<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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
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.
As of October 31, 1997, there were 200,772,961 shares of Loral Space &
Communications Ltd. common stock outstanding.
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<PAGE> 2
PART 1. FINANCIAL INFORMATION
LORAL SPACE & COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 DECEMBER 31, 1997 DECEMBER 31,
------------- 1996 ------------- 1996
------------ ------------
(NOTE 1) (NOTE 1)
<S> <C> <C> <C> <C>
Revenues.................................... $ 371,118 $ 1,002,619
Management fee from affiliate............... $ 1,713 $ 5,088
Costs and expenses.......................... 368,797 6,214 993,466 17,289
-------- -------- ---------- --------
Operating income (loss)..................... 2,321 (4,501) 9,153 (12,201)
Interest income, net........................ 7,342 10,579 23,106 28,699
-------- -------- ---------- --------
Income before income taxes, minority
interest and equity in net loss of
affiliates................................ 9,663 6,078 32,259 16,498
Income taxes................................ 4,607 1,271 17,582 2,912
-------- -------- ---------- --------
Income (loss) before minority interest and
equity in net loss of affiliates.......... 5,056 4,807 14,677 13,586
Minority interest........................... 35 (5,021)
Equity in net loss of affiliates............ (9,053) (184) (24,320) (4,709)
-------- -------- ---------- --------
Net income (loss)........................... (3,962) 4,623 (14,664) 8,877
Preferred dividends......................... (11,633) -- (14,580) --
-------- -------- ---------- --------
Net income (loss) applicable to common
stockholders.............................. $ (15,595) $ 4,623 $ (29,244) $ 8,877
======== ======== ========== ========
Shares used in per share calculations....... 246,444 236,989 240,539 229,396
======== ======== ========== ========
Earnings (loss) per share................... $ (0.06) $ 0.02 $ (0.12) $ 0.04
======== ======== ========== ========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 3
LORAL SPACE & COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
1996
SEPTEMBER 30, ------------
1997 (Note)
-------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 193,164 $1,180,752
Contracts in process........................................... 459,916
Inventories.................................................... 94,074
Other assets................................................... 186,087 29,555
---------- ----------
Total current assets................................................ 933,241 1,210,307
Property, plant and equipment, net.................................. 768,277 17,939
Cost in excess of net assets acquired, less amortization............ 436,632
Long-term receivables............................................... 104,574
Investments in affiliates........................................... 358,926 443,057
Other assets........................................................ 147,004 28,023
---------- ----------
$ 2,748,654 $1,699,326
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt.............................. $ 2,146
Accounts payable............................................... 227,998 $ 10,708
Accrued employment costs....................................... 33,856
Customer advances.............................................. 75,981
Accrued interest and preferred dividends....................... 11,005 6,000
Other current liabilities...................................... 20,053
Income taxes payable........................................... 5,452 2,311
Deferred income taxes.......................................... 64,805 112
---------- ----------
Total current liabilities........................................... 441,296 19,131
Deferred income taxes............................................... 45,108 4,611
Pension and other postretirement liabilities........................ 57,088 19,723
Long-term liabilities............................................... 38,238 2,500
Long-term debt...................................................... 229,323
Minority interest................................................... 11,136
Convertible preferred equivalent obligations ($600,000 principal
amount at December 31, 1996)...................................... 583,292
Commitments and contingencies (Note 6)
Shareholders' equity:
Series A convertible preferred stock, par value $.01........... 459 459
Series C convertible redeemable preferred stock ($747,260
principal amount at September 30, 1997)....................... 731,195
Common stock, par value $.01................................... 2,007 1,911
Paid-in capital................................................ 1,214,850 1,058,822
Treasury stock................................................. (1,680)
Retained earnings (deficit).................................... (20,366) 8,877
---------- ----------
Total shareholders' equity.......................................... 1,926,465 1,070,069
---------- ----------
$ 2,748,654 $1,699,326
========== ==========
</TABLE>
- ---------------
Note: The December 31, 1996 balance sheet has been derived from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
2
<PAGE> 4
LORAL SPACE & COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Operating activities:
Net income (loss)................................................. $ (14,664) $ 8,877
Equity in net loss of affiliates.................................. 24,320 4,709
Minority interest................................................. 5,021
Deferred taxes.................................................... 13,922 (926)
Depreciation and amortization..................................... 42,691 1,051
Contracts in process and inventories.............................. (140,325)
Customer advances................................................. (50,084)
Other changes in working capital.................................. (100,813) (16,714)
---------- ----------
Cash used in operating activities................................... (219,932) (3,003)
---------- ----------
Investing activities:
Acquisition of businesses, net of cash acquired................... (561,639)
Proceeds from the sale of property, plant and equipment........... 5,003
Investment in affiliates.......................................... (132,273) (6,425)
Other investments................................................. (26,489)
Capital expenditures, net......................................... (140,276) (540)
---------- ----------
Cash used in investing activities................................... (860,677) (1,962)
---------- ----------
Financing activities:
Borrowings under revolving credit facility, net................... 103,883
Proceeds from convertible preferred equivalent obligations........ 583,292
Proceeds from exercise of stock options........................... 3,718
Preferred dividends............................................... (14,580)
Proceeds from the Distribution.................................... 612,274
Transaction expenses related to the Distribution.................. (12,286)
Advances from Loral Corporation prior to the Distribution......... 2,425
---------- ----------
Cash provided by financing activities............................... 93,021 1,185,705
---------- ----------
(Decrease) increase in cash and cash equivalents.................... (987,588) 1,180,740
Cash and cash equivalents -- beginning of period.................... 1,180,752 12
---------- ----------
Cash and cash equivalents -- end of period.......................... $ 193,164 $1,180,752
========== ==========
Non-cash investing activities:
Issuance of Series C Preferred Stock to acquire equity interest in
SS/L........................................................... $ 147,260
==========
Issuance of Loral Common Stock to acquire equity interest in
SS/L........................................................... $ 133,240 $ 100,313
========== ==========
Issuance of Loral Common Stock to acquire equity interest in
Globalstar..................................................... $ 17,487
==========
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..................................................... $ 32,836
==========
Taxes paid........................................................ $ 2,726 $ 1,528
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) FORMATION OF LORAL SPACE & COMMUNICATIONS
Loral Space & Communications Ltd. (the "Company" or "Loral") was
formed to effectuate the distribution of Loral Corporation's ("Old Loral")
space and telecommunications businesses (the "Distribution") to
shareholders of Old Loral and holders of options to purchase Old Loral
common stock pursuant to a merger agreement (the "Merger") dated January 7,
1996 between 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. Old Loral's fiscal year end was March 31. Loral
adopted a December 31 year end and its first fiscal quarter ended on June
30, 1996. Accordingly, the comparative quarter for the quarter ended
September 30, 1997 is the quarter ended December 31, 1996 and the
comparative period for the nine months ended September 30, 1997 is the nine
months ended December 31, 1996.
2) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by Loral pursuant to the rules of the Securities and
Exchange Commission ("SEC") and, in the opinion of the Company, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of results of operations, financial position and cash flows.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules. The
Company believes that the disclosures made are adequate to keep the
information presented from being misleading. The results of operations for
the three and nine months ended September 30, 1997, are not necessarily
indicative of the results to be expected for the full year. As described in
Note 3, Loral increased its ownership of Space Systems/Loral, Inc. ("SS/L")
in the first quarter of 1997. Accordingly, Loral discontinued the equity
method of accounting and began consolidating the results of SS/L as of
January 1, 1997, with a reduction for SS/L's earnings attributable to its
other shareholders. It is suggested that these financial statements be read
in conjunction with the audited consolidated financial statements and notes
thereto of Loral and SS/L included in Loral's latest Form 10-K.
As described in Note 3, Loral acquired Skynet Satellites Services
("Skynet") on March 14, 1997. Skynet customers lease transponder capacity
on Skynet's satellites. Revenues for leased capacity is recognized as
service is provided. SS/L has a contract to construct Skynet's satellites.
Intercompany sales and profits on this contract are eliminated.
3) ACQUISITIONS AND INVESTMENT IN AFFILIATES
ACQUISITIONS
In February 1997, Loral agreed to acquire the 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 held by two of the Alliance Partners for $93.5
million in cash and $93.5 million of Loral's 6% Convertible Preferred
Equivalent Obligations due 2006 ("CPEOs"). In June 1997, the Company
acquired the remaining 24.5% of SS/L's common stock for $187 million in the
form of 8,042,922 shares of Loral common stock and 1,063,663 shares of
Loral Series C Preferred Stock. Since June 1997, Loral owned 100% of SS/L's
common stock.
On March 14, 1997, Loral acquired Skynet from AT&T for $478 million in
cash, subject to adjustment based on final net asset values. Skynet is a
leading U.S. satellite communications service provider that owns and
operates the Telstar satellite network. The Company intends to refinance a
significant portion of the Skynet purchase price with debt. The assets and
liabilities recorded in
4
<PAGE> 6
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
connection with the purchase price allocation based on preliminary
estimates of fair values were $575.2 million and $97.1 million,
respectively.
The acquisition of Skynet and the SS/L common stock have been
accounted for as purchases. The cost in excess of net assets acquired
arising from these acquisitions is being amortized over 40 years. Loral's
condensed consolidated financial statements reflect the results of
operations of SS/L from January 1, 1997 and the elimination of the minority
interest of the SS/L equity not owned by Loral during the period. Prior to
January 1, 1997, SS/L was accounted for under the equity method of
accounting. Loral's condensed consolidated financial statements reflect the
results of operations of Skynet since March 14, 1997.
Had the acquisition of Skynet and the purchase of the 49% equity
interest in SS/L held by the Alliance Partners occurred on April 1, 1996,
the unaudited pro forma sales, operating income, net income (loss)
applicable to common stockholders and related earnings per share data for
the nine months ended September 30, 1997 and December 31, 1996 would have
been: $995.7 million and $1.0 billion; $9.1 million and $50.5 million;
$(31.3) million and $3.1 million; and $(0.13) and $0.01, respectively.
These results, which are based on various assumptions, are not necessarily
indicative of what would have occurred had the acquisitions been
consummated on April 1, 1996.
INVESTMENTS IN AFFILIATES
On May 28, 1997, Globalstar Telecommunications Limited ("GTL"), a
general partner of Globalstar, L.P. ("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.
In March 1997, Loral exercised warrants to purchase 2,275,044 shares
of common stock of GTL (as adjusted for two-for-one stock split) 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 (as adjusted for two-for-one stock split). GTL used the proceeds
from the exercise of the warrants and the rights, to purchase additional
Globalstar ordinary partnership interests. In the second quarter, 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.
At September 30, 1997, Loral had an effective ownership of 20,422,212
ordinary partnership interests of the total 52,317,876 Globalstar ordinary
partnership interests outstanding (39.0%). At September 30, 1997, Loral's
investment in Globalstar includes $20.5 million of capitalized costs,
primarily interest.
Investments in affiliates is summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
SS/L........................................................... $ -- $267,418
Globalstar..................................................... 358,926 175,639
K & F.......................................................... 27,004 23,568
Deferred K & F Gain............................................ (27,004) (23,568)
-------- --------
$ 358,926 $443,057
======== ========
</TABLE>
5
<PAGE> 7
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Equity in net income (loss) of affiliates consists of (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
SS/L........................................................... $ -- $ 13,396
Globalstar..................................................... (24,320) (18,105)
-------- --------
$ (24,320) $ (4,709)
======== ========
</TABLE>
The following table represents the summary of results of operations of
Loral's affiliates for the nine months ended September 30, 1997 and
December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
--------------------- ----------------------------------
GLOBALSTAR K & F GLOBALSTAR K & F SS/L
---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Sales.................................. $ -- $224,296 $ -- $212,703 $1,017,653
Operating income (loss)................ (65,613) 48,628 (45,624) 42,160 54,011
Net income (loss)...................... (51,814) 18,370 (40,694) 5,902 31,025
Net loss applicable to ordinary
partnership interests................ (67,715) (56,593)
</TABLE>
4) CONTRACTS IN PROCESS (IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
U.S Government contracts:
Amounts billed.......................................................... $ 4,295
Unbilled contract receivables........................................... 16,531
--------
20,826
--------
Commercial contracts:
Amounts billed.......................................................... 221,514
Unbilled contract receivables........................................... 217,576
--------
439,090
--------
$ 459,916
========
</TABLE>
Unbilled amounts include recoverable costs and accrued profit on
progress completed which have 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 advance deposits for commercial contracts, equal to
varying percentages of the total contract amount.
5) SHAREHOLDERS' EQUITY
On April 30, 1997, the Company's shareholders approved the creation of
20 million shares of Series C Convertible Redeemable Preferred Stock
("Series C Preferred Stock"). On June 5, 1997, the Company's outstanding 6%
Convertible Preferred Equivalent Obligations ("CPEOs") were exchanged into
Series C Preferred Stock. The exchange resulted in the reclassification of
the outstanding amount of the CPEOs into shareholders' equity. The Series C
Preferred Stock may be redeemed at maturity for Loral common stock at the
option of the Company.
6
<PAGE> 8
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6) CONTINGENCIES
Two in-orbit satellites built by SS/L have experienced some solar
array circuit failures. One of the customers has asserted that, in light of
the failures and uncertainty as to future failure, it has not accepted the
satellite. The Company 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, due to a delay caused
by the replacement on a satellite under construction of solar arrays
similar to those that have experienced failures, another customer has
requested that SS/L structure an arrangement whereby the satellite would be
sold to another customer. Management believes that these matters will not
have a material adverse effect on the financial position or results of
operations of the Company.
7) SUBSEQUENT EVENTS
In October 1997, Loral sold its 22.5% interest in K&F for
approximately $80 million in cash.
On October 7, 1997, Loral agreed to acquire 100% of Orion Network
Systems, Inc. ("Orion") for Loral common stock. Based on Orion's fully
diluted shares of approximately 28 million shares, the value of the
transaction is approximately $490 million. The transaction is expected to
close in the first quarter of 1998 and is subject to regulatory and Orion
shareholder approvals. At the close, each share of Orion stock will be
converted into $17.50 worth of Loral common stock assuming the
"determination price", as defined, of Loral common stock is between $16.405
and $24.458. If the determination price is at or outside either end of this
range, each Orion share will be converted into a fixed number of Loral
shares obtained by dividing $17.50 by the high or low end of the range, as
appropriate. In no case will the exchange ratio be fewer than 0.71553
shares or more than 1.07329 shares of Loral stock for each share of Orion.
Orion owns and operates one satellite and has two additional satellites
under construction. The cost of the two additional satellites under
construction is fully funded.
On October 24, 1997, a joint venture between Loral and Telefonica
Autrey was selected as the winner of the auction to acquire a 75% interest
in Satelites Mexicanos ("SatMex"), with a bid of $688 million. SatMex has
three operating satellites and one satellite under construction to replace
one of the operating satellites nearing end-of-life. The joint venture will
receive concessions to use the three orbital slots for 20 years with an
automatic renewal for an additional 20 years. The auction process
stipulated that the Mexican government retain no less than a 25% non-voting
interest in SatMex and that there be Mexican ownership of 51% of the voting
stock, to be exercised by Telefonica Autrey. The economic ownership of
SatMex will be 49% for Loral, 26% for Telefonica Autrey and 25% for the
Mexican government. Loral, through its Loral Skynet subsidiary, will
provide overall guidance for the day-to-day operations and management of
SatMex. The joint venture intends to finance the purchase through
approximately $150 million in cash and non-recourse bank and high-yield
financing.
On November 11, 1997, Globalstar announced that it has rescheduled the
launch of its first four satellites to the first week of February 1998. The
eight-week postponement was adopted to allow for further testing and
rehearsals of the tracking, telemetry and control (TT&C) ground equipment
that will monitor the launch and deployment of the Globalstar satellites.
The postponement was adopted in order to assure an adequate period of time
to complete testing of Globalstar's TT&C function prior to the initial
launch and was not related to any segment performance issue. All other
elements of the project including system design, satellite and CDMA
technology, gateway design and handset production remain on schedule and
meet or exceed critical performance criteria.
Globalstar now expects to begin commercial service no later than in
the first quarter of 1999 following the launch of 44 satellites during
1998. The remaining 12 satellites will be launched in early 1999 as
scheduled.
7
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LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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 replaces SS/L's existing credit facility. The
facility is secured by the stock of Loral SpaceCom Corporation and SS/L and
contains various convents including an interest coverage ratio and debt to
capitalization ratios.
8
<PAGE> 10
LORAL SPACE & COMMUNICATIONS LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
from time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but are not limited to, various filings made by
the Company with the Securities and Exchange Commission, press releases or oral
statements made by or with the approval of an authorized executive officer of
the Company. Actual results could differ materially from those projected or
suggested in any forward-looking statements as a result of a wide variety of
factors and conditions. See the section of Loral's annual report on Form 10-K
for the fiscal period ended December 31, 1996, entitled "Certain Factors That
May Affect Future Results." In addition, with respect to Loral's interest in
Globalstar and GTL, see GTL's annual report on Form 10-K for the fiscal year
ended December 31, 1996 entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors That May Affect
Future Results" and the section of Globalstar's prospectus dated July 16, 1997,
entitled "Risk Factors."
RESULTS OF OPERATIONS
In February 1997, Loral agreed to acquire the 49% of the common stock of
Space Systems/Loral, Inc. ("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 held by two of the Alliance
Partners for $93.5 million in cash and $93.5 million of Loral's 6% Convertible
Preferred Equivalent Obligations due 2006 ("CPEOs"). In June 1997, Loral
acquired the remaining 24.5% of SS/L's common stock for $187 million in the form
of 8,042,922 shares of Loral common stock and 1,063,663 shares of Loral Series C
Preferred Stock. Since June 1997, Loral owned 100% of SS/L's common stock.
On March 14, 1997, Loral acquired Skynet Satellite Services ("Skynet") from
AT&T for $478 million in cash, subject to adjustment based on final net asset
values. Skynet is a leading U.S. satellite communications service provider that
owns and operates the Telstar satellite network.
In the second quarter of 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. At September 30, 1997, Loral had a
39.0% interest in Globalstar's ordinary partnership interests.
The acquisition of Skynet and the SS/L common stock have been accounted for
as purchases. Loral's condensed consolidated financial statements for the three
and nine months ended September 30, 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 periods 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.
Net income (loss) applicable to common stockholders for the quarter ended
September 30, 1997 was $(15.6) million compared to $4.6 million for the quarter
ended December 31, 1996. The change is primarily due to development costs
related to new satellite-based services of $8.7 million, an increase in
allocated Globalstar losses of $2.3 million, a decrease in interest income, net
of $3.2 million and preferred dividends of $11.6 million, offset by the
increased share of SS/L's profits.
In order to provide additional understanding of the Company, the results of
operations discusses the pro forma results of operations for the three and nine
months ended September 30, 1997 compared with the pro forma results of
operations for the three and nine months ended December 31, 1996 assuming Skynet
and the 49% equity interest in SS/L were acquired on April 1, 1996. (See Notes
1, 2 and 3) Pro forma sales for the quarter ended September 30, 1997 were $371.1
million compared to $366.3 million for the quarter ended December 31, 1996.
Sales for SS/L, before intercompany eliminations and Skynet did not vary
significantly from period to period. Intercompany eliminations decreased $4.8
million for the quarter ended September 30,
9
<PAGE> 11
LORAL SPACE & COMMUNICATIONS LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
1997 compared to the quarter ended December 31, 1996. Skynet's sales reflect the
loss of the Telstar 401 satellite in January 1997 offset by revenue from Telstar
5 which began commercial service in July 1997.
Pro forma operating income was $2.4 million for the quarter ended September
30, 1997 compared to $8.8 million for the quarter ended December 31, 1996. This
decrease is primarily attributed to the development costs related to new
satellite-based services of $8.7 million and the impact of the loss of Telstar
401 offset by revenue from Telstar 5.
Pro forma interest income (expense) for the quarter ended September 30,
1997 was $7.3 million compared to $(1.4) million for the quarter ended December
31, 1996, due to the difference in the assumed purchase price in each period
related to the value of the Telstar 401 satellite, and increased amounts of
capitalized interest in the quarter ended September 30, 1997 due to the higher
level of Skynet satellites under construction.
The Company is organized in Bermuda and, accordingly, foreign source income
and expenses not effectively connected with a U.S. trade or business are not
subject to, or deductible for, U.S. Federal taxation. The Company's provision
for income taxes will vary depending on the proportion of such foreign source
income and expenses. The pro forma tax provision for the quarter ended September
30, 1997 was $4.6 million as compared to $4.4 million for the quarter ended
December 31, 1996.
The pro forma net income (loss) applicable to common stockholders for the
quarter ended September 30, 1997 was $(15.6) million compared to $(4.1) million
for the quarter ended December 31, 1996. Pro forma earnings per share are
$(0.06) for the quarter ended September 30, 1997 and $(0.02) for the quarter
ended December 31, 1996, based on 246.4 million and 245.0 million weighted
average common shares outstanding for the three months ended September 30, 1997
and December 31, 1996, respectively.
Pro forma sales for the nine months ended September 30, 1997 were $995.7
million compared to $1.0 billion for the nine months ended December 31, 1996.
Sales for SS/L, before intercompany eliminations, increased $82.4 million
reflecting increased satellite sales on the Telstar, Tempo, M2A, ChinaSat and
Globalstar programs, offset by reductions due to the completion of certain
programs. Intercompany sales increased $70.9 million. Skynet's sales decreased
$21.4 million reflecting the loss of the Telstar 401 satellite in January 1997
offset by revenue from Telstar 5 which began commercial service in July 1997.
Pro forma operating income was $9.0 million for the nine months ended
September 30, 1997 compared to $50.5 million for the nine months ended December
31, 1996. This decrease is primarily attributed to the impact of the loss of
Telstar 401 and $20.2 million of development costs related to new
satellite-based services.
Pro forma interest income (expense) for the nine months ended September 30,
1997 was $14.1 million compared to $(7.3) million for the nine months ended
December 31, 1996, due to the difference in the assumed purchase price in each
period related to the value of the Telstar 401 satellite, and increased amounts
of capitalized interest for the nine months ended September 30, 1997 due to the
higher level of Skynet satellites under construction.
The pro forma tax provision for the nine months ended September 30, 1997
decreased to $15.6 million as compared to $20.7 million for the nine months
ended December 31, 1996 primarily due to the extent of the Company's foreign
source income and expenses.
The pro forma net income (loss) applicable to common stockholders for the
nine months ended September 30, 1997 was $(31.3) million compared to $3.1
million for the nine months ended December 31, 1996. Pro forma earnings per
share are $(0.13) for the nine months ended September 30, 1997 and $0.01 for the
nine months ended December 31, 1996, based on 245.5 million and 241.0 million
weighted average common shares outstanding for the nine months ended September
30, 1997 and December 31, 1996, respectively.
10
<PAGE> 12
LORAL SPACE & COMMUNICATIONS LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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 nine months ended September 30, 1997 was $67.7 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 $2.9 million and an increase in development costs of
$17.1 million offset by an increase in interest income of $8.9 million.
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.
Interest income increased as a result of higher average cash balances
outstanding.
Development costs increased primarily as a result of increased activity in
the development of Globalstar's user terminals.
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 communications
service opportunities. In order to pursue such opportunities, Loral may seek
funds from strategic partners and other investors or through incurrence of debt
or the issuance of additional equity.
At September 30, 1997, Loral had $193.2 million of cash and cash
equivalents. Loral intends to utilize its existing capital base and access to
the capital markets to construct additional Skynet satellites, make additional
investments in Globalstar and Globalstar service provider opportunities and
invest in additional satellite communications service opportunities. In
connection with the Merger between Old Loral and Lockheed Martin, Lockheed
Martin assumed approximately $206 million of the guarantee under the Globalstar
Credit Agreement. The balance of $44 million of the guarantee was assumed by
various Globalstar partners, including $11.7 million by SS/L. Loral has agreed
to indemnify Lockheed Martin for its liability, if any, in excess of $150
million under its guarantee of the Globalstar Credit Agreement. Globalstar is
currently financed without recourse to Loral other than the indemnification
described above.
Skynet currently has two high-powered satellites operating in orbit. SS/L
is constructing two satellites and has commenced the process of designing and
obtaining long-lead components and subassemblies for two additional satellites
for Skynet. Although short-term borrowings may be required depending on the
timing of cash receipts and expenditures, Loral believes that available cash and
internal cash flows should be adequate to fund substantially all the capital
expenditures for these satellites. Loral intends to expand Skynet's business to
become a worldwide satellite service provider through the construction of
additional satellites. Loral anticipates that a portion of the funds required
for construction of these additional satellites will be provided through
additional borrowings.
On November 11, 1997, Globalstar announced that it has rescheduled the
launch of its first four satellites to the first week of February 1998. The
eight-week postponement was adopted to allow for further testing and rehearsals
of the tracking, telemetry and control (TT&C) ground equipment that will monitor
the launch and deployment of the Globalstar satellites. The postponement was
adopted in order to assure an adequate period of time to complete testing of
Globalstar's TT&C function prior to the initial launch and was not related to
any segment performance issue. All other elements of the project including
system design, satellite and CDMA
11
<PAGE> 13
LORAL SPACE & COMMUNICATIONS LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
technology, gateway design and handset production remain on schedule and meet or
exceed critical performance criteria.
Globalstar now expects to begin commercial service no later than in the
first quarter of 1999 following the launch of 44 satellites during 1998. The
remaining 12 satellites will be launched in early 1999 as scheduled.
Globalstar's current budgeted expenditures for the design, construction and
deployment of the Globalstar System, including working capital, cash interest on
anticipated borrowings and operating expenses, after giving effect to the
rescheduled launch is approximately $2.7 billion. As of October 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
space 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 38 initial
gateways ordered by Globalstar service providers. Globalstar expects to recover
its investment in this gateway financing program from the resale of the gateways
to service providers.
SS/L is the prime contractor for the design and construction of
Globalstar's satellites. In connection therewith, SS/L and its subcontractors
have committed $310 million of vendor financing to Globalstar, of which $121
million of such vendor financing is effectively borne by the subcontractors.
Subsequent Events. In October 1997, Loral received approximately $80
million in cash from the sale of its 22.5% interest in K&F.
On October 7, 1997, Loral agreed to acquire 100% of Orion Network Systems,
Inc. ("Orion") for Loral common stock. Based on Orion's fully diluted shares of
approximately 28 million shares, the value of the transaction is approximately
$490 million. The transaction is expected to close in the first quarter of 1998
and is subject to regulatory and Orion shareholder approvals. Orion owns and
operates one satellite and has two additional satellites under construction. The
cost of the two additional satellites under construction is fully funded. At
September 30, 1997, Orion had unrestricted cash and cash equivalents of $82.8
million, restricted cash to be used for the satellites under construction and
interest payments of $359.8 million and long-term debt of $790.6 million.
Orion's existing outstanding debt will be non-recourse to Loral.
On October 24, 1997, a joint venture between Loral and Telefonica Autrey
was selected as the winner of the auction to acquire a 75% interest in Satelites
Mexicanos ("SatMex") with a bid of $688 million. The joint venture intends to
finance the purchase through approximately $150 million in cash and non-recourse
bank and high-yield financing.
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. 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 replaces SS/L's existing credit facility. The facility is secured
by the stock of Loral SpaceCom Corporation and SS/L and contains various
convents including an interest coverage ratio and debt to capitalization ratios.
Cash Used and Provided. Cash used in operating activities for the nine
months ended September 30, 1997 was $219.9 million, primarily due to an increase
in satellite contracts in process and inventories of $140.3 million, a decrease
in customer advances of $50.1 million due to the progress on commercial
satellite contracts and an increase in launch vehicles deposits of $89.0
million, offset by funds generated by earnings before depreciation, taxes,
minority interest and equity in net loss of affiliates of $75.0 million. Cash
used in operating activities for the nine months ended December 31, 1996, was
$3.0 million, primarily due to increases
12
<PAGE> 14
LORAL SPACE & COMMUNICATIONS LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- (CONTINUED)
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 nine months ended September 30,
1997 was $860.7 million, primarily due to the purchase of Skynet and the SS/L
equity interest (see Note 3); the purchase of additional equity interests in
Globalstar (see Note 3); capital expenditures of $140.3 million primarily for
the construction of the Telstar satellites by SS/L for Skynet and other
investments of $26.5 million. 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 nine months ended
September 30, 1997 and December 31, 1996 was $93.0 million and $1.2 billion,
respectively, primarily as a result of borrowings by SS/L under existing credit
facilities in 1997 and the net proceeds from the Distribution and the net
proceeds from the issuance of the Convertible Preferred Equivalent Obligations
in 1996.
FINANCIAL ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"),
which is required to be adopted for fiscal periods ending after December 15,
1997. SFAS 128 establishes the accounting standards for computing and presenting
earnings per share. The Company believes that the adoption of SFAS 128 will not
have a material effect on the reported earnings per share of the Company.
13
<PAGE> 15
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
<TABLE>
<S> <C> <C>
Exhibit 11.1 -- Computation of Earnings per Share for the Three Months
Ended September 30, 1997 and December 31, 1996.
Exhibit 11.2 -- Computation of Earnings per Share for the Nine Months
Ended September 30, 1997 and December 31, 1996.
Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 -- Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LORAL SPACE & COMMUNICATIONS LTD.
--------------------------------------
Registrant
Date: November 14, 1997
MICHAEL P. DEBLASIO
--------------------------------------
Michael P. DeBlasio
Senior Vice President -- Finance
(Principal Financial Officer)
and
Registrant's Authorized Officer
15
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
------------- ------------------------------------------------------------------------
<S> <C> <C>
Exhibit 11.1 -- Computation of Earnings per Share for the Three Months Ended September
30, 1997 and December 31, 1996.
Exhibit 11.2 -- Computation of Earnings per Share for the Nine Months Ended September
30, 1997 and December 31, 1996.
Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 -- Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.1
LORAL SPACE & COMMUNICATIONS LTD.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Primary:
Weighted average common shares outstanding during the period..... 200,547 191,092
Assumed conversion of Series A Convertible Preferred Stock....... 45,897 45,897
Dilutive effect of stock options................................. * *
-------- --------
246,444 236,989
======== ========
Net income (loss) applicable to common stockholders.............. $ (15,595) $ 4,623
======== ========
Primary earnings (loss) per share.................................. $ (0.06) $ 0.02
======== ========
Fully Diluted:
Weighted shares -- primary....................................... 246,444 236,989
Incremental increase to dilutive effect of stock options......... ** **
Weighted shares issuable upon conversion of Convertible Preferred
Equivalent Obligations or Series C Redeemable Preferred
Stock***...................................................... ** **
-------- --------
246,444 236,989
======== ========
Earnings:
Net income (loss) applicable to common stockholders.............. $ (15,595) $ 4,623
Interest expense on Convertible Preferred Equivalent Obligations,
net of tax or dividends on Series C Redeemable Preferred
Stock***...................................................... ** **
-------- --------
$ (15,595) $ 4,623
======== ========
Fully diluted earnings (loss) per share............................ $ (0.06) $ 0.02
======== ========
</TABLE>
- ---------------
* Dilutive effect of stock options is less than 3%.
** Effect is antidilutive.
*** The Convertible Preferred Equivalent Obligations were exchanged for Series C
Redeemable referred Stock on June 5, 1997.
<PAGE> 1
EXHIBIT 11.2
LORAL SPACE & COMMUNICATIONS LTD.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Primary:
Weighted average common shares outstanding during the period..... 194,642 186,799
Assumed conversion of Series A Convertible Preferred Stock....... 45,897 42,198
Dilutive effect of stock options................................. * 399
-------- --------
240,539 229,396
======== ========
Net income (loss) applicable to common stockholders.............. $ (29,244) $ 8,877
======== ========
Primary earnings (loss) per share.................................. $ (0.12) $ 0.04
======== ========
Fully Diluted:
Weighted shares -- primary....................................... 240,539 229,396
Incremental increase to dilutive effect of stock options......... ** **
Weighted shares issuable upon conversion of Convertible Preferred
Equivalent Obligations or Series C Redeemable Preferred
Stock***...................................................... ** **
-------- --------
240,539 229,396
======== ========
Earnings:
Net income (loss) applicable to common stockholders.............. $ (29,244) $ 8,877
Interest expense on Convertible Preferred Equivalent Obligations,
net of tax or dividends on Series C Redeemable Preferred
Stock***...................................................... ** **
-------- --------
$ (29,244) $ 8,877
======== ========
Fully diluted earnings (loss) per share............................ $ (0.12) $ 0.04
======== ========
</TABLE>
- ---------------
* Dilutive effect of stock options is less than 3%
** Effect is antidilutive.
*** The Convertible Preferred Equivalent Obligations were exchanged for Series C
Redeemable Preferred Stock on June 5, 1997.
<PAGE> 1
EXHIBIT 12
LORAL SPACE & COMMUNICATIONS LTD
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(In thousands, Except Ratios)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
------------------
<S> <C>
Earnings:
Income before income taxes, minority interest and equity in net loss of
affiliates............................................................. $ 32,259
Plus interest expense..................................................... 29,918
Less capitalized interest................................................. 13,777
-------
Earnings available to cover fixed charges................................... $ 48,400
=======
Fixed charges............................................................... $(61,962)
=======
Deficiency of earnings to cover fixed charges............................... $(13,562)
=======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LORAL SPACE & COMMUNICATIONS LTD. FOR THE QUARTER ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 193,164
<SECURITIES> 0
<RECEIVABLES> 459,916
<ALLOWANCES> 0
<INVENTORY> 94,074
<CURRENT-ASSETS> 933,241
<PP&E> 929,736
<DEPRECIATION> 161,459
<TOTAL-ASSETS> 2,748,654
<CURRENT-LIABILITIES> 441,296
<BONDS> 0
0
731,744
<COMMON> 2,007
<OTHER-SE> 1,192,840
<TOTAL-LIABILITY-AND-EQUITY> 2,748,654
<SALES> 1,002,619
<TOTAL-REVENUES> 1,025,725
<CGS> 993,466
<TOTAL-COSTS> 993,466
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 32,259
<INCOME-TAX> 17,582
<INCOME-CONTINUING> (14,664)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,244)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
