 1995 1994
---------- ---------- -------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 226,547 $1,180,752 $ 12 $ -- $ --
Total assets............................. 3,004,936 1,699,326 354,396 251,819 163,479
Convertible preferreds(3)................ 583,292
Debt..................................... 435,398
Non-current liabilities.................. 179,482 26,834
Shareholders' equity(4)/Invested
equity................................. 1,973,245 1,070,069 354,396 251,819 159,198
- ---------------
(1) In 1997, Loral increased its ownership in SS/L to 100% and, accordingly, the
1997 financial information includes the results of SS/L. In prior years SS/L
was accounted for under the equity method of accounting. On March 14, 1997
Loral acquired Skynet from AT&T; Loral's financial information includes the
results of Skynet from that date. Financial information as of and for the
three years in the period ended March 31, 1996, represents the space and
communications operations of Old Loral. The results of operations for the
three years in the period ended March 31, 1996 include allocations and
estimates of certain expenses of Loral based upon estimates of actual
services performed by Old Loral on behalf of Loral. Interest expense was
allocated to Loral based on Old Loral's historical weighted average interest
rate applied to the average investment in affiliates.
(2) The Company's affiliates are Globalstar and SatMex since November 17, 1997.
Loral sold its interest in K&F Industries, Inc. in 1997.
(3) Convertible preferreds were exchanged for 6% Series C Preferred Stock and
were reclassified to shareholders' equity in 1997 upon approval by the
Company's shareholders.
(4) As of December 31, 1997, 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 $4.98 and $4.97,
respectively. Book value per share represents the quotient obtained by
dividing shareholders' equity, reduced by the Series C Preferred Stock
redemption value, 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.
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SPACE SYSTEMS/LORAL, INC.
(In thousands)
YEARS ENDED MARCH 31,
NINE MONTHS ENDED --------------------------------
DECEMBER 31, 1996 1996 1995 1994
------------------ ---------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $1,017,653 $1,121,619 $633,717 $596,267
Gross profit.................................. 64,157 34,406 27,785 24,964
Net income.................................... 31,025 12,367 5,554 3,591
MARCH 31,
--------------------------------
DECEMBER 31, 1996 1996 1995 1994
----------------- ---------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 19,181 $126,863 $ 52,222 $ 26,578
Total assets.................................. 1,059,064 908,677 766,475 743,016
Long-term debt................................ 127,586 65,052 34,040 92,249
Shareholders' equity.......................... 478,893 447,868 435,501 429,947
GLOBALSTAR, L.P.
(In thousands, except per partnership interest amounts)
YEAR ENDED DECEMBER 31, 1994
--------------------------------
CUMULATIVE PRE-CAPITAL
MARCH 23, 1994 MARCH 23 SUBSCRIPTION PERIOD(1)
(COMMENCEMENT YEARS ENDED (COMMENCEMENT ---------------------------
OF OPERATIONS) TO DECEMBER 31, OF OPERATIONS) TO JANUARY 1 TO YEAR ENDED
DECEMBER 31, ------------------------------- DECEMBER 31, MARCH 22, DECEMBER 31,
1997 1997 1996 1995 1994 1994 1993
----------------- ------- --------- --------- ----------------- ------------ ------------
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operating loss.......... 257,349 88,071 61,025 80,226 28,027 6,872 11,510
Net loss applicable to
ordinary partnership
interests............. 255,238 88,788 71,969 68,237 26,244 6,872 11,510
Net loss per weighted
average ordinary
partnership interest
outstanding........... 1.74 1.53 1.50 0.73
Cash distributions per
ordinary partnership
interest-basic and
diluted...............
OTHER DATA:
Deficiency of earnings
to cover fixed
charges(2)............ 184,683 81,869 N/A N/A
CASH FLOW DATA:
Used in operating
activities............ 210,304 97,128 51,756 38,368 23,052
Used in investing
activities............ 1,301,049 591,025 591,025 280,345 50,549
Provided by partners'
capital
transactions.......... 883,495 132,990 284,714 318,630 147,161
Provided by (used in)
other financing
activities............ 1,092,012 998,137 95,750 (1,875)
DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 464,154 $ 21,180 $ 71,602 $ 73,560
Total assets........................................ 2,149,053 942,913 505,391 151,271
Vendor financing liability.......................... 197,723 130,694 42,219
Debt................................................ 1,099,531 96,000
Redeemable preferred partnership interests.......... 303,089 302,037
Ordinary partners' capital.......................... 380,828 315,186 386,838 112,944
- ---------------
(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 RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Results of
Operations and Financial Condition of the Company, Globalstar, SatMex and Orion,
and elsewhere in this Annual Report, 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 companies, with substantial
activities in both satellite manufacturing and satellite-based communications
services. Space Systems/Loral, Inc. ("SS/L") is a leading designer and
manufacturer of space systems. Loral Skynet ("Skynet"), acquired on March 14,
1997, is a leading provider of satellite communications services in the United
States. Skynet owns and operates the Telstar satellite network and is expanding
its business internationally. On November 17, 1997, a joint venture including
Loral and another partner acquired 75% of SatMex, a satellite services provider
to Mexico and South America. Loral also manages and is the largest equity owner
of Globalstar, L.P. ("Globalstar"), a global, mobile satellite telephony system
scheduled for service initiation in early 1999. Loral is pursuing additional
satellite-based communications service opportunities, including CyberStar, a
proposed worldwide high-speed broadband data services system initially using
leased Ku-band transponder capacity on Skynet's Telstar 5 satellite. In
addition, on March 20, 1998, Loral acquired Orion Network Systems, Inc.
("Orion"), a corporate data networking and satellite services company with
operations in the United States and Europe that will be expanded to Asia/
Pacific and South America in 1998 and the first half of 1999, respectively.
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"). Loral operates on a December 31 fiscal year-end. The space and
communications operations of Old Loral operated under a March 31 year-end.
RESULTS OF OPERATIONS
In 1997, Loral accelerated its transformation from a company with extensive
equity investments to a major satellite manufacturer and provider of satellite
services by making a number of acquisitions that significantly affected its
results of operations.
In February 1997, Loral agreed to acquire the remaining 49% of the common
stock of SS/L held by four international aerospace and communications companies
(the "Alliance Partners") for $374 million paid in cash and Loral securities
(see Note 3 to Loral's consolidated financial statements). On March 14, 1997,
Loral acquired Skynet from AT&T for $462.1 million in cash.
The acquisition of Skynet and the remaining equity interest in SS/L have
been accounted for as purchases. Loral's consolidated financial statements for
the year ended December 31, 1997, reflect the results of operations of SS/L from
January 1, 1997, the elimination of the minority interest of the SS/L equity not
owned by Loral during the period and the results of operations of Skynet from
March 14, 1997. Prior to January 1, 1997, SS/L was accounted for using the
equity method of accounting.
In 1997, Loral increased its ownership of Globalstar by exercising existing
warrants and rights to acquire 1,312,696 Globalstar ordinary partnership
interests for $34.8 million in cash and by acquiring 2,748,372 Globalstar
ordinary partnership interests from other Globalstar partners for $97.5 million
in cash, 1,255,684 shares of Loral common stock and a deferred purchase price of
$24.8 million. At December 31, 1997, Loral had a 40.1% interest in Globalstar's
ordinary partnership interests.
In connection with the privatization by the Mexican Government of its fixed
satellite services business, Loral and Telefonica Autrey formed a joint venture,
Firmamento Mexicano, S. de R.L. de C.V. ("Holdings"). On November 17, 1997,
Holdings acquired 75% of the outstanding capital stock of SatMex for $646.8
million. The purchase price was financed by a Loral equity contribution of $94.6
million, a Telefonica Autrey equity contribution of $50.9 million and debt
issued by Holdings. As part of the acquisition, Holdings issued a
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$125.1 million seven year Government Obligation bearing interest at 6.03% to the
Mexican Government in consideration for the assumption by SatMex of the debt
incurred by Holdings in connection with the acquisition. The debt of SatMex and
Holdings is non-recourse to Loral and Telefonica Autrey. However, Loral and
Telefonica Autrey have agreed to maintain assets in a collateral trust in an
amount equal to the value of the Government Obligation though December 30, 2000
and, thereafter, in an amount equal to 1.2 times the value of the Government
Obligation until maturity. Loral has a 65% economic interest in Holdings and a
49% indirect economic interest in SatMex. Loral accounts for SatMex using the
equity method. The consolidated financial statements reflect the equity in net
loss of SatMex for the period November 17 to December 31, 1997.
On March 20, 1998, Loral acquired all of the outstanding stock, as defined,
of Orion in exchange for Loral common stock. Loral issued 17.9 million shares of
its common stock and assumed existing Orion options and warrants to purchase 1.9
million shares of Loral common stock representing an aggregate purchase price of
$467.0 million. Loral will include Orion's results from the date of acquisition
using the purchase method of accounting. Orion is a provider of satellite-based
communications services, focused primarily on private communications network
services, Internet services and video distribution and other satellite
transmission services. Orion provides multinational corporations with private
communications networks designed to carry high speed data, fax, video
teleconferencing, voice and other specialized services. Orion currently has one
satellite in orbit and two satellites under construction. The cost of the two
additional satellites under construction is fully funded. At December 31, 1997,
Orion had unrestricted cash and cash equivalents of $70.0 million, restricted
cash to be used for the satellites under construction and interest payments of
$356.9 million and debt of $747.1 million which is expected to remain
outstanding after the transaction. Orion's outstanding debt is non-recourse to
Loral.
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 this 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 of the Year Ended December 31, 1997
and the Nine Months Ended December 31, 1996
Revenues for the year ended December 31, 1997 totaled $1.5 billion before
elimination of intercompany sales of $200.1 million. SS/L's sales were $1.4
billion before elimination of intercompany eliminations of $199.3 million.
SS/L's commercial sales were $1.1 billion, including sales to Globalstar of
$408.1 million, and sales to the U.S. government were $90.5 million. Skynet's
sales were $69.3 million from date of acquisition to December 31, 1997. Revenue
for the nine months ended December 31, 1996, represented management fees earned
from SS/L of $5.1 million.
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Earnings before interest, taxes, depreciation and amortization
("EBITDA")(1) for 1997 is as follows (in millions):
SS/L........................................................ $99.7
Skynet -- from March 14, 1997............................... 42.0
Corporate expenses and intercompany eliminations............ (33.2)
------
EBITDA before development costs............................. 108.5
SatMex(2)................................................... 5.1
------
Adjusted EBITDA before development costs(3)................. $113.6
======
- ---------------
(1) EBITDA should not be construed as an alternative to net income, as an
indicator of a company's operating performance, as cash flow from operations
or as a measure of a company's liquidity.
(2) Represents Loral's proportionate share of SatMex's EBITDA from November 17,
1997.
(3) Development costs for CyberStar were $32.2 million and Loral's proportionate
share of Globalstar's development costs was $33.3 million.
EBITDA before development costs was $108.5 million in 1997. CyberStar
development costs were $32.2 million and depreciation and amortization was $62.7
million, resulting in operating income for 1997 of $13.6 million. The nine
months ended December 31, 1996, reflected an operating loss of $12.2 million
primarily due to corporate expenses of $17.3 million.
In connection with delayed payment in 1997 by two Asian customers for three
satellites, SS/L stopped work, reduced backlog by $291 million, which will
reduce future sales, and recorded a charge of $23 million. If the current
programs for these three satellites are not restarted, the satellites will be
sold to other customers.
Interest income of $49.1 million for the year ended December 31, 1997
represents $42.6 million of interest earned on the investment of available cash
during the year and interest on the GTL Convertible Preferred Equivalent
Obligations ("GTL Convertible Preferreds") held by Loral (See Note 6 to Loral's
consolidated financial statements), and $6.5 million of interest earned on
orbital incentive payments. Interest income for the nine months ended December
31, 1996 of $34.7 million reflects the investment of available cash during the
period and interest on the GTL Convertible Preferreds.
Interest expense of $15.2 million, net of capitalized interest of $22.6
million, for 1997, reflects the assumption of SS/L's debt, borrowings under the
Credit Agreement (see Note 7 to Loral's consolidated financial statements) and
interest on Loral's outstanding Convertible Preferred Equivalent Obligations
("CPEOs") until June 5, 1997, when the CPEOs were exchanged for Loral 6% Series
C Convertible Redeemable Preferred Stock ("Series C Preferred Stock"). Preferred
dividends in 1997 of $26.3 million result from the exchange of the Company's
CPEOs for Series C Preferred Stock. Interest expense for the nine months ended
December 31, 1996 of $6.0 million reflects interest on the CPEOs for one
quarter.
The results of operations for 1997, reflect the gain on sale of K&F stock
of $79.6 million, net of expenses.
The Company's effective income tax rate for 1997 was 27.5%. The current
year 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.
The minority interest expense in 1997 reflects the reduction of SS/L's
income attributed to the Alliance Partners.
The equity in net loss of affiliates for 1997 of $47.3 million reflects
increased development costs at Globalstar as well as an increased ownership
percentage by Loral in Globalstar. In addition, in connection with Loral's
investment in SatMex in 1997, Loral recorded its share of SatMex's losses of
$6.4 million. The equity in net loss of affiliates for the nine months ended
December 31, 1996 reflects the Company's share of Globalstar losses of $18.1
million offset by the Company's share of SS/L's income of $13.4 million. In
1997, the Company discontinued using the equity method for SS/L and fully
consolidated SS/L's results of operations.
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As a result of the above, net income applicable to common stockholders for
1997 was $13.7 million, or $0.06 per diluted share, compared to $8.9 million, or
$0.04 per diluted share, for the nine months ended December 31, 1996. Diluted
weighted average shares were 243.6 million for 1997 and 229.4 million for the
nine months ended December 31, 1996.
Comparison of Results for the Nine Months Ended December 31, 1996 and 1995
For the nine months ended December 31, 1996, the consolidated financial
statements include the accounts of Loral Space & 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.
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.
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
operation of its satellite and telecommunications businesses on a stand-alone
basis.
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.
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.
SUMMARY RESULTS OF OPERATIONS OF AFFILIATES
GLOBALSTAR
Globalstar is a development stage partnership and has not commenced
commercial service operations. The net loss applicable to ordinary partnership
interests for the year ended December 31, 1997 was $88.8 million as compared to
$56.6 million for the nine months ended December 31, 1996. The increase in the
net loss is a result of increased marketing, general and administrative expenses
of $10.7 million and an increase in development costs of $31.7 million as a
result of increased activity in the development of Globalstar's user terminals,
offset by an increase in interest income of $15.6 million as a result of higher
average cash balances
23
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outstanding. Globalstar is expending significant funds for the construction,
testing and deployment of the Globalstar System and expects such losses to
continue through commencement of revenue generating service operations.
SATMEX
For the period November 17, 1997 to December 31, 1997, SatMex had revenues,
EBITDA, operating income and a net loss of $12.5 million, $10.5 million, $4.8
million and $13.1 million, respectively (unaudited). The net loss is primarily
attributed to interest expense of $16.2 million on debt issued to finance the
acquisition, which includes a charge for $8.9 million of fees associated with a
bridge loan. SatMex expects such losses to continue through 1999 until funds
from operations reduce outstanding debt.
LIQUIDITY AND CAPITAL RESOURCES
Loral intends to capitalize on its innovative capabilities, market position
and advanced technologies to offer value-added satellite-based services as part
of the evolving worldwide communications networks and, where appropriate, to
form strategic alliances with major telecommunications service providers and
equipment manufacturers to enhance and expand its satellite-based communications
service opportunities. In order to pursue such opportunities, Loral may seek
funds from strategic partners and other investors, through incurrence of debt or
the issuance of additional equity.
At December 31, 1997, Loral had $226.5 million of cash and cash
equivalents. Loral intends to utilize its existing capital base and access to
the capital markets to construct and operate additional satellites, make
additional investments in Globalstar and Globalstar service provider
opportunities and invest in additional satellite communications service
opportunities.
On November 14, 1997, the Company, through its wholly owned subsidiary
Loral SpaceCom Corporation, entered into a $850 million credit facility with a
group of banks (see Note 7 to Loral's consolidated financial statements). The
facility consists of a $500 million revolving credit facility, a $275 million
term loan and a $75 million letter of credit facility. The facility replaced
SS/L's existing credit facility. The facility is secured by the stock of Loral
SpaceCom Corporation and SS/L and contains various covenants including an
interest coverage ratio, debt to capitalization ratios and restrictions on cash
transfers to its parent. At December 31, 1997, there was $435.4 million
outstanding under this agreement and other similar credit agreements with SS/L.
Skynet: Skynet currently has two high-powered satellites operating in
orbit. Loral intends to expand Skynet's business to become a worldwide satellite
service provider through the construction of additional satellites and has four
satellites under construction by SS/L. Loral anticipates that a portion of the
funds required for construction of these additional satellites will be provided
through additional borrowings or the issuance of additional equity.
Globalstar: On February 14, 1998, Globalstar launched its first four
satellites. Globalstar expects to begin commercial service in early 1999
following the launch of 44 satellites during 1998. The remaining 12 satellites,
including eight in-orbit spares, will be launched in the first half of 1999.
Globalstar's current budgeted expenditures for the design, construction and
deployment of the Globalstar System, including working capital, cash interest on
borrowings and operating expenses is approximately $2.7 billion. As of December
31, 1997, Globalstar had raised or received commitments for approximately $2.6
billion.
In addition, Globalstar has agreed to purchase from SS/L eight additional
spare satellites at a cost estimated at $175 million. Further, in order to
accelerate the deployment of gateways around the world Globalstar has agreed to
finance approximately $80 million of the cost of up to 32 of the initial 38
gateways. Globalstar expects to recover this financing upon resale of such
gateways to its partners and service providers.
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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 $353 million of vendor financing to Globalstar, of which $121
million of such vendor financing is effectively borne by the subcontractors.
Commitments and Contingencies: 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 is currently financed without recourse
to Loral other than the indemnification described above.
In 1997, two in-orbit satellites built by SS/L experienced solar array
circuit failures. One of the customers has asserted that, in light of the
failures and uncertainty as to further failures, it has not accepted the
satellite. Loral believes that the customer was contractually required to accept
the satellite at completion of in-orbit testing and that risk of loss has passed
to the customer. In addition, another customer has requested that SS/L structure
an arrangement whereby a satellite under construction would be sold to another
customer. Management believes that these matters will not have a material
adverse effect on the financial condition or results of operations of Loral.
Cash Used and Provided. Cash used in operating activities for the year
ended December 31, 1997 was $230.2 million, primarily due to an increase in
satellite contracts in process and inventories of $152.8 million, a decrease in
customer advances of $57.8 million due to the progress on commercial satellite
contracts and an increase in deposits of $107.7 million, offset by funds
generated by earnings before depreciation and amortization, taxes, gain on sale
of K&F stock, minority interest and equity in net loss of affiliates of $110.2
million. Cash used in operating activities for the nine months ended December
31, 1996, was $3.0 million, primarily due to increases in other current assets,
offset by funds generated from earnings before depreciation, taxes and equity in
net loss of affiliates of $17.5 million.
Cash used in investing activities for the year ended December 31, 1997 was
$1.0 billion primarily due to the purchase of Skynet and the SS/L equity
interests (see Note 3 to Loral's consolidated financial statements); the
purchase of equity interests in Globalstar and SatMex (see Note 6 to Loral's
consolidated financial statements); capital expenditures of $255.3 million
primarily for the construction of the Telstar satellites by SS/L for Skynet and
facility expansion and renovation at SS/L; and other assets of $63.5 million,
offset by the proceeds from the sale of K&F stock. Cash used in investing
activities for the nine months ended December 31, 1996 was $2.0 million due
primarily to the purchase of $2.5 million principal amount of GTL Convertible
Preferred Equivalent Obligations in April 1996 and the purchase of SS/L equity
interests, offset by the sale of certain fixed assets.
Net cash provided by financing activities for the year ended December 31,
1997 and December 31, 1996 was $298.8 million and $1.2 billion, respectively,
primarily as a result of borrowings under credit facilities in 1997 and the net
proceeds from the Distribution and the net proceeds from the issuance of the
CPEOs in 1996.
YEAR 2000 ISSUE
The Company is evaluating the potential effect of the year 2000 on its
information processing systems. It is not known at this time what modifications,
if any, will be required. All costs associated with any modification will be
expensed as incurred.
ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"), and in February 1998, issued statement No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of
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general purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. SFAS 131 establishes
annual and interim reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic areas and major
customers. SFAS 132 expands and standardizes the disclosure requirements for
pensions and other postretirement benefits. The Company is required to adopt
SFAS 130, SFAS 131 and SFAS 132 in 1998, and the Company's consolidated
financial statements will reflect the appropriate disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has limited involvement with derivative financial instruments
and does not use such instruments for trading purposes. The derivative financial
instruments are used to manage foreign currency exchange risk.
At December 31, 1997, the Company had foreign currency exchange contracts
(forwards and swaps) with several banks to purchase and sell foreign currencies,
primarily Japanese yen, aggregating $175.1 million. Such contracts were
designated as hedges of certain foreign contracts and subcontracts to be
performed by SS/L through May 2006. The fair value of these contracts, based on
quoted market prices, was $139.0 million at December 31, 1997. At December 31,
1997, deferred gains on forward contracts to sell foreign currencies, primarily
yen, were $26.6 million and deferred losses on forward contracts to purchase
foreign currencies, primarily yen, were $9.5 million.
The Company is exposed to credit-related losses in the event of
nonperformance by counter parties to these financial instruments, but does not
expect any counter party to fail to meet its obligation.
The maturity of foreign currency exchange contracts held at December 31,
1997 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.............................................. $68,582 $59,937 $ 20,711 $14,766
2 to 5......................................... 5,804 4,939 65,276 48,975
6 to 10........................................ 14,750 10,385
------- ------- -------- -------
$74,386 $64,876 $100,737 $74,126
======= ======= ======== =======
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules on
pages 28 and 29.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information required for this item is set forth in the Company's 1998
definitive proxy statement which is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
---- --- --------
Bernard L.
Schwartz........... 72 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.
Gregory J. Clark..... 55 President and Chief Operating Officer since January 1998.
Prior to that, President of News Technology Group, a
division of News Corporation, since September 1994. Prior to
that, Director of Science and Technology of IBM in Australia
since 1988.
Michael P.
DeBlasio........... 61 First Senior Vice President and Chief Financial Officer
since February 1998. Prior to that, Senior Vice President
and Chief Financial Officer since March 1996. Prior to that,
Senior Vice President -- Finance of Old Loral since 1979.
Robert E. Berry...... 69 Senior Vice President since November 1996 and President of
Space Systems/Loral since 1990.
Nicholas C. Moren.... 51 Senior Vice President and Treasurer since February 1998.
Prior to that, Vice President and Treasurer since March
1996. Prior to that, Vice President and Treasurer of Old
Loral since April 1991.
Eric J. Zahler....... 47 Senior Vice President, General Counsel and Secretary since
February 1998. Prior to that, Vice President, General
Counsel and Secretary since March 1996. Prior to that, Vice
President and General Counsel of Old Loral since April 1992.
Prior to that, partner in the law firm of Fried, Frank,
Harris, Shriver & Jacobson.
W. Neil Bauer........ 51 Vice President since March 1998. Prior to that, Chief
Executive Officer and President of Orion Network Systems,
Inc. since September 1993. Prior to that, President of Orion
Network Systems, Inc. since March 1993.
Terry J. Hart........ 51 Vice President since February 1998 and President of Loral
Skynet since March 1997. Prior to that, Division Manager of
AT&T Skynet Satellite Services since 1991.
Ronald C. Maehl...... 50 Vice President since February 1998 and President of
CyberStar since March 1997. Prior to that, Senior Vice
President of Strategic Ventures of SS/L since April 1996.
Prior to that, Senior Vice President of Advance Programs of
SS/L since January 1993.
Laurence D. Atlas.... 40 Vice President, Government Relations -- Telecommunications
since May 1997. Prior to that, Associate Chief of the Common
Carrier Bureau of the FCC since January 1995. Prior to that,
Associate Chief of the FCC's Wireless Telecommunications
Bureau since November 1994. Prior to that, associate in the
law firm of Willkie Farr & Gallagher since 1982.
Jeanette H. Clonan... 49 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... 56 Vice President -- Administration since March 1997. Prior to
that, Vice President -- Administration of Old Loral since
1978.
27
29
NAME AGE POSITION
---- --- --------
Avi Katz............. 39 Vice President, Deputy General Counsel and Assistant
Secretary since February 1998. Prior to that, Deputy General
Counsel and Assistant Secretary since August 1997. Prior to
that, Associate General Counsel and Assistant Secretary
since July 1996. Prior to that, associate in the law firm of
Willkie Farr & Gallagher since 1987.
Jerald A. Lindfelt... 51 Vice President -- Business Operations since March 1997.
Prior to that, Division President of Old Loral since July
1991.
Russell R. Mack...... 43 Vice President -- Business Ventures since February 1998.
Prior to that, Director of Business Planning and Development
since April 1996. Prior to that, Manager of Project Finance
of Old Loral since July 1991.
Harvey B. Rein....... 44 Vice President and Controller since April 1996. Prior to
that, Assistant Controller of Old Loral since 1985. \
Thomas B. Ross....... 68 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.
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 1998 definitive proxy statement which is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
PAGE
----
Index to Financial Statements............................... F-1
Loral Space & Communications Ltd.
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
December 31, 1996...................................... F-3
Consolidated Statements of Operations for the year ended
December 31, 1997, for the nine months ended December
31, 1996 and for the year ended March 31, 1996......... F-4
Consolidated Statements of Shareholders' Equity/Invested
Equity for the year ended December 31, 1997, for the
nine months ended December 31, 1996 and for the year
ended March 31, 1996................................... F-5
Consolidated Statements of Cash Flows for the year ended
December 31, 1997, for the nine months ended December
31, 1996 and for the year ended March 31, 1996......... F-6
Notes to Consolidated Financial Statements................ F-7
Space Systems/Loral, Inc.
Independent Auditors' Report.............................. F-29
Consolidated Balance Sheets as of December 31, 1996....... F-30
28
30
PAGE
----
Consolidated Statements of Income for the nine months
ended December 31, 1996 and the year ended March 31,
1996................................................... F-31
Consolidated Statements of Shareholders' Equity for the
nine months ended December 31, 1996 and the year ended
March 31, 1996......................................... F-32
Consolidated Statements of Cash Flows for the nine months
ended December 31, 1996 and the year ended March 31,
1996................................................... F-33
Notes to Consolidated Financial Statements................ F-34
Globalstar, L.P. (A development stage limited partnership)
Independent Auditors' Report.............................. *
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... *
Consolidated Statements of Operations for the years ended
December 31, 1997 and 1996 and 1995 and cumulative..... *
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, 1995 and cumulative........... *
Consolidated Statements of Partners' Capital and
Subscriptions Receivable for the period March 23, 1994
(commencement of operations) to December 31, 1997...... *
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, 1997,
pages F-13 through F-32.
(a) 2. Financial Statement Schedules
Independent Auditors' Report............................ S-1
Schedule I -- Condensed Financial Information of
Registrant.............................................. S-2
Financial statement schedules not listed are either not required or
the information required is reflected in the consolidated financial
statements.
(a) 3. Exhibits
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
2.1 Restructuring, Financing and Distribution Agreement, dated
as of January 7, 1996, among Loral Corporation, Loral
Aerospace Holdings, Inc., Loral Aerospace Corp., Loral
General Partner, Inc., Loral Globalstar L.P., Loral
Globalstar Limited, the Registrant and Lockheed Martin
Corporation(1)
2.2 Amendment to Restructuring, Financing and Distribution
Agreement, dated as April 15, 1996(1)
2.3 Agreement for the Purchase and Sale of Assets dated as of
September 25, 1996 by and between AT&T Corp., as Seller, and
Loral Space & Communications Ltd., as Buyer(2)
2.4 First Amendment to Agreement for the Purchase and Sale of
Assets dated as of March 14, 1997 by and between AT&T Corp.,
as Seller, and Loral Space & Communications Ltd., as
Buyer(3)
2.5 Agreement and Plan of Merger dated as of October 7, 1997 by
and among Orion Network Systems, Inc., Loral Space &
Communications Ltd. and Loral Satellite Corporation(4)
2.6 First Amendment to Agreement and Plan of Merger dated as of
February 11, 1998 by and among Orion Network Systems, Inc.,
Loral Space & Communications Ltd. and Loral Satellite
Corporation.(5)
2.7 Second Amendment to Agreement and Plan of Merger dated as of
March 20, 1998 by and among Orion Network Systems, Inc.,
Loral Space & Communications Ltd. and Loral Satellite
Corporation.+
3.1 Memorandum of Association(1)
3.2 Memorandum of Increase of Share Capital(1)
29
31
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.3 Second Amended and Restated Bye-laws(1)
3.4 Schedule III to Second Amended and Restated Bye-laws
relating to Registrant's 6% Series C Convertible Redeemable
Preferred Stock(6)
4.1 Rights Agreement dated March 27, 1996 between the Registrant
and The Bank of New York, Rights Agent(1)
10.1 Shareholders Agreement dated as of April 23, 1996 between
Loral Corporation and the Registrant(1)
10.2 Tax Sharing Agreement dated as of April 22, 1996 between
Loral Corporation, the Registrant, Lockheed Martin
Corporation and LAC Acquisition Corporation(1)
10.3 Exchange Agreement dated as of April 22, 1996 between the
Registrant and Lockheed Martin Corporation(1)
10.4 Amended and Restated Agreement of Limited Partnership of
Globalstar, L.P., dated as of 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(7)
10.5 Service Provider Agreements by and between Globalstar, L.P.
and each of Loral General Partner, Inc. and Loral/DASA
Globalstar, L.P.(8)
10.6 Contract between Globalstar, L.P. and Space Systems/Loral,
Inc.(8)
10.7 1996 Stock Option Plan(1)++
10.8 Common Stock Purchase Plan for Non-Employee Directors(1)++
10.9 Employment Agreement between the Registrant and Bernard L.
Schwartz(1)++
10.9.1 Amendment dated as of March 1, 1997 to Employment Agreement
between the Registrant and Bernard L. Schwartz+++
10.10 Registration Rights Agreement dated as of August 9, 1996
among Loral Space & Communications Ltd., Lehman Brothers
Capital Partners II, L.P., Lehman Brothers Merchant Banking
Portfolio Partnership L.P., Lehman Brothers Offshore
Investment Partnership L.P. and Lehman Brothers Offshore
Investment Partnership-Japan L.P.(9)
10.11 Registration Rights Agreement dated November 6, 1996
relating to the Registrant's 6% Convertible Preferred
Equivalent Obligations due 2006(6)
10.12 Registration Rights Agreement (Series C Preferred Stock)
dated as of March 31, 1997 between Loral Space &
Communications Ltd. and Finmeccanica S.p.A. and dated as
June 23, 1997 among Loral Space & Communications Ltd.,
Aerospatiale SNI and Alcatel Espace(10)
10.13 Registration Rights Agreement (Common Stock) dated as of
June 23, 1997 among Loral Space & Communications Ltd.,
Aerospatiale SNI and Alcatel Espace(10)
10.14 Alliance Agreement dated as of June 23, 1997 among Loral
Space & Communications Ltd., Aerospatiale SNI, Alcatel
Espace and Finmeccanica S.p.A.(10)
10.15 Principal Stockholder Agreement dated as of October 7, 1997
among Loral Space & Communications Ltd., Loral Satellite
Corporation, Orion Network Systems, Inc. and certain Orion
stockholders signatory thereto(4)
10.16 Amended and Restated Credit and Participation Agreement,
dated as of November 14, 1997, among Loral SpaceCom
Corporation, Space Systems/Loral, Inc., the Banks parties
thereto, Bank of America National Trust and Savings
Association, as Administrative Agent, and Istituto Bancario
San Paolo di Torino S.p.A, individually and as Italian
Export Financing and Arranger and as Selling Bank(11)
10.17 Agreement of Limited Partnership of CyberStar, L.P. dated as
of June 30, 1997+
10.18 Purchase and Sale Agreement dated November 17, 1997 between
the Federal Government of the United Mexican States and
Corporativo Satelites Mexicanos, S.A. de C.V. for the
purchase and sale of the capital stock of Satelites
Mexicanos, S.A. de C.V. (English translation of Spanish
original)+
30
32
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.19 Membership Agreement dated and effective as of November 17,
1997 among Loral SatMex Ltd. and Ediciones Enigma, S.A. de
C.V. and Firmamento Mexicano, S. de R.L. de C.V.+
10.20 Letter Agreement dated December 29, 1997 between Loral Space
& Communications Ltd., Telefonica Autrey S.A. de C.V.,
Donaldson, Lufkin & Jenrette Securities Corporation, Lehman
Brothers Inc. and Lehman Commercial Paper Inc. and related
Agreement between the Federal Government of United Mexican
States, Telefonica Autrey, S.A. de C.V., Ediciones Enigma,
S.A. de C.V., Loral Space & Communications Ltd., Loral
SatMex Ltd. and Servicios Corporativos Satelitales, S.A. de
C.V.+
12 Statement Re: Computation of Ratios+
21 List of Subsidiaries of the Registrant+
23 Consent of Deloitte & Touche LLP+
27 Financial Data Schedule (EDGAR only)+
99.1 Consolidated Financial Statements of Globalstar, L.P. and
Independent Auditors' Report(12)
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form 10 (No. 1-14180).
(2) Incorporated by reference to the Registrant's Form 8-K filed on September
27, 1996.
(3) Incorporated by reference to the Registrant's Form 8-K filed on March 28,
1997.
(4) Incorporated by reference to the Registrant's Form 8-K filed on October 10,
1997.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 filed on February 17, 1998 (File No. 333-46407).
(6) Incorporated by reference to the Registrant's Form 10-K for the nine month
period ended December 31, 1996.
(7) 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).
(8) Incorporated by reference to the Registration Statement on Form S-1 of
Globalstar Telecommunications Limited (File No. 33-86808).
(9) Incorporated by reference to the Registrant's Form 8-K filed on August 13,
1996.
(10) Incorporated by reference to the Registrant's Form 8-K filed on July 8,
1997.
(11) Incorporated by reference to the Registrant's Form 8-K filed on December 9,
1997.
(12) Incorporated by reference to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 filed by Globalstar Telecommunications Limited
(File No. 0-25456).
+ Filed herewith.
++ Management compensation plan.
(b) Reports on Form 8-K
DATE OF REPORT
--------------
October 7, 1997 Item 5 - Loral entered into a Merger Agreement with Orion
Network Systems, Inc.
November 14, 1997 Item 5 - Loral SpaceCom Corporation entered into an $850
million credit facility. Loral joint venture entered into an
agreement to acquire 75% of SatMex.
31
33
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 30, 1998
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 30, 1998
- --------------------------------------------------- Officer and Director (Principal
Bernard L. Schwartz Executive Officer)
HOWARD GITTIS Director March 30, 1998
- ---------------------------------------------------
Howard Gittis
ROBERT B. HODES Director March 30, 1998
- ---------------------------------------------------
Robert B. Hodes
GERSHON KEKST Director March 30, 1998
- ---------------------------------------------------
Gershon Kekst
CHARLES LAZARUS Director March 30, 1998
- ---------------------------------------------------
Charles Lazarus
MALVIN A. RUDERMAN Director March 30, 1998
- ---------------------------------------------------
Malvin A. Ruderman
E. DONALD SHAPIRO Director March 30, 1998
- ---------------------------------------------------
E. Donald Shapiro
ARTHUR L. SIMON Director March 30, 1998
- ---------------------------------------------------
Arthur L. Simon
DANIEL YANKELOVICH Director March 30, 1998
- ---------------------------------------------------
Daniel Yankelovich
MICHAEL P. DEBLASIO First Senior Vice President and March 30, 1998
- --------------------------------------------------- Chief Financial Officer
Michael P. DeBlasio (Principal Financial Officer)
HARVEY B. REIN Vice President and Controller March 30, 1998
- --------------------------------------------------- (Principal Accounting Officer)
Harvey B. Rein
32
34
INDEX TO FINANCIAL STATEMENTS
Loral Space & Communications Ltd. and Subsidiaries
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-3
Consolidated Statements of Operations for the year ended
December 31, 1997, nine months ended December 31, 1996
and year ended March 31, 1996.......................... F-4
Consolidated Statements of Shareholders' Equity/Invested
Equity for the year ended December 31, 1997, nine
months ended December 31, 1996 and year ended March 31,
1996................................................... F-5
Consolidated Statements of Cash Flows for the year ended
December 31, 1997, nine months ended December 31, 1996
and year ended March 31, 1996.......................... F-6
Notes to Consolidated Financial Statements................ F-7
Space Systems/Loral, Inc.
Independent Auditors' Report.............................. F-29
Consolidated Balance Sheet as of December 31, 1996........ F-30
Consolidated Statements of Income for the nine months
ended December 31, 1996 and the year ended March 31,
1996................................................... F-31
Consolidated Statements of Shareholders' Equity for the
nine months ended December 31, 1996 and the year ended
March 31, 1996......................................... F-32
Consolidated Statements of Cash Flows for the nine months
ended December 31, 1996 and the year ended March 31,
1996................................................... F-33
Notes to Consolidated Financial Statements................ F-34
F-1
35
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, 1997 and 1996 and the related consolidated
statements of operations, shareholders' equity/invested equity and cash flows
for the year ended December 31, 1997, the nine months ended December 31, 1996
and the year ended March 31, 1996. 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, 1997 and 1996, and the results of its operations and its cash flows
for the year ended December 31, 1997, the nine months ended December 31, 1996
and the year ended March 31, 1996 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
New York, New York
March 6, 1998
(March 20, 1998 as to the fifth
paragraph of Note 3)
F-2
36
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31,
------------------------
1997 1996
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 226,547 $1,180,752
Contracts in process...................................... 468,134
Inventories............................................... 98,325
Other current assets...................................... 51,612 29,555
---------- ----------
Total current assets........................................ 844,618 1,210,307
Property, plant and equipment, net.......................... 926,679 17,939
Cost in excess of net assets acquired, less amortization.... 361,411
Long-term receivables....................................... 78,639
Investments in affiliates................................... 472,639 443,057
Deposits.................................................... 154,970
Other assets................................................ 165,980 28,023
---------- ----------
$3,004,936 $1,699,326
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt................................... $ 2,146
Accounts payable.......................................... 231,519 $ 10,708
Accrued employment costs.................................. 38,797
Customer advances......................................... 68,287
Accrued interest and preferred dividends.................. 11,192 6,000
Other current liabilities................................. 25,931
Income taxes payable...................................... 25,934 2,311
Deferred income taxes..................................... 4,187 112
---------- ----------
Total current liabilities................................... 407,993 19,131
Deferred income taxes....................................... 99,696 4,611
Pension and other postretirement liabilities................ 48,398 19,723
Long-term liabilities....................................... 31,388 2,500
Long-term debt.............................................. 433,252
Minority interest........................................... 10,964
Convertible preferred equivalent obligations ($600,000
principal amount)......................................... 583,292
Commitments and contingencies (Notes 6, 7 and 12)
Shareholders' equity:
Series A convertible preferred stock, $.01 par value;
150,000,000 shares authorized, 45,896,977 shares
issued................................................. 459 459
Series B preferred stock, $.01 par value; 750,000 shares
authorized and unissued................................
6% Series C convertible redeemable preferred stock
($745,472 redemption value), $.01 par value; 20,000,000
shares authorized, 14,909,437 shares issued............ 733,762
Common stock, $.01 par value; 750,000,000 shares
authorized, 200,950,864 and 191,092,308 shares
issued................................................. 2,010 1,911
Paid-in capital........................................... 1,216,128 1,058,822
Treasury stock, at cost; 101,053 shares................... (1,680)
Retained earnings......................................... 22,566 8,877
---------- ----------
Total shareholders' equity.................................. 1,973,245 1,070,069
---------- ----------
$3,004,936 $1,699,326
========== ==========
See notes to consolidated financial statements.
F-3
37
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ ----------
Revenues............................................... $1,312,591
Management fee from affiliate.......................... $ 5,088 $ 5,608
Costs and expenses..................................... 1,299,039 17,289 3,021
---------- -------- --------
Operating income (loss)................................ 13,552 (12,201) 2,587
Interest and investment income......................... 49,069 34,699
Interest expense....................................... 15,230 6,000 10,524
Gain on sale of K&F stock.............................. 79,591
---------- -------- --------
Income (loss) before income taxes, minority interest
and equity in net loss of affiliates................. 126,982 16,498 (7,937)
Income taxes........................................... 34,871 2,912 (2,780)
---------- -------- --------
Income (loss) before minority interest and equity in
net loss of affiliates............................... 92,111 13,586 (5,157)
Minority interest...................................... (4,834)
Equity in net loss of affiliates....................... (47,273) (4,709) (8,628)
---------- -------- --------
Net income (loss)...................................... 40,004 8,877 (13,785)
Preferred dividends and accretion...................... (26,315)
---------- -------- --------
Net income (loss) applicable to common stockholders.... $ 13,689 $ 8,877 $(13,785)
========== ======== ========
Earnings (loss) per share:
Basic................................................ $ 0.06 $ 0.04 $ (.08)
========== ======== ========
Diluted.............................................. $ 0.06 $ 0.04 $ (.08)
========== ======== ========
Weighted average shares outstanding:
Basic................................................ 242,070 228,997 183,580
========== ======== ========
Diluted.............................................. 243,591 229,396 183,580
========== ======== ========
See notes to consolidated financial statements.
F-4
38
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/INVESTED EQUITY
YEAR ENDED DECEMBER 31, 1997, NINE MONTHS ENDED DECEMBER 31, 1996 AND
YEAR ENDED MARCH 31, 1996
(In thousands, except per share amounts)
6% SERIES C
SERIES A CONVERTIBLE
CONVERTIBLE REDEEMABLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------- ------------------ ----------------
SHARES SHARES SHARES PAID-IN INVESTED
ISSUED AMOUNT ISSUED AMOUNT ISSUED AMOUNT CAPITAL EQUITY
------ ------ ------- -------- ------- ------ ---------- ---------
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...............................
------ ---- ------- -------- ------- ------ ---------- ---------
Balance December 31, 1996................ 45,897 459 191,092 1,911 1,058,822
Shares issued:
Exercise of stock options and related
tax benefits, net of shares
tendered.............................. 208 2 2,015
Employee savings plan................... 352 4 6,997
Acquisition of equity interest in
SS/L.................................. 2,909 $149,600 8,043 80 130,820
Acquisition of Globalstar partnership
interests............................. 1,256 13 17,474
Mandatory exchange of Convertible
Preferred Equivalent Obligations, net
of unamortized issue costs............ 12,000 583,282
Preferred dividends $3.00 per share......
Accretion to Series C Convertible
Redeemable Preferred Stock redemption
value................................... 880
Net income...............................
------ ---- ------- -------- ------- ------ ---------- ---------
Balance at December 31, 1997............. 45,897 $459 14,909 $733,762 200,951 $2,010 $1,216,128 $ --
====== ==== ======= ======== ======= ====== ========== =========
TOTAL
TREASURY RETAINED SHAREHOLDERS'
STOCK EARNINGS EQUITY
-------- -------- -------------
Balance March 31, 1995................... $ 251,819
Advances from Old Loral.................. 116,362
Net loss................................. (13,785)
Incorporation of Loral Space &
Communications Ltd......................
------- -------- ----------
Balance March 31, 1996................... 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..... 255,988
Sale of Series A Convertible Preferred
Stock............................... 344,000
Common stock issued to acquire interest
in SS/L................................. 100,313
Net income............................... $ 8,877 8,877
------- -------- ----------
Balance December 31, 1996................ 8,877 1,070,069
Shares issued:
Exercise of stock options and related
tax benefits, net of shares
tendered.............................. $(1,680) 337
Employee savings plan................... 7,001
Acquisition of equity interest in
SS/L.................................. 280,500
Acquisition of Globalstar partnership
interests............................. 17,487
Mandatory exchange of Convertible
Preferred Equivalent Obligations, net
of unamortized issue costs............ 583,282
Preferred dividends $3.00 per share...... (25,435) (25,435)
Accretion to Series C Convertible
Redeemable Preferred Stock redemption
value................................... (880)
Net income............................... 40,004 40,004
------- -------- ----------
Balance at December 31, 1997............. $(1,680) $ 22,566 $1,973,245
======= ======== ==========
See notes to consolidated financial statements.
F-5
39
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ----------------- ----------
Operating activities:
Net income (loss)......................................... $ 40,004 $ 8,877 $ (13,785)
Gain on the sale of K&F stock............................. (79,591)
Equity in net loss of affiliates.......................... 47,273 4,709 8,628
Minority interest......................................... 4,834
Deferred taxes............................................ 419 (926) 3,838
Accretion on GTL CPEOs.................................... (1,739)
Depreciation and amortization............................. 62,764 1,051
Changes in operating assets and liabilities, net of
acquisitions:
Contracts in process and inventories...................... (152,794)
Deposits.................................................. (107,670)
Other assets.............................................. (26,615) (9,252)
Accounts payable.......................................... 69,574 (1,832)
Customer advances......................................... (57,778)
Accrued expenses.......................................... (36,602) (4,506)
Taxes payable............................................. 24,873
Long-term liabilities..................................... (17,200) (1,124)
----------- ---------- ---------
Cash used in operating activities........................... (230,248) (3,003) (1,319)
----------- ---------- ---------
Investing activities:
Acquisition of businesses, net of cash acquired........... (545,642)
Proceeds from the sale of K&F stock, net of expenses...... 79,591
Investment in affiliates.................................. (237,899) (6,425) (105,231)
Other assets.............................................. (63,482) (9,800)
Proceeds from the sale of property, plant and equipment... 5,003
Capital expenditures...................................... (255,340) (540)
----------- ---------- ---------
Cash used in investing activities........................... (1,022,772) (1,962) (115,031)
----------- ---------- ---------
Financing activities:
Borrowings under revolving credit facility, net........... 32,812
Proceeds from issuance of term loan....................... 275,000
Proceeds from convertible preferred equivalent
obligations............................................. 583,292
Proceeds from exercise of stock options and issuances to
employee savings plan................................... 7,338
Contribution from minority partner........................ 9,100
Preferred dividends....................................... (25,435)
Proceeds from the Distribution............................ 612,274
Transaction expenses related to the Distribution.......... (12,286)
Advances from Loral Corporation prior to the
Distribution............................................ 2,425 116,362
----------- ---------- ---------
Cash provided by financing activities....................... 298,815 1,185,705 116,362
----------- ---------- ---------
(Decrease) increase in cash and cash equivalents............ (954,205) 1,180,740 12
Cash and cash equivalents -- beginning of period............ 1,180,752 12
----------- ---------- ---------
Cash and cash equivalents -- end of period.................. $ 226,547 $1,180,752 $ 12
=========== ========== =========
Non-cash transactions:
Mandatory exchange of Convertible Preferred Equivalent
Obligations............................................. $ 583,282
===========
Issuance of Series C Preferred Stock to acquire equity
interest in SS/L........................................ $ 149,600
===========
Issuance of Loral common stock to acquire equity interest
in SS/L and Globalstar partnership interests............ $ 148,387 $ 100,313
=========== ==========
Deferred purchase price to acquire Globalstar partnership
interests............................................... $ 24,787
===========
Assets transferred from Loral Corporation at the
Distribution............................................ $ 31,383
==========
Liabilities assumed from Loral Corporation at the
Distribution............................................ $ 27,313
==========
Transfer of GTL common stock to acquire equity interest in
SS/L.................................................... $ 5,158
==========
Supplemental Information:
Interest paid............................................. $ 40,866
===========
Taxes paid................................................ $ 8,901 $ 1,528
=========== ==========
See notes to consolidated financial statements.
F-6
40
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL BUSINESS
Loral Space & Communications Ltd. and subsidiaries (the "Company" or
"Loral") is one of the world's leading satellite companies, with substantial
activities in satellite manufacturing and satellite-based communications
services. Space Systems/Loral, Inc. ("SS/L") is a leading designer and
manufacturer of space systems. Loral Skynet ("Skynet"), acquired March 14, 1997,
is a leading provider of satellite communications services in the United States.
Skynet owns and operates the Telstar satellite network and is expanding its
business internationally. On November 17, 1997, a joint venture including Loral
and another partner acquired 75% of SatMex, a satellite services provider to
Mexico and South America. Loral also manages and is the largest equity owner of
Globalstar, L.P. ("Globalstar"), a global, mobile satellite telephony system
scheduled for service initiation in early 1999. Loral is pursuing additional
satellite-based communications service opportunities including CyberStar, a
proposed worldwide high-speed broadband data services system initially using
leased Ku-band transponder capacity on Skynet's Telstar 5 satellite.
Loral was formed to effectuate the distribution of Loral Corporation's
("Old Loral") space and communications businesses (the "Distribution") to
shareholders of Old Loral and holders of options to purchase Old Loral common
stock pursuant to a merger agreement (the "Merger") dated January 7, 1996
between Old Loral and Lockheed Martin Corporation ("Lockheed Martin"). The
Distribution of approximately 183.6 million shares of Loral common stock was
made on April 23, 1996. In connection with the Distribution, Lockheed Martin
contributed $612 million in cash to the Company. Of the amount contributed, $344
million represented the purchase of 45,896,977 shares of Loral Series A
Convertible Preferred Stock ("Series A 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 operates on a December 31 fiscal year-end. The consolidated financial
statements for the year ended December 31, 1997 and the nine months ended
December 31, 1996, include the accounts of Loral Space & Communications Ltd. and
its subsidiaries. The consolidated financial statements for the year ended
December 31, 1997, include the results of SS/L for the full year and Skynet from
March 14, 1997 (see Note 3). 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 year
ended March 31, 1996, 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.
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 Loral's revenue is associated with long-term
contracts which require significant estimates. These estimates include forecasts
of costs and schedules, estimating contract revenue related to contract
performance (including orbital incentives) and the potential for component
obsolescence in connection with long-term procurements. Other significant
estimates include the estimated useful lives of the Company's satellites.
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.
F-7
41
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Concentration of Credit Risk and Major Customers
Financial instruments which potentially subject Loral to concentrations of
credit risk consist principally of cash and cash equivalents, foreign exchange
contracts and contracts in process and long-term receivables. Loral's cash and
cash equivalents are maintained with high-credit-quality financial institutions.
Loral'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.
Sales to foreign customers, primarily in Asia, represented 30% of revenues
for the year ended December 31, 1997. Sales to the U.S. government represented
7% of revenues for the year ended December 31, 1997.
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.
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.
In connection with Loral's investment in Globalstar, a development stage
company, Loral capitalizes interest cost on its investment. At December 31, 1997
and 1996 the total amount of capitalized interest included in the investment in
Globalstar was $23.5 million and $10.3 million, respectively.
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.
Costs incurred in connection with the construction and successful
deployment of the Company's satellites and related equipment are capitalized.
Such costs include direct contract costs, allocated indirect costs, launch
costs, launch insurance and construction period interest. Capitalized interest
related to the construction of satellites for the year ended December 31, 1997
was $9.4 million. All capitalized satellite costs will be amortized over the
estimated useful life of the related satellite. The estimated useful life of the
satellites, ranging from 12 to 18 years, was determined by engineering analyses
performed at the in-service date. Losses from unsuccessful launches and in-orbit
failures of the Company's satellites, net of insurance proceeds, will be
recorded in the period when the loss occurs.
Cost in Excess of Net Assets Acquired
The excess of the cost of purchased businesses over the fair value of net
assets acquired is being amortized over 40 years using the straight line method.
Accumulated amortization was $10.8 million at December 31, 1997.
Valuation of Long-Lived Assets
The carrying value of Loral's long-lived assets is reviewed for impairment
whenever events or changes in circumstances indicate that the asset may not be
recoverable. Current and future profitability, as well as
F-8
42
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
current and future undiscounted cash flows, excluding financing costs, are
primary indicators of recoverability. For the year ended December 31, 1997,
there was no adjustment to the carrying value of Loral's long-lived assets
resulting from these evaluations.
Other Assets
Other assets include a $25 million equity investment in CD Radio Inc.
representing approximately 12% of CD Radio's equity. The Company accounts for
this investment using the 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 Loral'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.
Skynet provides satellite capacity under lease agreements that generally
provide for the use of satellites and, in certain cases, earth stations for
periods generally ranging from one year to the life of the satellite. Some of
these agreements have certain obligations, including providing spare or
substitute capacity, if available, in the event of satellite failure. If no
spare or substitute capacity is available, the agreement may be terminated.
Revenue under transponder lease agreements is recognized as services are
performed.
Allocation of Certain Expenses
For the year ended March 31, 1996, 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 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 year ended 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 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.
F-9
43
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Foreign Exchange Contracts
Loral 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.
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 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 year ended March 31, 1996, 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.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Dilutive
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts have been presented and,
where appropriate, restated to conform to the requirements of SFAS 128 (see Note
14).
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"), and in February 1998, issued Statement No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. SFAS 131 establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. SFAS 132 expands and
standardizes the disclosure requirements for pensions and other postretirement
benefits. The Company is
F-10
44
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
required to adopt SFAS 130, SFAS 131 and SFAS 132 in 1998, and the Company's
consolidated financial statements will reflect the appropriate disclosures.
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
current year presentation.
3. ACQUISITIONS
SS/L
At April 1, 1996, Loral had an effective 32.7% interest in SS/L. In 1996,
Loral 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 7.5 million newly
issued shares of Loral common stock, 534,512 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 agreed to acquire the remaining 49% of the common
stock of SS/L held by four international aerospace and communications companies
(the "Alliance Partners") for $374 million. In March 1997, Loral acquired 24.5%
of SS/L's common stock for $93.5 million in cash and $93.5 million of Loral's
Convertible Preferred Equivalent Obligations ("CPEOs"). In June 1997, the
Company acquired the remaining 24.5% of SS/L's common stock for $187.0 million
in the form of 8,042,922 shares of Loral common stock and 1,063,663 shares of
Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock").
The aggregate purchase price of the 67.3% interest in SS/L acquired by Loral was
$493.2 million. The purchase price represented $174.4 million in excess of
SS/L's proportionate net book value which was allocated primarily to the
incremental value of SS/L's investment in Globalstar of $62.2 million and cost
in excess of net assets acquired of $105.9 million. The consolidated financial
statements include the results of operations of SS/L since January 1, 1997, with
a reduction for the earnings attributed to the minority shareholders.
Skynet
On March 14, 1997, Loral acquired Skynet from AT&T for $462.1 million in
cash. The fair value of assets and liabilities recorded in connection with the
purchase price allocation was $569.8 million and $107.7 million, respectively.
Loral's consolidated financial statements include the results of operations of
Skynet from the date of acquisition.
Had the acquisitions of SS/L, Skynet and the investment in SatMex (see Note
6) occurred on April 1, 1996 the unaudited pro forma revenue, net loss
applicable to common stockholders and related basic and diluted loss per share
for the year ended December 31, 1997 and the nine months ended December 31, 1996
would have been: $1.3 billion and $1.0 billion; $19.2 million and $26.1 million;
$0.08 and $0.11, and, $0.08 and $0.11, respectively. These results, which are
based on various assumptions, are not necessarily indicative of what would have
occurred had the acquisitions been consummated as of April 1, 1996.
Orion
On March 20, 1998, Loral acquired all of the outstanding stock, as defined,
of Orion Network Systems, Inc. ("Orion") in exchange for Loral common stock.
Loral issued 17.9 million shares of its common stock and assumed existing Orion
options and warrants to purchase 1.9 million shares of Loral common stock
representing an aggregate purchase price of $467.0 million. Loral will include
Orion's results from the date of acquisition using the purchase method of
accounting. Orion is a provider of satellite-based communications services,
focused primarily on private communications network services, Internet services
and video distribution and other satellite transmission services. Orion provides
multinational corporations with private communi-
F-11
45
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS -- (CONTINUED)
cations networks designed to carry high speed data, fax, video teleconferencing,
voice and other specialized services. Orion currently has one satellite in orbit
and two satellites under construction.
Had the acquisitions of SS/L, Skynet, the investment in SatMex (see Note 6)
and Orion occurred on April 1, 1996 the unaudited pro forma revenue, net loss
applicable to common stockholders and related basic and diluted loss per share
for the year ended December 31, 1997 and the nine months ended December 31, 1996
would have been: $1.4 billion and $1.0 billion; $95.4 million and $112.2
million; $0.36 and $0.43; and, $0.36 and $0.43, respectively. These results,
which are based on various assumptions, are not necessarily indicative of what
would have occurred had the acquisitions been consummated as of April 1, 1996.
4. CONTRACTS-IN-PROCESS
DECEMBER 31, 1997
-------------------
(IN THOUSANDS)
U.S. government contracts:
Amounts billed............................................ $ 5,243
Unbilled contract receivables............................. 10,274
--------
15,517
--------
Commercial contracts:
Amounts billed............................................ 194,997
Unbilled contract receivables............................. 257,620
--------
452,617
--------
$468,134
========
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.
Billed receivables relating to long-term contracts are expected to be
collected within one year. Loral classifies the orbital component of unbilled
receivables expected to be collected beyond one year as long term. Long-term
receivable balances related to satellite orbital incentive payments at December
31, 1997 are scheduled to be received as follows (in thousands):
1999........................................................ $11,416
2000........................................................ 10,792
2001........................................................ 10,782
2002........................................................ 10,657
Thereafter.................................................. 34,992
-------
$78,639
=======
Selling, general and administrative expenses for the year ended December
31, 1997 were $125.7 million and include independent research and development
costs, which are expensed as incurred, of $56.8 million.
F-12
46
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
---------------------
1997 1996
---------- -------
(IN THOUSANDS)
Land and land improvements.................................. $ 24,999
Buildings................................................... 58,443
Leasehold improvements...................................... 10,234 $ 171
Equipment, furniture and fixtures........................... 154,684 20,083
Satellites and earth stations............................... 506,852
Satellites under construction............................... 233,204
Construction in progress.................................... 29,823
---------- -------
1,018,239 20,254
Accumulated depreciation.................................... (91,560) (2,315)
---------- -------
$ 926,679 $17,939
========== =======
Depreciation expense was $52.0 million and $1.1 million for the year ended
December 31, 1997 and the nine months ended December 31, 1996. No depreciation
expense was allocated to the Space & Communications Operations of Old Loral for
the year ended March 31, 1996.
6. INVESTMENTS IN AFFILIATES
DECEMBER 31,
----------------------
1997 1996
-------- --------
(IN THOUSANDS)
Globalstar.................................................. $383,714 $175,639
SatMex...................................................... 88,925
SS/L........................................................ 267,418
K&F......................................................... 23,568
Deferred K&F gain........................................... (23,568)
-------- --------
$472,639 $443,057
======== ========
Equity in net income (loss) of affiliates consists of (in thousands):
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 MARCH 31, 1996
----------------- ------------------ --------------
Globalstar.............................. $(42,503) $(18,105) $(20,980)
Tax benefit of Globalstar partnership
losses (see Note 8)................... 1,626 8,308
SatMex.................................. (6,396)
SS/L.................................... 13,396 4,044
-------- -------- --------
$(47,273) $ (4,709) $ (8,628)
======== ======== ========
Globalstar
Loral is the managing partner of Globalstar. Globalstar will operate a
worldwide, LEO satellite-based digital telecommunications system (the
"Globalstar(TM) System") that is scheduled to commence service in early 1999.
The Globalstar System is designed to enable local service providers to offer
low-cost, high quality wireless voice telephony and data services in virtually
every populated area of the world. Currently, Globalstar's designated service
providers have agreed to offer service and seek all necessary regulatory
approvals in more than 100 nations, accounting for about 88% of the world's
population. On February 14, 1998, Globalstar launched the first four satellites
of its 56 (including eight in-orbit spares) satellite constellation.
F-13
47
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED)
In May, 1997, Globalstar Telecommunications Limited ("GTL"), a public
company that acts as a general partner of Globalstar, issued a two-for-one stock
split. Accordingly, all GTL share amounts have been adjusted to reflect the
two-for-one stock split. Prior to the two-for-one stock split, GTL's equity
securities and convertible securities were represented by equivalent Globalstar
partnership interests on a one-for-one basis. Globalstar's partnership interests
were not affected by the GTL stock split and, accordingly, GTL's equity
securities and convertible securities are now represented by equivalent
Globalstar partnership interests on a two-for-one basis.
At December 31, 1997, Loral had a direct and indirect ownership of
20,962,211 (40.1%) ordinary partnership interests of the total 52,319,076
Globalstar ordinary partnership interests outstanding. A portion of Loral's
investment in Globalstar is held in the form of 5,439,678 shares of GTL common
stock. At December 31, 1997, the market value of the GTL shares, based on the
last reported sales price, was $267.2 million.
On September 14, 1995, Old Loral in its capacity as managing general
partner of Globalstar, granted certain officers of Old Loral, who were also
officers of GTL and Globalstar, options to purchase 280,000 shares of the GTL
common stock owned by Loral at an exercise price of $10.00 per share. On
December 12, 1995, Loral granted non-employee directors of Loral options to
purchase 400,000 shares of the GTL common stock owned by Loral at an exercise
price of $16.69 per share. These options were 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 of Loral, who were also officers of GTL and Globalstar,
options to purchase 304,000 shares of the GTL common stock owned by Loral at an
exercise price of $12.50 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 "Globalstar Credit Agreement") with a group of banks. Lockheed
Martin, SS/L and certain other Globalstar partners have guaranteed $206.3
million, $11.7 million and $32.0 million of the Globalstar Credit Agreement,
respectively. In addition, Loral agreed to indemnify Lockheed Martin for any
liability in excess of $150 million. In exchange for the guarantee and
indemnity, GTL issued warrants to purchase 8,370,636 shares of GTL common stock
at $13.25 per share as follows: Loral and SS/L 2,275,044 warrants, Lockheed
Martin 5,022,380 warrants and certain other Globalstar partners 1,073,212
warrants. In February 1997, GTL accelerated the vesting and exercisability of
these warrants and the holders exercised such warrants. In addition, GTL
distributed to the holders of its common stock rights to subscribe for and
purchase 2,262,336 GTL shares for a price of $13.25 per share of which Loral
received rights to purchase 318,344 shares and agreed to purchase all shares not
purchased upon exercise of the rights. In March 1997, Loral exercised warrants
to purchase 2,275,044 shares of common stock of GTL for $30.1 million and, in
April 1997, Loral exercised its right as a shareholder in GTL to purchase an
additional 350,348 shares of GTL common stock for $13.25 per share. GTL used the
proceeds from the exercise of the warrants and the rights, to purchase
additional Globalstar ordinary partnership interests.
In March 1996, Loral purchased $100 million principal amount of GTL 6 1/2%
Convertible Preferred Equivalent Obligations, due 2006 par value $50 per share,
("GTL CPEOs") for $97 million. In April 1996, Loral purchased an additional $2.5
million principal amount of the GTL CPEOs for $2.4 million. 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 3,153,846 shares of GTL common stock subject to adjustment for certain
anti-dilution provisions. Loral's interest income for the year and nine months
ended December 31, 1997 and 1996 includes $7.2 million and $5.5 million related
to its investment in GTL CPEOs.
F-14
48
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED)
During 1997, Loral acquired 2,208,372 Globalstar ordinary partnership
interests from other Globalstar partners for $97.5 million in cash and 1,255,684
shares of Loral common stock. In addition, on October 21, 1997 Loral acquired
540,000 ordinary partnership interests of Globalstar from another Globalstar
partner, for $24.8 million. The purchase price is payable in installments during
1998 and bears interest at 6%. Any unpaid balance at December 31, 1998 is due in
cash.
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.
SS/L is the prime contractor for the construction and launch of the
satellite constellation under a contract valued at $1.4 billion. SS/L has
awarded subcontracts to third parties, including other investors in Globalstar,
for substantial portions of its obligations under the contract. Revenue recorded
under the Globalstar contract for the year ended December 31, 1997 was $408.1
million. Billed and unbilled receivables from Globalstar at December 31, 1997,
were $84.2 million.
Globalstar's current budgeted expenditures for the cost for the design,
construction and development of the Globalstar System, including working
capital, cash interest on borrowings and operating expenses, are approximately
$2.7 billion. Globalstar has raised or received commitments for approximately
$2.6 billion in equity, debt and vendor financing. In addition, Globalstar will
purchase from SS/L eight additional spare satellites for $175 million 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, would be reimbursed to Globalstar.
SS/L provides Globalstar with 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. In addition, under the contract for the additional eight spare
satellites, SS/L will provide an additional $43 million of vendor financing of
which $19 million will be interest bearing. The repayment terms are
substantially the same as the prior vendor financing. At December 31, 1997,
$90.0 million was due under these arrangements, all of which was interest
bearing.
SatMex
In connection with the privatization by the Federal Government of Mexico
(the "Mexican Government") of its fixed satellite services business, Loral and
Telefonica Autrey, S.A. de C.V. ("Telefonica Autrey") formed a joint venture,
Firmamento Mexicano, S. de R.L. de C.V. ("Holdings"). Holdings acquired 75% of
the outstanding capital stock of Satelites Mexicanos, S.A. de C.V. ("SatMex")
for $646.8 million. The purchase price was financed by a Loral equity
contribution of $94.6 million, a Telefoncia Autrey equity contribution of $50.9
million and debt issued by Holdings. As part of the acquisition, Holdings issued
a
F-15
49
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED)
$125.1 million seven year obligation bearing interest at 6.03% to the Mexican
Government (the "Government Obligation") in consideration for the assumption by
SatMex of the debt incurred by Holdings in connection with the acquisition. The
debt of SatMex and Holdings is non-recourse to Loral and Telefonica Autrey.
However, Loral and Telefonica Autrey have agreed to maintain assets in a
collateral trust in an amount equal to the value of the Government Obligation
through December 30, 2000 and, thereafter, in an amount equal to 1.2 times the
Government Obligation until maturity. Loral has a 65% economic interest in
Holdings and a 49% indirect economic interest in SatMex.
Loral, together with Telefonica Autrey, will be responsible for managing
SatMex and will receive an aggregate management fee, based on a sliding scale,
applied to SatMex's quarterly gross revenues up to a maximum of 3.75% of
cumulative gross revenues. In addition, Loral Skynet will license certain
intellectual property to SatMex for a fee of 1.5% of SatMex's gross revenues.
Such fees were not significant for the year ended December 31, 1997.
SS/L
In 1997, Loral discontinued the use of the equity method of accounting for
SS/L and consolidates SS/L's financial position and results of operations in its
financial statements (see Note 3).
The SS/L stockholders' agreement provided 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 $5.1 million and $5.6 million
for the nine months ended December 31, 1996 and the year ended March 31, 1996,
respectively. The stockholders' agreement also required 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 $2.7 million and
$3.4 million for the nine months ended December 31, 1996 and for the year ended
March 31, 1996, respectively.
At December 31, 1996, other current assets include $9.3 million due from
SS/L primarily related to these management fees and overhead reimbursement.
K&F
Old Loral's 22.5% voting equity interest in K&F Industries, Inc. ("K&F")
was transferred to Loral at the Distribution. Loral used the equity method to
account for its investment in K&F; however, no income or loss was recognized due
to K&F's financial position. In December 1997, Loral sold its 22.5% equity
interest for $80.6 million and recorded a $79.6 million gain on the sale.
Summary Financial Data of Affiliates
The following table presents summary financial data for Globalstar at
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 and cumulative (in thousands):
YEAR ENDED DECEMBER 31, CUMULATIVE MARCH 23, 1994
----------------------------- (COMMENCEMENT OF OPERATIONS)
1997 1996 1995 TO DECEMBER 31, 1997
------- ------- ------- ----------------------------
STATEMENT OF OPERATIONS DATA:
Revenues............................. $ -- $ -- $ -- $ --
Operating loss....................... 88,071 61,025 80,226 257,349
Net loss............................. 67,586 54,646 68,237 216,713
Preferred distributions.............. 21,202 17,323 38,525
Net loss applicable to ordinary
partnership interests.............. 88,788 71,969 68,237 255,238
F-16
50
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS IN AFFILIATES -- (CONTINUED)
DECEMBER 31,
--------------------------
1997 1996
---------- ------------
BALANCE SHEET DATA:
Current assets.............................................. $ 493,780 $ 21,786
Total assets................................................ 2,149,053 942,913
Current liabilities......................................... 143,810 75,267
Long-term debt.............................................. 1,099,531 --
Long-term liabilities....................................... 221,795 250,423
Redeemable preferred partnership interests.................. 303,089 302,037
Ordinary partners' capital.................................. 380,828 315,186
The following table presents unaudited summary financial data for SatMex at
December 31, 1997, and for the period November 17, 1997 (date of acquisition)
through December 31, 1997 (in thousands):
NOVEMBER 17, 1997
TO
DECEMBER 31, 1997
-----------------
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ 12,540
Operating income............................................ 4,757
Net loss.................................................... 13,058
DECEMBER 31, 1997
-----------------
BALANCE SHEET DATA:
Current assets.............................................. $ 62,457
Total assets................................................ 936,554
Current liabilities......................................... 5,438
Long-term debt.............................................. 570,000
Shareholders' equity........................................ 361,116
The following table presents summary financial data for SS/L at December
31, 1996 and for the nine months ended December 31, 1996 and the year ended
March 31, 1996 (in thousands):
NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1996 MARCH 31, 1996
----------------- --------------
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $1,017,653 $1,121,619
Operating income............................................ 54,011 22,054
Net income.................................................. 31,025 12,367
DECEMBER 31, 1996
-----------------
BALANCE SHEET DATA:
Current assets.............................................. $ 521,510
Total assets................................................ 1,059,064
Current liabilities......................................... 377,929
Long term debt.............................................. 127,586
Other noncurrent liabilities................................ 72,666
Minority interest........................................... 1,990
Shareholders' equity........................................ 478,893
F-17
51
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
Term loan, 7.2%............................................. $275,000
Revolving credit facility, 7.2%............................. 55,000
Note purchase facility...................................... 88,234
Export-Import credit facility............................... 17,164
--------
Total debt........................................ 435,398
Less, current maturities.................................... 2,146
--------
$433,252
========
Loral SpaceCom Corporation ("Loral SpaceCom"), a wholly owned subsidiary of
Loral, and SS/L have entered into an $850 million amended and restated credit
and participation agreement (the "Credit Agreement") with a group of banks dated
November 14, 1997. The Credit Agreement provides for a $275 million term loan
facility, a $500 million revolving credit facility, of which up to $175 million
may be used for letters of credit, and a separate $75 million letter of credit
facility. Both the term loan facility and revolving credit facility are for a
period of five years. The separate letter of credit facility runs for a two-year
period. The term loan facility requires repayment in twelve consecutive
quarterly installments beginning December 31, 1999. The first four installments
are $18,750,000 each with the final eight installments being $25,000,000 each.
Borrowings under the facilities are secured by the stock of Loral SpaceCom and
SS/L and bear interest, at Loral SpaceCom's option, at various rates based on
margins over the lead bank's base rate or the London Interbank Offer Rate
("LIBOR") for periods of one to six months. Loral SpaceCom pays a commitment fee
on the unused portion of the facilities. The Credit Agreement contains customary
covenants including an interest coverage ratio and debt to capitalization
ratios. In addition, the Credit Agreement contains limitations on indebtedness,
liens, guarantee obligations, asset sales, dividends, investments and
transactions with affiliates. Under the terms of the Credit Agreement, Loral
SpaceCom may pay dividends to its parent if the cumulative dividend payments do
not exceed 50% of cumulative net income, as defined, and the ratio of funded
debt to EBITDA, as defined, is less than three to one. Currently, Loral
SpaceCom, a wholly owned subsidiary of Loral, has equity and intercompany debt
of approximately $1.1 billion, of which approximately $200 million can be paid
to its parent.
In 1994 SS/L entered into a $139.3 million 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. The outstanding
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 the Credit
Agreement.
SS/L borrowed a total of $42.9 million under an export-import credit
facility (the "EX-IM Facility") with a Japanese bank. The EX-IM Facility is
fully secured by a letter of credit arrangement with another bank. At December
31, 1997, no amounts remained available for borrowing under this facility. The
outstanding 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 for the years 1998 through 2002 are as follows:
$2,146,000, $20,896,000, $83,396,000, $102,146,000 and $220,380,000.
F-18
52
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ ----------
Current:
U.S. Federal................................. $27,204 $2,913 $(5,772)
State and local.............................. 7,248 925 (660)
------- ------ -------
34,452 3,838 (6,432)
Deferred, principally U.S. Federal............. 419 (926) 3,652
------- ------ -------
Total provision (benefit) for income taxes..... $34,871 $2,912 $(2,780)
======= ====== =======
The provision for income taxes excludes: current tax benefits related to
the exercise of stock options, credited directly to Stockholders' Equity, of
$0.5 million for the year ended December 31, 1997; a current tax benefit of $4.3
million and $0.2 million for the years ended December 31, 1997 and March 31,
1996, respectively, and, a deferred tax liability of $2.7 million and a benefit
of $8.1 million for the years ended December 31, 1997 and March 31, 1996,
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:
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 MARCH 31, 1996
----------------- ----------------- --------------
Statutory U.S. Federal income tax
rate............................. 35.0% 35.0% (35.0)%
State and local income taxes, net
of Federal income tax............ 3.0 3.0 (4.0)
Foreign source income and losses
taxed at lower rate.............. (13.3) (21.3)
Non-deductible amortization of cost
in excess of net assets
acquired......................... 2.6
Undistributed income of
affiliates....................... 4.0
Other, net......................... .2 1.0
----- ----- -----
Effective income tax rate.......... 27.5% 17.7% (35.0)%
===== ===== =====
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $28.4 million and tax credit carryforwards of approximately $3.6
million which generally expire through 2012. For the twelve months ended
December 31, 1997 and the nine months ended December 31, 1996, income before
income taxes includes approximately $72.0 and $10.0 million, respectively, of
foreign source income.
F-19
53
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES -- (CONTINUED)
The significant components of the net deferred income tax liability are (in
thousands):
DECEMBER 31,
-------------------
1997 1996
-------- ------
Postretirement benefits other than pensions............... $(14,927)
Inventoried costs......................................... (37,457)
Net operating loss and tax credit carryovers.............. (13,562)
Compensation and benefits................................. (11,129) $ 32
Other, net................................................ (74) 251
Pension costs............................................. 5,957 52
Property, plant and equipment............................. 54,838 4,388
Income recognition on long-term contracts................. 120,237
-------- ------
Net deferred income tax liability........................... $103,883 $4,723
======== ======
9. SHAREHOLDERS' EQUITY
Series A Preferred Stock
Significant terms of the Company's Series A Preferred Stock include a
liquidation preference of $.01 per share prior to pro rata participation with
the common stock and the ability to convert to common stock upon the receipt of
certain antitrust clearance or sales to an unaffiliated third party. The Series
A Preferred Stock has the same voting rights as the Company's common stock
except, it has no right to vote for the election of directors.
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.
6% Series C Preferred Stock
On November 1, 1996, the Company sold $600 million of 6% Convertible
Preferred Equivalent Obligations which, were mandatorily exchanged on June 5,
1997 into shares of the Company's Series C Preferred Stock resulting in a
reclassification of these amounts into shareholders' equity. The Series C
Preferred Stock has an aggregate liquidation preference equal to the aggregate
redemption value and a mandatory redemption date of November 1, 2006. The Series
C Preferred Stock is convertible into shares of common stock of the Company at a
conversion price of $20 per share. At December 31, 1997, the outstanding Series
C Preferred Stock was convertible into 37,273,593 shares of Loral common stock.
The Series C Preferred Stock, with respect to dividend rights and rights
upon liquidation, winding up and dissolution, ranks pari passu with Loral's
Series A Preferred Stock and senior to or pari passu with all other existing and
future series of preferred stock of Loral and senior to Loral common stock. The
Series C Preferred Stock is redeemable in cash or Loral common stock at any
time, in whole or in part, at the option of the Company (at a premium which
declines over time) commencing November 5, 1999.
Stock Plans
In April 1996, Loral established the 1996 Stock Option Plan. An aggregate
of 12 million 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
F-20
54
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SHAREHOLDERS' EQUITY -- (CONTINUED)
exercisable as determined by the Board, generally over five years, and generally
expire no more than 10 years from the date of the grant.
As discussed in Note 2, the Company continues to account for 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
based on the fair value method 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 as though the Company had adopted the fair value
method. Under SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's calculations were made using
the Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1996: expected life, 6 months following vesting; stock
volatility, 25%; risk free interest rate, 5.5% to 6.55% based on date of grant;
and no dividends during the expected term. The Company's calculations are based
on a multiple option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the 1997 and 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 applicable to common stockholders would have decreased by $4.4 million
($.02 per diluted share) and $4.1 million ($.02 per diluted share) to $9.3
million ($.04 per diluted share) and $4.8 million ($.02 per diluted share) for
the year and nine months ended December 31, 1997 and 1996, respectively.
A summary of the status of the Company's stock option plans as of December
31, 1997 and 1996 and changes during the periods then ended is presented below:
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
--------- ---------
Outstanding at March 31, 1996............................... -- $ --
Granted (weighted average fair value $2.93 per share)....... 6,412,000 10.60
Forfeited................................................... 500 10.50
--------- ------
Outstanding at December 31, 1996............................ 6,411,500 10.60
Granted (weighted average fair value $3.97 per share)....... 732,500 13.93
Exercised................................................... 207,750 10.50
Forfeited................................................... 175,800 12.98
--------- ------
Outstanding at December 31, 1997............................ 6,760,450 $10.90
========= ======
Options exercisable at December 31, 1997.................... 2,014,250 $10.53
========= ======
Options exercisable at December 31, 1996.................... 1,200,000 $10.50
========= ======
At December 31, 1997, the range of exercise prices and the weighted-average
remaining contractual life of outstanding options was $10.50 to $20.47 and 8.4
years, respectively. The range for the options exercisable at December 31, 1997
was $10.50 to $15.94. All options granted during the year were non-qualified
stock options. As of December 31, 1997, 5,031,800 shares of common stock were
available for future grant under the Plan.
F-21
55
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS
Pensions
The Company maintains a pension plan and a supplemental retirement plan.
These plans are defined benefit pension plans and members in certain locations
may contribute to the pension plan in order to receive enhanced benefits.
Eligibility for participation in these plans vary and benefits are based on
members' compensation and/or years of service. 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 pension plan in accordance with the Internal Revenue Code
and regulations thereon and to fund the supplemental retirement plan on an
actuarial basis, including service cost and amortization amounts. Contributions
of $1.9 million were made for the year ended December 31, 1997, and 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 includes the following components (in thousands):
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
Service cost-benefits earned during the period..... $ 6,538 $ 268
Interest cost on projected benefit obligation...... 14,277 1,410
Actual return on plan assets....................... (28,044) (499)
Net amortization and deferral...................... 11,619 (77)
-------- ------
Total pension cost................................. $ 4,390 $1,102
======== ======
The following presents the plans' funded status and amounts recognized in
the balance sheet (in thousands):
DECEMBER 31,
-----------------------------------------------
1997 1996
------------------------------ -------------
ASSETS EXCEED ACCUMULATED ACCUMULATED
ACCUMULATED BENEFITS BENEFITS
BENEFITS EXCEED ASSETS EXCEED ASSETS
------------- ------------- -------------
Actuarial present value of benefit
obligations:
Vested benefits............................. $154,328 $ 24,210 $ 27,831
======== ========= ========
Accumulated benefits........................ $156,443 $ 24,226 $ 27,845
Effect of projected future salary
increases................................ 22,929 568 694
-------- --------- --------
Projected benefits.......................... 179,372 24,794 28,539
Plan assets at fair value..................... 189,546 8,467 9,450
-------- --------- --------
Plan assets in excess of (less than) projected
benefit obligation.......................... 10,174 (16,327) (19,089)
Unrecognized prior service cost............... (72) 88
Unrecognized net loss (gain).................. 3,115 (1,048) (445)
-------- --------- --------
Prepaid (accrued) pension cost................ $ 13,217 $ (17,287) $(19,534)
======== ========= ========
The principal actuarial assumptions were:
1997 1996
---- ----
Discount rate............................................... 7.25% 7.75%
Rate of increase in compensation levels..................... 4.50% 4.50%
Expected long-term rate of return on plan assets............ 9.50% 9.50%
F-22
56
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED)
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.
Postretirement health care and life insurance costs include the following
components (in thousands):
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ------------------
Service cost - benefits earned during the period... $ 915 $13
Interest cost on accumulated postretirement benefit
obligation....................................... 2,314 9
Actual return on plan assets....................... (136)
Net amortization and deferral...................... (1,137)
------- ---
Total postretirement health care and life insurance
costs............................................ $ 1,956 $22
======= ===
The following presents the plans funded status and amounts recognized in
the balance sheet (in thousands):
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
Actuarial present value of benefit obligations:
Retirees......................................... $16,695 $ --
Fully eligible active participants............... 3,864 30
Other active participants........................ 15,451 148
------- ----
Accumulated postretirement benefit obligations... 36,010 178
Plan assets at fair value.......................... 2,022
------- ----
Accumulated postretirement benefit obligations
in excess of plan assets......................... 33,988 178
Unrecognized prior service cost.................... 2,894
Unrecognized net gain (loss)....................... (5,771) 11
------- ----
Accrued postretirement health care cost............ $31,111 $189
======= ====
The principal actuarial assumptions were:
Discount rate...................................... 7.25% 7.75%
Expected long-term rate of return on plan assets... 9.50%
The health care cost trend rates at December 31, 1997 and 1996, were
assumed to be 9.96% and 10.59%, respectively, 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 change the accumulated postretirement
benefit obligation at December 31, 1997 by approximately $6.7 million and the
aggregate service and interest cost components for 1997 by approximately $0.8
million.
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
F-23
57
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS -- (CONTINUED)
contributions in Loral common stock or cash were $5.6 million for the year ended
December 31, 1997 and $0.1 million for the nine months ended December 31, 1996.
11. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
fair value:
The carrying amount of cash and cash equivalents approximates fair value
because of the short maturity of those instruments. The fair value of the Series
C Preferred Stock and the CPEO's are based on market quotations and the fair
value of the Company's long-term debt is based on carrying value due to the
short-term variable interest rate on the outstanding borrowings.
The estimated fair values of the Company's financial instruments are as
follows (in thousands):
DECEMBER 31, 1997
------------------------
CARRYING FAIR
AMOUNT VALUE
---------- ----------
Cash and cash equivalents................................... $ 226,547 $ 226,547
Long-term debt, including current maturities................ 435,398 435,398
Series C Preferred Stock.................................... 733,762 916,930
DECEMBER 31, 1996
------------------------
CARRYING FAIR
AMOUNT VALUE
---------- ----------
Cash and cash equivalents................................... $1,180,752 $1,180,752
Convertible Preferred Equivalent Obligations................ 583,292 681,000
Foreign Currency Hedges
At December 31, 1997, the Company had foreign currency exchange contracts
(forwards and swaps) with several banks to purchase and sell foreign currencies,
primarily Japanese yen, aggregating $175.1 million. Such contracts were
designated as hedges of certain foreign contracts and subcontracts to be
performed by SS/L through May 2006. The fair value of these contracts, based on
quoted market prices, was $139.0 million at December 31, 1997. At December 31,
1997, deferred gains on forward contracts to sell foreign currencies, primarily
yen, were $26.6 million and deferred losses on forward contracts to purchase
foreign currencies, primarily yen, were $9.5 million.
The Company is exposed to credit-related losses in the event of
nonperformance by counter parties to these financial instruments, but does not
expect any counter party to fail to meet its obligation.
F-24
58
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. FINANCIAL INSTRUMENTS -- (CONTINUED)
The maturity of foreign currency exchange contracts held at December 31,
1997 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.............................................. $68,582 $59,937 $ 20,711 $14,766
2 to 5......................................... 5,804 4,939 65,276 48,975
6 to 10........................................ 14,750 10,385
------- ------- -------- -------
$74,386 $64,876 $100,737 $74,126
======= ======= ======== =======
12. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities equipment and transponder capacity
under agreements expiring at various dates. Certain leases covering facilities
contain renewal and or purchase options which may be exercised by the Company.
Rent expense was $17.7 million for the year ended December 31, 1997.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more consisted
of the following at December 31, 1997 (in thousands):
1998........................................................ $16,257
1999........................................................ 15,409
2000........................................................ 14,963
2001........................................................ 12,268
2002........................................................ 6,355
Thereafter.................................................. 33,389
-------
$98,641
=======
At December 31, 1997 the Company had outstanding letters of credit of
approximately $71.5 million.
Due to the long lead times required to produce purchased parts, SS/L has
entered into various purchase commitments with suppliers. These commitments
aggregated $973.1 million at December 31, 1997.
Prior to its acquisition by Loral, Skynet sold several transponders under
which title to specific transponders was transferred to the customer upon the
customer's acceptance. Under the terms of the contracts, Skynet continues to
operate the satellites on which the transponders are located and provides a
warranty for a period of 10 to 14 years, generally the economic life of the
satellite. Depending on the contract, Skynet is required to replace transponders
failing to meet operating specifications. All customers are entitled to a refund
equal to the reimbursement value, as defined, in the event there is no repair or
replacement. The reimbursement value is determined based on the original
purchase price plus an interest factor from the time the payment is received to
acceptance of the transponder by the customer, reduced on a straight-line basis
over the warranty period. In case of satellite failure, the reimbursement value
may be paid from proceeds received from insurance policies.
In 1997, two in-orbit satellites built by SS/L experienced solar array
circuit failures. One of the customers has asserted that, in light of the
failures and uncertainty as to further failures, it has not accepted the
satellite. Loral believes that the customer was contractually required to accept
the satellite at completion of in-orbit testing and that risk of loss has passed
to the customer. In addition, another customer has requested
F-25
59
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
that SS/L structure an arrangement whereby the satellite under construction
would be sold to another customer. Management believes that these matters will
not have a material adverse effect on the financial condition or results of
operations of Loral.
13. RELATED PARTY TRANSACTIONS
In connection with contract performance, Loral provided services to and
acquired services from Lockheed Martin for the year ended December 31, 1997. A
summary of such transactions and balances is as follows (in thousands):
YEAR ENDED
DECEMBER 31, 1997
-----------------
Revenue from services sold.................................. $ 3,550
Cost of purchased services.................................. 78,160
Balance at year end:
Receivable................................................ $ 80
Payable................................................... 29,589
-------
Net payable................................................. $29,509
=======
Loral's sales to, purchases from, and balances with the Alliance Partners
are as follows (in thousands):
YEAR ENDED
DECEMBER 31, 1997
-----------------
Revenue from services sold.................................. $ 39,303
Cost of purchased services.................................. 147,777
Balance at year end:
Receivable................................................ $ 10,492
Payable................................................... 81,716
--------
Net payable................................................. $ 71,224
========
14. EARNINGS PER SHARE
Basic earnings per share is computed based upon the weighted average number
of shares of common stock and the Series A Preferred Stock outstanding. Diluted
earnings per share excludes the assumed conversion of the Series C Preferred
Stock as the effect would have been antidilutive. 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.
F-26
60
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. EARNINGS PER SHARE -- (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings per share:
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
Net income (loss)............................... $ 40,004 $ 8,877 $(13,785)
Preferred stock dividends and accretion......... (26,315)
-------- -------- --------
Numerator for basic and diluted earnings per
share -- net income (loss) applicable to
common stockholders.......................... $ 13,689 $ 8,877 $(13,785)
======== ======== ========
Denominator:
Weighted average shares:
Common stock................................. 196,173 186,799 183,580
Series A Preferred Stock..................... 45,897 42,198
-------- -------- --------
Denominator for basic earnings per share........ 242,070 228,997 183,580
Effect of dilutive securities:
Employee stock options....................... 1,521 399
-------- -------- --------
Denominator for diluted earnings per share...... 243,591 229,396 183,580
======== ======== ========
Basic earnings per share.......................... $ 0.06 $ 0.04 $ (.08)
======== ======== ========
Diluted earnings per share........................ $ 0.06 $ 0.04 $ (.08)
======== ======== ========
15. QUARTERLY FINANCIAL INFORMATION (Unaudited, in thousands, except per share
amounts)
QUARTER ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,*
--------- -------- ------------- -------------
YEAR ENDED DECEMBER 31, 1997
Revenues........................... $340,353 $291,148 $371,118 $309,972
Income before income taxes and
equity in net loss of
affiliates....................... 19,476 3,120 9,663 94,723
Net income (loss).................. (406) (10,296) (3,962) 54,668
Preferred dividends and
accretion........................ (2,947) (11,633) (11,735)
Net income (loss) applicable to
common shareholders.............. (406) (13,243) (15,595) 42,933
Earnings per share -- basic........ 0.00 (0.06) (0.06) 0.17
Earnings per share -- diluted...... 0.00 (0.06) (0.06) 0.17
Market price per share
High............................. 19 1/2 17 1/2 21 24 1/4
Low.............................. 14 1/8 13 14 1/16 19
- ---------------
* The results of operations for the quarter ended December 31, 1997, include a
$79.6 million gain on the sale of K&F stock.
F-27
61
LORAL SPACE & COMMUNICATIONS LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. QUARTERLY FINANCIAL INFORMATION (Unaudited, in thousands, except per share
amounts) -- (continued)
QUARTER ENDED
--------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31,
-------- ------------- ------------
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 -- basic............. 0.01 0.01 0.02
Earnings per share -- diluted........... 0.01 0.01 0.02
Market price per share
High.................................. 18 1/2 16 5/8 19 5/8
Low................................... 10 1/2 11 1/8 15 1/4
F-28
62
INDEPENDENT AUDITORS' REPORT
Space Systems/Loral, Inc.:
We have audited the accompanying consolidated balance sheet of Space
Systems/Loral, Inc. and its subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the nine months ended December 31, 1996 and for the year 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 the results of their operations and
their cash flows for the nine months ended December 31, 1996 and for the year
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-29
63
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)
DECEMBER 31,
1996
------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 19,181
Contracts in process, net................................. 376,847
Inventories............................................... 74,572
Deposits and other current assets......................... 50,910
----------
Total current assets................................... 521,510
Property, plant and equipment, net.......................... 166,786
Cost in excess of net assets acquired, less amortization.... 227,604
Long-term receivables....................................... 90,005
Investments................................................. 15,000
Prepaid pension costs and other assets...................... 38,159
----------
$1,059,064
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 122,549
Accrued payroll........................................... 25,515
Customer advances......................................... 163,819
Income taxes payable...................................... 3,052
Deferred income taxes..................................... 54,360
Other current liabilities................................. 8,634
----------
Total current liabilities.............................. 377,929
Long-term debt.............................................. 127,586
Deferred income taxes....................................... 37,787
Postretirement and other liabilities........................ 34,879
Minority interest in ISTI................................... 1,990
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
Retained earnings (accumulated deficit)................... 12,225
----------
Total shareholders' equity............................. 478,893
----------
$1,059,064
==========
See notes to consolidated financial statements.
F-30
64
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
1996 1996
------------ ----------
Revenues.................................................... $1,017,653 $1,121,619
Costs and expenses.......................................... 953,496 1,087,213
---------- ----------
Gross profit................................................ 64,157 34,406
Amortization of cost in excess of net assets acquired....... 5,058 6,744
Management fee.............................................. 5,088 5,608
---------- ----------
Operating income............................................ 54,011 22,054
Interest income............................................. 9,179 9,652
Interest expense............................................ 3,098 3,301
---------- ----------
Income before income taxes, minority interest and equity in
net loss of affiliate..................................... 60,092 28,405
Provision for income taxes.................................. 27,643 15,180
---------- ----------
Income before minority interest and equity in net loss
of affiliate.............................................. 32,449 13,225
Minority interest in losses of ISTI......................... 125 151
Equity in net loss of Globalstar, net of tax benefit........ (1,549) (1,009)
---------- ----------
Net income.................................................. $ 31,025 $ 12,367
========== ==========
See notes to consolidated financial statements.
F-31
65
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND FOR THE YEAR ENDED MARCH 31,
1996
(In thousands, except share data)
COMMON STOCK RETAINED
------------------ EARNINGS
SHARES (ACCUMULATED
ISSUED AMOUNT DEFICIT) TOTAL
------ -------- ------------ --------
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-32
66
SPACE SYSTEMS/LORAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE YEAR ENDED
MONTHS ENDED MARCH 31,
DECEMBER 31, 1996 1996
----------------- ----------
Cash flows from operating activities:
Net income................................................ $ 31,025 $ 12,367
Depreciation and amortization............................. 23,242 29,993
Deferred income taxes..................................... 26,673 10,237
Minority interest in losses of ISTI....................... (125) (151)
Equity in net loss of LQSS................................ 1,549 1,009
Changes in operating assets and liabilities:
Contracts in process, including long-term
receivables.......................................... (152,454) (58,092)
Inventories............................................ (37,990) (26,729)
Deposits and other current assets...................... (39,212) 8,431
Prepaid pension cost and other assets.................. (16,208) 1,450
Accounts payable and other current liabilities......... (7,803) 79,450
Customer advances...................................... 37,501 10,368
Postretirement and other liabilities................... 317 (537)
-------- --------
Net cash (used in) provided by operating activities......... (133,485) 67,796
-------- --------
Investing activities:
Capital expenditures...................................... (26,731) (24,167)
Investment in ABCN........................................ (10,000) --
-------- --------
Net cash used in investing activities....................... (36,731) (24,167)
-------- --------
Financing activities:
Proceeds from borrowings.................................. 290,408 100,740
Repayment of debt......................................... (227,874) (69,728)
-------- --------
Net cash provided by (used in) financing activities......... 62,534 31,012
-------- --------
Net (decrease) increase in cash and cash equivalents........ (107,682) 74,641
Cash and cash equivalents, beginning of period.............. 126,863 52,222
-------- --------
Cash and cash equivalents, end of period.................... $ 19,181 $126,863
======== ========
Supplemental information:
Interest paid, net of amounts capitalized................. $ 2,562 $ 2,440
======== ========
Income taxes paid......................................... $ 1,449 $ 1,501
======== ========
See notes to consolidated financial statements.
F-33
67
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% and 10% of revenues for the
nine months ended December 31, 1996 and for the year ended March 31, 1996,
respectively. Sales to foreign customers, primarily in Asia, represented 25% and
27% of revenues for the nine months ended December 31, 1996 and for the year
F-34
68
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ended March 31, 1996, 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.
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-35
69
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 at December 31, 1996.
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 year 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,
1996
--------------
(IN THOUSANDS)
U.S. government contracts:
Amounts billed............................................ $ 11,880
Unbilled contract receivables............................. 11,828
--------
23,708
--------
Commercial contracts:
Amounts billed............................................ 145,447
Unbilled contract receivables............................. 207,692
--------
353,139
--------
$376,847
========
Unbilled amounts include recoverable costs and accrued profit on progress
completed which has not been billed. Such amounts are billed upon shipment of
the product, achievement of contractual milestones, or completion of the
contract and are reclassified to billed receivables.
Payment terms and conditions vary between contracts, however, SS/L
generally requires, for commercial contracts, advance deposits equal to varying
percentages of the total contract amount.
F-36
70
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. CONTRACTS-IN-PROCESS: (CONTINUED)
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
$26,878,000 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 year ended March 31, 1996 were $45,231,000 and
$40,273,000 and include independent research and development costs of
$16,274,000 and $11,171,000, respectively.
3. PROPERTY, PLANT AND EQUIPMENT:
DECEMBER 31,
1996
--------------
(IN THOUSANDS)
Land........................................................ $ 22,300
Buildings and improvements.................................. 65,448
Machinery, equipment, furniture and fixtures................ 178,137
Leasehold improvements...................................... 5,780
Construction-in-process..................................... 22,054
--------
293,719
Accumulated depreciation.................................... (126,933)
--------
$166,786
========
Depreciation and amortization expense was $18,184,000 and $23,249,000 and
capitalized interest costs were $97,000 and $127,000 for the nine months ended
December 31, 1996 and the year ended March 31, 1996, respectively.
4. FINANCING ARRANGEMENTS:
Foreign currency exchange facilities:
At December 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. 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 at December 31, 1996. At December 31, 1996, deferred gains on
forward contracts to sell foreign currencies, primarily 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
F-37
71
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS: (CONTINUED)
$5,106,000. 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,
1996
--------------
(IN THOUSANDS)
Revolving credit agreement
(weighted average annual interest rate of 8.25%).......... $ 59,000
Note purchase facility
(weighted average annual interest rate of 4.26%).......... 49,276
Export -- Import credit facility
(weighted average annual interest rate of 5.63% and 5.8%,
respectively)............................................. 19,310
--------
$127,586
========
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.
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
F-38
72
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS: (CONTINUED)
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:
YEAR ENDED
NINE MONTHS ENDED MARCH 31,
DECEMBER 31, 1996 1996
------------------ ----------
(IN THOUSANDS)
Current:
Federal............................................... $ 683 $ 1,836
State, local & foreign................................ 287 3,107
------- -------
970 4,943
Deferred, principally federal........................... 26,673 10,237
------- -------
Total................................................. $27,643 $15,180
======= =======
The provision for income taxes excludes a deferred tax benefit of $834,000
and $544,000 for the nine months ended December 31, 1996 and the year ended
March 31, 1996, 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:
YEAR ENDED
NINE MONTHS ENDED MARCH 31,
DECEMBER 31, 1996 1996
------------------ -----------
(IN THOUSANDS)
Provision at statutory federal income tax rate.......... $21,032 $ 9,942
State income taxes, net of federal income tax benefit... 4,042 2,219
Non-deductible goodwill amortization.................... 1,770 2,360
Losses of ISTI.......................................... 229 330
Non-deductible meals, entertainment and
lobbying expense...................................... 370 208
Other................................................... 200 121
------- -------
Total provision for income taxes.............. $27,643 $15,180
======= =======
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.
F-39
73
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES: (CONTINUED)
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,
1996
--------------
(IN THOUSANDS)
Deferred tax assets:
Postretirement benefits other than pensions............... $ 13,849
Net operating loss carryforwards.......................... 7,288
Compensation and benefits................................. 3,842
Other, net................................................ 3,464
--------
28,443
Deferred tax liabilities:
Income recognition on long-term contracts................. 86,761
Property, plant and equipment............................. 25,059
Pension costs............................................. 8,770
--------
120,590
--------
Net deferred income tax liability........................... $ 92,147
========
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. 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 and $1,553,000 for the nine
months ended December 31, 1996 and the year ended March 31, 1996, 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 year ended March 31, 1996 was $280,627,000 and
$336,977,000, respectively. Billed and unbilled receivables from Globalstar were
$22,572,000 and $130,694,000 at December 31, 1996.
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
F-40
74
SPACE SYSTEMS/LORAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INVESTMENTS: (CONTINUED)
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, 1996, $130.7 million was due under this arrangement, of
which $72.0 million 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 and
$5,608,000 for the nine months ended December 31, 1996 and the year ended March
31, 1996 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 and $3,427,000
for the nine months ended December 31, 1996 and for the year ended March 31,
1996, 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 for the
year ended March 31, 1996.
F-41
75
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 year ended March 31, 1996. A summary of such
transactions and balances is as follows:
YEAR ENDED
NINE MONTHS ENDED MARCH 31,
DECEMBER 31, 1996 1996
------------------ ----------
(IN THOUSANDS)
Revenue from services sold.............................. $ 3,174 $ 1,096
Cost of purchased services.............................. 124,275 28,228
Balances at year end:
Receivable............................................ $ 1,650 $ 430
Payable............................................... 3,572 15,823
------- --------
Net payable............................................. $ 1,922 $ 15,393
======= ========
SS/L's sales to, purchases from, and balances with the Alliance partners
are as follows:
YEAR ENDED
NINE MONTHS ENDED MARCH 31,
DECEMBER 31, 1996 1996
------------------ ----------
(IN THOUSANDS)
Revenue from services sold.............................. $55,019 $ 32,561
Cost of purchased services.............................. 150,608 249,092
Balances at year end:
Receivable............................................ $ 8,526 $ 15,066
Payable............................................... 41,335 38,257
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 year ended March 31, 1996, SS/L employees were eligible to
participate in Old Loral's stock option plans. At March 31, 1996, options to
purchase 466,304 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 year ended March 31, 1996, 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 year ended March 31, 1996, $4,510,000 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-42
76
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 and
$6,440,000 for the nine months ended December 31, 1996 and the year ended March
31, 1996, 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-43
77
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 year ended March 31, 1996 were
$3,990,000. Plan assets are invested primarily in U.S. government and agency
obligations and listed stocks and bonds.
Net pension costs include the following components:
YEAR ENDED
NINE MONTHS ENDED MARCH 31,
DECEMBER 31, 1996 1996
------------------ ----------
(IN THOUSANDS)
Service cost -- benefits earned during the period....... $ 3,808 $ 3,676
Interest cost on projected benefit obligation........... 8,205 10,070
Actual loss (return) on plan assets..................... (9,934) (27,838)
Net amortization and deferral........................... 574 18,110
------- --------
Net pension costs....................................... $ 2,653 $ 4,018
======= ========
The following table sets forth the Plan's funded status:
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested benefits........................................... $130,363
========
Accumulated benefits...................................... $134,507
Effect of projected future salary increases............... 16,981
--------
Projected benefits........................................ 151,488
Plan assets at fair value................................... 167,635
--------
Plan assets in excess of (less than) projected benefit
obligation................................................ 16,147
Unrecognized net prior service cost......................... 60
Unrecognized net loss....................................... 5,183
--------
Prepaid pension cost included in other assets in the
accompanying balance sheet................................ $ 21,390
========
The principal actuarial assumptions are as follows:
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 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-44
78
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:
YEAR ENDED
NINE MONTHS ENDED MARCH 31,
DECEMBER 31, 1996 1996
------------------ ----------
(IN THOUSANDS)
Service cost -- benefits earned during the period....... $ 622 $ 405
Interest cost on accumulated postretirement benefit
obligation............................................ 1,599 1,549
Net amortization and deferrals.......................... (916) (1,316)
------- -------
Total postretirement health care and life insurance
costs................................................. $ 1,305 $ 638
======= =======
The following table reconciles the amounts recognized in the balance sheet:
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees.................................................. $15,260
Fully eligible plan participants.......................... 3,517
Other active plan participants............................ 10,541
-------
Total accumulated postretirement benefit obligation......... 29,318
Fair value of assets........................................ (2,055)
-------
Unfunded accumulated postretirement benefit obligation...... 27,263
Unrecognized prior service gain related to plan
amendments................................................ 12,742
Unrecognized net (loss) gain................................ (6,225)
-------
Accrued postretirement health care and life insurance
costs..................................................... $33,780
=======
The principal assumptions used in determining the pension benefit
obligation are as follows:
Discount rate............................................... 7.75%
Rate of increase in compensation levels..................... 4.50%
Present healthcare cost trend rate.......................... 10.59%
Ultimate trend rate by the year 2004........................ 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 and
$2,852,000 for the nine months ended December 31, 1996 and the year ended March
31, 1996, respectively.
F-45
79
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-46
80
INDEPENDENT AUDITORS' REPORT
We have audited the consolidated financial statements of Loral Space &
Communications Ltd. (a Bermuda company) as of December 31, 1997 and 1996, and
for the year ended December 31, 1997, the nine months ended December 31, 1996,
and the year ended March 31, 1996, and have issued our report thereon dated
March 6, 1998 (March 20, 1998 as to the fifth paragraph of Note 3), included
elsewhere in this Annual Report on Form 10-K. Our audits also included the
financial statement schedule listed in Item 14(a)2 of this Annual Report on Form
10-K. This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
New York, New York
March 6, 1998
S-1
81
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
LORAL SPACE & COMMUNICATIONS LTD.
BALANCE SHEETS
(In thousands, except share data)
DECEMBER 31,
------------------------
1997 1996
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 171,850 $1,175,018
Other current assets...................................... 3,864 9,795
---------- ----------
Total current assets........................................ 175,714 1,184,813
Note receivable from unconsolidated subsidiary.............. 349,000
Investments in affiliates................................... 410,221 443,057
Investment in unconsolidated subsidiaries................... 776,493 19,427
Due from unconsolidated subsidiaries........................ 245,089 191
Other assets................................................ 69,555 13,476
---------- ----------
$2,026,072 $1,660,964
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities............ $ 29,187 $ 340
Accrued interest and preferred dividends.................. 9,478 6,000
Income taxes payable...................................... 12,004 1,263
Deferred income taxes..................................... 1,796
---------- ----------
Total current liabilities................................... 52,465 7,603
Deferred income taxes....................................... 362
Convertible preferred equivalent obligations ($600,000
principal amount)......................................... 583,292
Commitments and contingencies
Shareholders' equity:
Series A convertible preferred stock, $.01 par value;
150,000,000 shares authorized, 45,896,977 shares
issued................................................. 459 459
Series B preferred stock, $.01 par value; 750,000 shares
authorized and unissued................................
6% Series C convertible redeemable preferred stock
($745,472 redemption value), $.01 par value; 20,000,000
shares authorized, 14,909,437 shares issued............ 733,762
Common stock, $.01 par value; 750,000,000 shares
authorized, 200,950,864 and 191,092,308 shares
issued................................................. 2,010 1,911
Paid-in capital........................................... 1,216,128 1,058,822
Treasury stock, at cost; 101,053 shares................... (1,680)
Retained earnings......................................... 22,566 8,877
---------- ----------
Total shareholders' equity.................................. 1,973,245 1,070,069
---------- ----------
$2,026,072 $1,660,964
========== ==========
See note to financial statements.
S-2
82
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONT.)
LORAL SPACE & COMMUNICATIONS LTD.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ------------ ----------
Management fee from affiliate.......................... $ 5,608
Costs and expenses..................................... $ 14,123 $ 6,561 3,021
-------- -------- --------
Operating income (loss)................................ (14,123) (6,561) 2,587
Interest and investment income......................... 60,915 34,717
Interest expense....................................... 695 6,000 10,524
Gain on sale of K&F stock.............................. 79,591
-------- -------- --------
Income (loss) before income taxes, minority interest
and equity in net income (loss) of affiliates and
subsidiaries......................................... 125,688 22,156 (7,937)
Income taxes........................................... 19,644 1,263 (2,780)
-------- -------- --------
Income (loss) before minority interest and equity in
net loss of affiliates............................... 106,044 20,893 (5,157)
Equity in net loss of unconsolidated subsidiaries...... (21,007) (7,307)
Equity in net loss of affiliates....................... (45,033) (4,709) (8,628)
-------- -------- --------
Net income (loss)...................................... 40,004 8,877 (13,785)
Preferred dividends and accretion...................... (26,315)
-------- -------- --------
Net income (loss) applicable to common stockholders.... $ 13,689 $ 8,877 $(13,785)
======== ======== ========
Earnings (loss) per share:
Basic................................................ $ 0.06 $ 0.04 $ (.08)
======== ======== ========
Diluted.............................................. $ 0.06 $ 0.04 $ (.08)
======== ======== ========
Weighted average shares outstanding:
Basic................................................ 242,070 228,997 183,580
======== ======== ========
Diluted.............................................. 243,591 229,396 183,580
======== ======== ========
See note to financial statements.
S-3
83
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONT.)
LORAL SPACE & COMMUNICATIONS LTD.
STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1996 1996
------------ ----------------- ----------
Operating activities:
Net income (loss)......................................... $ 40,004 $ 8,877 $ (13,785)
Gain on the sale of K&F stock............................. (79,591)
Equity in net loss of affiliates.......................... 45,003 4,709 8,628
Equity in net loss of unconsolidated subsidiaries......... 21,007 7,307
Deferred taxes............................................ (2,158) 3,838
Accretion on GTL CPEOs.................................... (1,739)
Depreciation and amortization............................. 78
Changes in operating assets and liabilities, net of
acquisitions:
Due from unconsolidated subsidiaries...................... (244,898) 191
Accounts payable.......................................... 4,218 (217)
Accrued expenses.......................................... 3,283 5,340
Taxes payable............................................. 10,741 1,263
Other assets and liabilities.............................. (82,367) (5,010)
----------- ---------- ---------
Cash used in operating activities........................... (286,419) 22,460 (1,319)
----------- ---------- ---------
Investing activities:
Proceeds from the sale of K&F stock, net of expenses...... 79,591
Investment in affiliates.................................. (232,729) (6,425) (105,231)
Investments in unconsolidated subsidiaries................ (144,060) (26,734)
Other assets.............................................. (52,454) (9,800)
----------- ---------- ---------
Cash used in investing activities........................... (349,652) (33,159) (115,031)
----------- ---------- ---------
Financing activities:
Issuance of note to unconsolidated subsidiary, net of
repayments.............................................. (349,000)
Proceeds from convertible preferred equivalent
obligations............................................. 583,292
Proceeds from exercise of stock options and issuances to
employee savings plan................................... 7,338
Preferred dividends....................................... (25,435)
Proceeds from the Distribution............................ 612,274
Transaction expenses related to the Distribution.......... (12,286)
Advances from Loral Corporation prior to the
Distribution............................................ 2,425 116,362
----------- ---------- ---------
Cash provided by financing activities....................... (367,097) 1,185,705 116,362
----------- ---------- ---------
(Decrease) increase in cash and cash equivalents............ (1,003,168) 1,175,006 12
Cash and cash equivalents -- beginning of period............ 1,175,018 12
----------- ---------- ---------
Cash and cash equivalents -- end of period.................. $ 171,850 $1,175,018 $ 12
=========== ========== =========
Non-cash transactions:
Mandatory exchange of Convertible Preferred Equivalent
Obligations............................................. $ 583,282
===========
Issuance of Series C Preferred Stock to acquire equity
interest in SS/L........................................ $ 149,600
===========
Issuance of Loral common stock to acquire equity interest
in SS/L and Globalstar partnership interests............ $ 148,387 $ 100,313
=========== ==========
Deferred purchase price to acquire Globalstar partnership
interests............................................... $ 24,787
===========
Assets transferred from Loral Corporation at the
Distribution............................................ $ 31,383
==========
Liabilities assumed from Loral Corporation at the
Distribution............................................ $ 27,313
==========
Transfer of GTL common stock to acquire equity interest in
SS/L.................................................... $ 5,158
==========
Supplemental information:
Interest paid............................................. $ 22,823
===========
Taxes paid................................................ $ 6,205
===========
See note to financial statements.
S-4
84
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO FINANCIAL STATEMENTS
1. Loral Space & Communications Ltd. ("Loral"), a Bermuda company, is a
holding company which is the ultimate parent of all Loral subsidiaries and is
the registrant of all Loral securities. The accompanying financial statements
reflect the financial position, results of operations and cash flows of Loral on
a separate company basis. All subsidiaries of Loral are reflected as investments
accounted for under the equity method of accounting. Accordingly intercompany
payables and receivables have not been eliminated.
Loral's significant transactions with its subsidiaries other than the
investment account and related equity in net loss of unconsolidated subsidiaries
are the management fee charged by Loral SpaceCom Corporation ("SpaceCom") to
Loral and intercompany payable and receivables resulting primarily from the
funding of the construction of the Telstar Satellites. The note receivable from
SpaceCom relates to the Loral Skynet acquisition and bears interest at 8.2% per
annum. Principal payments are restricted to a maximum of $149,000,000 by a
financing arrangement entered into by SpaceCom.
No cash dividends were paid to Loral by its subsidiaries or its affiliates
during the year ended December 31, 1997, the nine months ended December 31, 1996
or the year ended March 31, 1996.
S-5
85
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
2.1 Restructuring, Financing and Distribution Agreement, dated
as of January 7, 1996, among Loral Corporation, Loral
Aerospace Holdings, Inc., Loral Aerospace Corp., Loral
General Partner, Inc., Loral Globalstar L.P., Loral
Globalstar Limited, the Registrant and Lockheed Martin
Corporation(1)
2.2 Amendment to Restructuring, Financing and Distribution
Agreement, dated as April 15, 1996(1)
2.3 Agreement for the Purchase and Sale of Assets dated as of
September 25, 1996 by and between AT&T Corp., as Seller, and
Loral Space & Communications Ltd., as Buyer(2)
2.4 First Amendment to Agreement for the Purchase and Sale of
Assets dated as of March 14, 1997 by and between AT&T Corp.,
as Seller, and Loral Space & Communications Ltd., as
Buyer(3)
2.5 Agreement and Plan of Merger dated as of October 7, 1997 by
and among Orion Network Systems, Inc., Loral Space &
Communications Ltd. and Loral Satellite Corporation(4)
2.6 First Amendment to Agreement and Plan of Merger dated as of
February 11, 1998 by and among Orion Network Systems, Inc.,
Loral Space & Communications Ltd. and Loral Satellite
Corporation.(5)
2.7 Second Amendment to Agreement and Plan of Merger dated as of
March 20, 1998 by and among Orion Network Systems, Inc.,
Loral Space & Communications Ltd. and Loral Satellite
Corporation.+
3.1 Memorandum of Association(1)
3.2 Memorandum of Increase of Share Capital(1)
3.3 Second Amended and Restated Bye-laws(1)
3.4 Schedule III to Second Amended and Restated Bye-laws
relating to Registrant's 6% Series C Convertible Redeemable
Preferred Stock(6)
4.1 Rights Agreement dated March 27, 1996 between the Registrant
and The Bank of New York, Rights Agent(1)
10.1 Shareholders Agreement dated as of April 23, 1996 between
Loral Corporation and the Registrant(1)
10.2 Tax Sharing Agreement dated as of April 22, 1996 between
Loral Corporation, the Registrant, Lockheed Martin
Corporation and LAC Acquisition Corporation(1)
10.3 Exchange Agreement dated as of April 22, 1996 between the
Registrant and Lockheed Martin Corporation(1)
10.4 Amended and Restated Agreement of Limited Partnership of
Globalstar, L.P., dated as of 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(7)
10.5 Service Provider Agreements by and between Globalstar, L.P.
and each of Loral General Partner, Inc. and Loral/DASA
Globalstar, L.P.(8)
10.6 Contract between Globalstar, L.P. and Space Systems/Loral,
Inc.(8)
10.7 1996 Stock Option Plan(1)++
10.8 Common Stock Purchase Plan for Non-Employee Directors(1)++
10.9 Employment Agreement between the Registrant and Bernard L.
Schwartz(1)++
86
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
10.9.1 Amendment dated as of March 1, 1997 to Employment Agreement
between the Registrant and Bernard L. Schwartz+++
10.10 Registration Rights Agreement dated as of August 9, 1996
among Loral Space & Communications Ltd., Lehman Brothers
Capital Partners II, L.P., Lehman Brothers Merchant Banking
Portfolio Partnership L.P., Lehman Brothers Offshore
Investment Partnership L.P. and Lehman Brothers Offshore
Investment Partnership-Japan L.P.(9)
10.11 Registration Rights Agreement dated November 6, 1996
relating to the Registrant's 6% Convertible Preferred
Equivalent Obligations due 2006(6)
10.12 Registration Rights Agreement (Series C Preferred Stock)
dated as of March 31, 1997 between Loral Space &
Communications Ltd. and Finmeccanica S.p.A. and dated as
June 23, 1997 among Loral Space & Communications Ltd.,
Aerospatiale SNI and Alcatel Espace(10)
10.13 Registration Rights Agreement (Common Stock) dated as of
June 23, 1997 among Loral Space & Communications Ltd.,
Aerospatiale SNI and Alcatel Espace(10)
10.14 Alliance Agreement dated as of June 23, 1997 among Loral
Space & Communications Ltd., Aerospatiale SNI, Alcatel
Espace and Finmeccanica S.p.A.(10)
10.15 Principal Stockholder Agreement dated as of October 7, 1997
among Loral Space & Communications Ltd., Loral Satellite
Corporation, Orion Network Systems, Inc. and certain Orion
stockholders signatory thereto(4)
10.16 Amended and Restated Credit and Participation Agreement,
dated as of November 14, 1997, among Loral SpaceCom
Corporation, Space Systems/Loral, Inc., the Banks parties
thereto, Bank of America National Trust and Savings
Association, as Administrative Agent, and Istituto Bancario
San Paolo di Torino S.p.A, individually and as Italian
Export Financing and Arranger and as Selling Bank(11)
10.17 Agreement of Limited Partnership of CyberStar, L.P. dated as
of June 30, 1997+
10.18 Purchase and Sale Agreement dated November 17, 1997 between
the Federal Government of the United Mexican States and
Corporativo Satelites Mexicanos, S.A. de C.V. for the
purchase and sale of the capital stock of Satelites
Mexicanos, S.A. de C.V. (English translation of Spanish
original)+
10.19 Membership Agreement dated and effective as of November 17,
1997 among Loral SatMex Ltd. and Ediciones Enigma, S.A. de
C.V. and Firmamento Mexicano, S. de R.L. de C.V.+
10.20 Letter Agreement dated December 29, 1997 between Loral Space
& Communications Ltd., Telefonica Autrey S.A. de C.V.,
Donaldson, Lufkin & Jenrette Securities Corporation, Lehman
Brothers Inc. and Lehman Commercial Paper Inc. and related
Agreement between the Federal Government of United Mexican
States, Telefonica Autrey, S.A. de C.V., Ediciones Enigma,
S.A. de C.V., Loral Space & Communications Ltd., Loral
SatMex Ltd. and Servicios Corporativos Satelitales, S.A. de
C.V.+
12 Statement Re: Computation of Ratios+
21 List of Subsidiaries of the Registrant+
23 Consent of Deloitte & Touche LLP+
27 Financial Data Schedule (EDGAR only)+
87
EXHIBIT NUMBER DESCRIPTION PAGE
- -------------- ----------- ----
99.1 Consolidated Financial Statements of Globalstar, L.P. and
Independent Auditors' Report(12)
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form 10 (No. 1-14180).
(2) Incorporated by reference to the Registrant's Form 8-K filed on September
27, 1996.
(3) Incorporated by reference to the Registrant's Form 8-K filed on March 28,
1997.
(4) Incorporated by reference to the Registrant's Form 8-K filed on October 10,
1997.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 filed on February 17, 1998 (File No. 333-46407).
(6) Incorporated by reference to the Registrant's Form 10-K for the nine month
period ended December 31, 1996.
(7) 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).
(8) Incorporated by reference to the Registration Statement on Form S-1 of
Globalstar Telecommunications Limited (File No. 33-86808).
(9) Incorporated by reference to the Registrant's Form 8-K filed on August 13,
1996.
(10) Incorporated by reference to the Registrant's Form 8-K filed on July 8,
1997.
(11) Incorporated by reference to the Registrant's Form 8-K filed on December 9,
1997.
(12) Incorporated by reference to the Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 filed by Globalstar Telecommunications Limited
(File No. 0-25456).
+ Filed herewith.
++ Management compensation plan.