<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT ON FORM 8-K
DATED MARCH 14, 1997
FILED PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-14180
------------------------
LORAL SPACE & COMMUNICATIONS LTD.
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
================================================================================
<PAGE> 2
AMENDMENT NO. 1
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K dated
March 14, 1997 as set forth below:
ADD ITEM 7 -- FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
<TABLE>
<CAPTION>
PAGE(S)
--------
<S> <C>
A. FINANCIAL STATEMENTS
Audited financial statements of Skynet Satellite Services as of December 31, 1996
and 1995 and for the years ended December 31, 1996, 1995 and 1994................ 2-16
B. PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Consolidated Statement of Income of Loral Space &
Communications Ltd. and Skynet Satellite Services for the nine months ended
December 31, 1996................................................................ 17-18
C. EXHIBITS
23 Consent of Coopers & Lybrand L.L.P.............................................. 19
</TABLE>
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 hereunto duly authorized.
LORAL SPACE & COMMUNICATIONS LTD.
--------------------------------------
Registrant
By: MICHAEL P. DEBLASIO
------------------------------------
Michael P. DeBlasio
Senior Vice President -- Finance
Date: May 28, 1997
1
<PAGE> 3
SKYNET SATELLITE SERVICES
(A FULLY INTEGRATED BUSINESS UNIT OF AT&T CORP.)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
AND FOR THE YEARS ENDED DECEMBER 31,
1996, 1995 AND 1994
2
<PAGE> 4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Management of Skynet Satellite Services:
We have audited the accompanying statements of net assets of Skynet
Satellite Services (the "Company"), a fully integrated business unit of AT&T
Corp., as of December 31, 1996 and 1995 and the related statements of operations
and changes in net assets and cash flows for the years ended December 31, 1996,
1995 and 1994. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Skynet Satellite Services as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years ended December 31, 1996, 1995 and 1994, in conformity with
generally accepted accounting principles.
In January 1997, the Telstar 401 Satellite abruptly stopped functioning and
was subsequently declared permanently out of service. The pro forma effect of
this event, had it occurred on December 31, 1996, is provided in Note 12.
The Company is a fully integrated business unit of AT&T Corp.;
consequently, as indicated in Note 2, these financial statements have been
derived from the consolidated financial statements and accounting records of
AT&T Corp., and reflect significant assumptions and allocations. Moreover, as
indicated in Note 1, the Company relies on AT&T Corp. and its other business
units for administrative, management and other services and provides transponder
services to affiliates. The financial position, results of operations and cash
flows of the Company could differ from those that would have resulted had the
company operated autonomously or as an entity independent of AT&T Corp.
Coopers & Lybrand L.L.P.
New York, New York
April 15, 1997
3
<PAGE> 5
SKYNET SATELLITE SERVICES
(A FULLY INTEGRATED BUSINESS UNIT OF AT&T CORP.)
STATEMENTS OF NET ASSETS
AS OF DECEMBER 31, 1996 AND 1995
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable (net of allowances of $7,702 and $8,770,
respectively)............................................... $ 9,986 $ 6,172
Prepaid expenses............................................... 4,036 1,813
-------- --------
Total current assets................................... 14,022 7,985
Property, plant and equipment, net............................. 487,000 425,015
Deferred tax asset............................................. 19,985 21,225
-------- --------
Total assets........................................... 521,007 454,225
-------- --------
LIABILITIES AND DEFERRED CREDITS
Current liabilities:
Accrued payables............................................... 5,000 5,000
Deferred revenue and profit on transponder sales -- current
portion..................................................... 5,850 5,647
-------- --------
Total current liabilities.............................. 10,850 10,647
Deferred revenue............................................... 10,917 11,619
Deferred profit on transponder sales........................... 34,295 37,409
Deferred tax liability......................................... 66,277 42,108
Other liabilities.............................................. 4,123 4,479
-------- --------
Total liabilities and deferred credits................. 126,462 106,262
-------- --------
Commitments and contingencies
Net assets....................................................... $394,545 $347,963
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
SKYNET SATELLITE SERVICES
(A FULLY INTEGRATED BUSINESS UNIT OF AT&T CORP.)
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Transponder services -- external.................. $ 95,564 $ 59,484 $ 40,690
Transponder services -- affiliates................ 14,950 10,211 12,822
Transponder sales, net............................ 12,134 16,032 116,243
Other............................................. 1,684 1,164 1,067
-------- -------- --------
124,332 86,891 170,822
-------- -------- --------
Costs and expenses:
Cost of transponder services...................... 36,987 40,790 41,779
Cost of transponder sales......................... 7,597 12,343 112,924
Operating expenses................................ 15,328 20,628 20,806
-------- -------- --------
59,912 73,761 175,509
-------- -------- --------
Operating income (loss)........................ 64,420 13,130 (4,687)
Interest expense.................................... (15,073) (11,135) (4,395)
Loss on destruction of satellite.................... (44,866)
Other (expense)/income.............................. (3,031) 2,000
-------- -------- --------
Income (loss) before taxes..................... 49,347 (1,036) (51,948)
Provision (credit) for income taxes................. 19,359 (406) (20,379)
-------- -------- --------
Net income (loss).............................. 29,988 (630) (31,569)
Advances from (payments to) AT&T Corp., net......... 16,594 100,682 (139,638)
Transfer of property, plant and equipment to AT&T
Corp.............................................. (16,809) (7,003)
Net assets, beginning of year.................. 347,963 264,720 442,930
-------- -------- --------
Net assets, end of year........................ $394,545 $347,963 $264,720
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
SKYNET SATELLITE SERVICES
(A FULLY INTEGRATED BUSINESS UNIT OF AT&T CORP.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net income (loss)................................. $ 29,988 $ (630) $ (31,569)
Adjustments to reconcile net income to net cash
provided by operating activities:
Cost of transponder sales...................... 7,597 12,343 112,924
Depreciation and amortization of property,
plant and equipment.......................... 24,880 13,008 18,760
Provision for uncollectibles................... 653 1,045 2,645
Loss on destruction of satellite and other
settlements.................................. -- 3,228 44,866
Changes in operating assets and liabilities:
Increase in accounts receivable.............. (4,467) (2,807) (3,055)
(Increase)/decrease in prepaid expenses...... (2,223) 2,527 (1,853)
Decrease/(increase) in deferred tax asset.... 1,240 (1,554) (17,166)
Increase in deferred tax liability........... 24,169 23,357 485
Decrease in deferred revenue, customer
advances and deferred profit on
transponder sales......................... (3,613) (1,191) (73,701)
(Decrease)/increase in other long term
liabilities............................... (356) (316) 4,795
-------- --------- ---------
Net cash provided by operating activities......... 77,868 49,010 57,131
-------- --------- ---------
Investing activities:
Additions to property, plant and equipment........ (94,462) (149,692) (104,693)
Proceeds from insurance settlement................ -- -- 187,200
-------- --------- ---------
Net cash (used in)/provided by investing
activities..................................... (94,462) (149,692) 82,507
-------- --------- ---------
Financing activities:
Advances from/(payments to) AT&T Corp., net....... 16,594 100,682 (139,638)
-------- --------- ---------
Net cash provided by (used in) financing
activities..................................... 16,594 100,682 (139,638)
-------- --------- ---------
Net increase (decrease) in cash.............. $ -- $ -- $ --
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 8
SKYNET SATELLITE SERVICES
(A FULLY INTEGRATED BUSINESS UNIT OF AT&T CORP.)
NOTES TO THE FINANCIAL STATEMENTS
(dollars in thousands)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS:
Skynet Satellite Services ("Skynet" or the "Company") is a fully
integrated business unit of AT&T Corp. ("AT&T").
The Company operates domestic telecommunications satellite systems in
the United States. The Company currently provides video, voice and data
telecommunications services to broadcasting and communication businesses,
as well as services to long-distance telephone carriers. The Company
operates in the continental U.S., Alaska, Hawaii, Puerto Rico, and the U.S.
Virgin Islands, with some incidental service to Canada and Mexico using its
fleet of geostationary satellites.
The Company holds licenses from the Federal Communications Commission
("FCC") to operate the in-orbit satellites at the following orbital
locations:
<TABLE>
<CAPTION>
SATELLITE ORBITAL LOCATION LAUNCH DATE
------------------------------------------- ---------------- --------------
<S> <C> <C>
Telstar 302................................ 85 degrees W.L. August 1984
Telstar 303................................ 120 degrees W.L. June 1985
Telstar 401................................ 97 degrees W.L. December 1993
Telstar 402R............................... 89 degrees W.L. September 1995
</TABLE>
Each license is granted for a ten year term beginning the date a
satellite is placed in service. The FCC may grant extensions of these
licenses upon evidence by the Company that a satellite's service life will
continue beyond the ten year term. The Company estimates that Telstar 402R
will be operational for 14 years and had estimated that Telstar 401 would
be operational for 12 years. Subsequent to December 31, 1996, Telstar 401
was declared permanently out of service and Telstar 303 was moved into
orbital location 97 degrees W.L. in order to provide back-up capacity for
Telstar 401 (See Note 12). Telstar 302 is currently in inclined orbit.
The Company has received authorization from the FCC to construct,
launch, and operate two additional satellites, Telstar 5 and Telstar 6.
They will be hybrid satellites that operate in both the C and Ku frequency
bands. Telstar 5, in part, was authorized as a replacement for Telstar 303.
Commercial operation of Telstar 5 is expected to begin on July 1, 1997.
The Company has received FCC authorization to launch the Telstar 5
satellite into geostationary orbit 97 degrees W.L. In addition, the Company
has the right to use orbital locations of 93 degrees W.L. and 69 degrees
W.L. for future satellites.
As an integrated business unit of AT&T, the Company relies on AT&T and
other AT&T affiliates to provide administration management and other
services including, but not limited to, management information systems,
telecommunications, accounting and financial reporting, treasury, cash
management, human resources, employee benefit administration, payroll,
legal, tax planning and compliance and other support. The Company receives
cost allocations from AT&T and AT&T affiliates for these services (see Note
2). However, these costs may not be indicative of costs that would have
been incurred had the Company operated autonomously or as an entity
independent of AT&T.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation -- As an integrated business unit of AT&T , the
Company does not prepare separate financial statements in accordance with
Generally Accepted Accounting Principles ("GAAP") in the normal course of
operations. Accordingly, the accompanying financial statements have been
derived by extracting the assets, liabilities and revenues and expenses of
the Company from the
7
<PAGE> 9
SKYNET SATELLITE SERVICES
(A FULLY INTEGRATED BUSINESS UNIT OF AT&T CORP.)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in thousands)
consolidated assets, liabilities and revenues and expenses and the
accounting records of AT&T. The accompanying financial statements reflect
assets, liabilities, revenue and expenses directly attributable to the
Company as well as allocations deemed reasonable by management to present
the financial position, results of operations and cash flows of the Company
on a stand alone basis. Although management is unable to estimate the
actual costs that would have been incurred if the services performed by
AT&T and its affiliates had been purchased from independent third parties,
the allocation methodologies have been described within the respective
footnotes, where appropriate, and management considers the allocations to
be reasonable. However, the financial position, results of operations and
cash flows of the Company may differ from those that may have been achieved
had the Company operated autonomously or as an entity independent of AT&T.
Transponder Service Revenues -- The Company provides satellite
capacity under agreements that generally provide for the use of satellites
and, in certain cases, earth stations for periods ranging from one year to
the life of the satellite. Payments under these agreements are usually due
on a monthly basis. Some of these agreements have certain obligations,
including providing spare or substitute capacity, if available, in the
event of satellite service failure. If no spare or substitute capacity is
available, the agreement may be terminated. Revenues under transponder
service agreements are recognized as services are performed.
Transponder Sales -- The Company has entered into several transponder
sale contracts under which the Company transfers title to specific
transponders to the customer upon the customer's acceptance of
transponders. Transponders are accepted by the customer upon placement of
the satellite in the assigned geostationary orbits and the subsequent
satisfaction of certain technical specifications as set forth in the sales
contracts. Under the terms of the contracts, the Company continues to
operate the satellites within 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, the Company is either
required or has the option to repair or 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.
Proceeds received prior to sales recognition are recorded as customer
advances. Revenues, along with the related cost of sales, are recognized at
the time of customer acceptance. Profits related to the sale are deferred
and amortized on a straight line basis over the term of the warranty
period. Transponder sales, net, consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Transponder sales............................. $ 8,992 $ 19,234 $154,734
Profit deferred on transponder sales.......... (1,395) (6,891) (41,810)
Profit recognized from current year and prior
year transponder sales...................... 4,537 3,689 3,319
------- ------- --------
$ 12,134 $ 16,032 $116,243
======= ======= ========
</TABLE>
Telemetry, Tracking and Control Services ("TT&C") Revenues -- TT&C
revenues, which are included in other revenue are recognized when earned.
Prepaid TT&C revenues are deferred and recognized ratably over the life of
the contract.
8
<PAGE> 10
SKYNET SATELLITE SERVICES
(A FULLY INTEGRATED BUSINESS UNIT OF AT&T CORP.)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in thousands)
Property, Plant and Equipment -- Satellites and other property and
equipment are stated at historical cost. The cost of the satellite systems
include all construction costs, launch costs, direct development costs,
capitalized interest, launch insurance, and accrued incentive payments.
Substantially all other property and equipment consists of the Company's
satellite control facilities. Upon sale or other dispositions of property,
plant and equipment, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is recorded in income,
except if the sale relates to transponder sales. Gains or losses on
transponder sales are deferred, as noted above.
Depreciation has been calculated using the straight line method over
the estimated useful lives of the respective assets as follows:
<TABLE>
<S> <C>
Telstar 302 and 303.................................................. 10
Telstar 401 and 402R................................................. 10-14
Satellite control buildings and equipment............................ 7-25
</TABLE>
The estimated useful life of a satellite system was determined by an
engineering analysis performed at the in-service date. The original
estimated useful lives are periodically reviewed using current TT&C data.
Subsequent to December 31, 1996, Telstar 401 was declared permanently out
of service (See Note 12). The telecommunication industry is subject to
rapid technological change which may require the Company to revise the
estimated useful lives of its satellites and communications equipment or to
adjust their carrying amounts.
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash flows is
less than the carrying amount of the asset, a loss is recognized for the
difference between the estimated fair value and carrying value of the
assets. No such losses have been recognized as of December 31, 1996.
Accounts Receivable and Bad Debts -- Accounts receivable are directly
related to the Company and include amounts earned under transponder service
agreements and occasional other services which are billable as performed.
Bad debt expenses have been determined based on the Company's specific
experience.
Accrued Payables -- AT&T does not maintain separate identifiable
records for accounts payable and accrued expenses, including payroll, for
the Company. Accordingly, these financial statements do not specifically
reflect such liabilities, if any, however, a reserve for certain
liabilities has been reflected in the Statements of Net Assets.
Cost of Services -- Cost of services represents costs specifically
identified to the Company's operations and consists principally of
depreciation, incentive payments, and any necessary payments to other
satellite operators that provide replacement service to the Company's
customers.
Operating Expenses -- Operating expenses represent an allocation of
AT&T's operating expenses and include payroll and other expenses relating
to marketing and sales, research and development, and operations as well as
common support costs such as treasury, cash management, accounting,
financial management, legal, public relations, information systems, human
resources, telecommunications, employee benefits, taxes and support
services. Also included are charges for office space which the Company
shares with AT&T. These costs have been allocated to the Company based on
the ratio that the average number of employees of the Company bears to the
average total employees of a larger business unit within which Skynet
resides. In the opinion of management, the costs allocated to the Company
are reasonable.
9
<PAGE> 11
SKYNET SATELLITE SERVICES
(A FULLY INTEGRATED BUSINESS UNIT OF AT&T CORP.)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in thousands)
Incentive Payments -- The Company's satellite construction contracts
require the Company to make incentive payments, generally on a quarterly
basis, throughout the life of the satellite. For certain contracts, the
incentive payments are contingent upon continued successful operation of
the satellite, in which case the payments are recorded as cost of services
as contingencies are resolved. Payments of $979 and $1,496 are included in
cost of services for the years ended December 31, 1995 and 1994,
respectively. For other contracts, incentive payments are required to be
made irrespective of successful operation of the satellite, in which case
the payments are discounted and capitalized as a cost of the satellite. At
December 31, 1996 and 1995, the discounted value of accrued incentive
payments amounted to $4,123 and $4,479, respectively, and are included in
other liabilities.
Income Taxes -- The Company's results are included in Federal and
State tax returns of AT&T and its affiliates. The Company has provided for
income taxes utilizing a statutory tax rate as if it were a separate
taxpayer utilizing the federal and state statutory tax rates. Tax losses
generated by the Company are treated as a current tax benefit as they are
utilized by AT&T.
Cash Flows -- The Company does not maintain separate cash accounts and
all cash receipts and disbursements are made through AT&T's cash management
system. For purposes of the statement of cash flows, all transactions
between the Company and AT&T have been accounted for as having been settled
in cash at the time the transaction was recorded by the Company.
Use of Estimates -- 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 at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. The most significant assumptions and estimates relate to the
allocation of operating expenses, income taxes, interest, allowance for bad
debts, and the estimated useful life of satellites. Actual results could
differ from those estimates.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Satellites in service.............................. $ 426,629 $ 435,113
Earth stations..................................... 47,443 47,288
Land, electronic and other equipment............... 2,136 2,136
--------- ---------
476,208 484,537
Less, accumulated depreciation..................... (168,926) (145,441)
--------- ---------
307,282 339,096
Satellites under construction...................... 179,718 85,919
--------- ---------
Property, plant and equipment, net................. $ 487,000 $ 425,015
========= =========
</TABLE>
Satellites in service consist of the Telstar 401 and 402R satellites
and the fully depreciated Telstar 302 and 303 satellites that are operating
in inclined orbit. Subsequent to December 31, 1996, the Telstar 401
satellite was declared permanently out of service (See Note 12).
Earth stations consist of primary satellite control facilities in
Hawley, PA and Three Peaks, CA.
Depreciation expense, which is included in the cost of services,
amounted to $24,880, $13,008 and $18,760 for the years ended December 31,
1996, 1995 and 1994, respectively.
10
<PAGE> 12
SKYNET SATELLITE SERVICES
(A FULLY INTEGRATED BUSINESS UNIT OF AT&T CORP.)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in thousands)
Interest is capitalized on expenditures for satellites under
construction, exclusive of amounts for which customer advances have been
received. Interest capitalized amounted to approximately $7,600, $9,500 and
$21,500 for the years ended December 31, 1996, 1995 and 1994, respectively.
Telstar 402, which was successfully launched in September 1994, was
officially considered lost after the satellite malfunctioned on deployment.
A replacement satellite, Telstar 402R, was successfully launched and placed
in service in 1995. The Company accounted for the destruction by removing
the costs from the accounts and recording a loss of $44,866, net of
$187,200 of insurance proceeds. Further, the loss of Telstar 402 required
the Company to purchase transponder services from other satellite operators
in order to provide contracted service to its customers. Replacement
transponder service costs of approximately $17,600 and $6,000 were incurred
for the years ended December 31, 1995 and 1994, respectively.
In connection with the insurance settlement on the loss of Telstar
402, certain underwriters have notified the Company that they might assert,
but have not yet asserted, claims against the Company. In the event a claim
is filed, the Company believes that it has good defenses against such
claims. An estimate of the impact of this potential claim cannot be made at
this time.
4. SATELLITE SYSTEMS UNDER DEVELOPMENT:
The Company has contracted with Space Systems/Loral, Inc. ("Loral") to
construct a satellite, Telstar 5 ("T-5"), to be deployed at 97 degrees W
Longitude. T-5 will be suitable for business television, distance learning
television, direct to home, and very small aperture terminals broadcast
purposes and is scheduled to be delivered in May 1997. T-5 will carry a
total of 52 transponders (24 at C-band and 28 at Ku band) and will provide
coverage in all 50 of the United States plus the Caribbean, Mexico, and
Southern Canada.
The Loral T-5 contract requires progress payments payable monthly
during the period of the satellite's construction and incentive payments
payable monthly over the useful life of the satellite. Incentive payments
are scheduled to commence after delivery and launch of the T-5 satellite.
The incentive payments are subject to reductions or termination (based on
transponders in service) if the satellite fails to meet specific technical
operating standards. The contract contains rights to cancellation, which
would result in a pro-rata liability for deliverable items and costs not
paid for in milestone payments.
The T-5 contract contains an option clause for the Company to purchase
one, two, or three additional satellites substantially identical to the
satellite being furnished pursuant to the contract. Option prices (based on
the number ordered) include all design, manufacturing, tests,
documentation, orbital performance incentives, mission operation services,
and shipping and transportation costs to the launch site. Insurance costs
applicable to the launch will be determined at the time of exercise.
The launch of T-5 by Integrated Launch Services is scheduled to take
place in 1997 from the Baikonur Cosmodrome in the former USSR. The Company
expects the total cost (including costs for engineering, construction,
launch, launch insurance, incentive payments, and direct development costs
and capitalized interest) of the T-5 to be approximately $230,000, of which
the Company has paid approximately $169,000 through December 31, 1996.
In October 1996, the Company made a $10,000 payment in anticipation of
exercising the option clause for one additional satellite with Loral.
11
<PAGE> 13
SKYNET SATELLITE SERVICES
(A FULLY INTEGRATED BUSINESS UNIT OF AT&T CORP.)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in thousands)
5. NET ASSETS:
Because the Company is a fully integrated business unit, AT&T's
accounting records do not distinguish its investment in the Company between
debt and permanent capital. In addition, AT&T, in the normal course of
operations, does not allocate any portion of its consolidated third party
debt and directly related interest cost to the Company and no portion of
AT&T's debt is directly related to the operations of the Company.
To reflect the Company's financing costs on a stand-alone basis,
AT&T's net investment has been allocated between permanent capital and
interest-bearing intercompany advances. Such intercompany advances were
calculated by allocating AT&T's investment in the Company at January 1,
1994 between intercompany debt and equity, based on the assumption that all
satellite costs, net of prepayments from transponder sales, were financed
with intercompany advances. The resulting intercompany balance was
subsequently adjusted for cash flows provided from or used in operating and
investing activities during 1994, 1995 and 1996. The financing costs
included in these financial statements have been calculated by applying
AT&T's long-term project interest rate to the intercompany balance at the
end of each period.
The average intercompany balance and related weighted average interest
rates were as follows for each of the periods presented:
<TABLE>
<CAPTION>
AVERAGE ASSIGNED
INTERCOMPANY INTEREST
BALANCE RATE
------------ ------------
<S> <C> <C>
Year ended:
December 31, 1996............................... $362,000 6.30%
December 31, 1995............................... 302,000 6.71%
December 31, 1994............................... 396,000 6.48%
</TABLE>
Interest cost reflected in these financial statements was
approximately $22,600, $20,600 and $25,900, for the years ended December
31, 1996, 1995 and 1994, respectively, including interest capitalized.
The intercompany balance has been classified as net assets in these
financial statements as there is no debt instrument and no defined
repayment period.
Net assets consists of the following amounts:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Permanent capital (deficit)....................... $ 25,474 $ (4,514)
Intercompany payable to AT&T...................... 369,071 352,477
-------- --------
$394,545 $347,963
======== ========
</TABLE>
6. TRANSACTIONS WITH AFFILIATES:
The Company, in the normal course of operations, conducts transactions
with AT&T and its other affiliates. Revenues from transponder services
provided to affiliates amounted to $14,950, $10,211 and $12,822 for the
years ended December 31, 1996, 1995 and 1994, respectively.
12
<PAGE> 14
SKYNET SATELLITE SERVICES
(A FULLY INTEGRATED BUSINESS UNIT OF AT&T CORP.)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in thousands)
7. INCOME TAXES:
The Company adopted SFAS No. 109, "Accounting for Income Taxes,"
effective January 1, 1993. Among other provisions, this standard requires
the Company to compute deferred tax amounts using the enacted corporate
income tax rates for the years in which the taxes will be paid or refunds
received. The Company has calculated the tax provision utilizing a
statutory tax rate as if it were a stand alone company.
The provision (benefit) for income taxes comprises the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................. $ (5,398) $(19,816) $ (3,300)
State and local..................... (652) (2,393) (398)
------- -------- --------
Total current benefit....... (6,050) (22,209) (3,698)
Deferred:
Federal............................. 22,672 19,454 (14,884)
State and local..................... 2,737 2,349 (1,797)
------- -------- --------
Total deferred provision
(benefit)................. 25,409 21,803 (16,681)
------- -------- --------
Total provision (benefit)
for income taxes.......... $ 19,359 $ (406) $(20,379)
======= ======== ========
</TABLE>
Deferred tax assets (liabilities) at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Deferred profit on transponder sales............. $ 16,862 $ 17,683
Allowance for bad debts.......................... 3,123 3,542
-------- --------
19,985 21,225
-------- --------
Deferred tax liabilities -- accelerated
depreciation..................................... (66,277) (42,108)
-------- --------
Net deferred tax liabilities............. $(46,292) $(20,883)
======== ========
</TABLE>
13
<PAGE> 15
SKYNET SATELLITE SERVICES
(A FULLY INTEGRATED BUSINESS UNIT OF AT&T CORP.)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in thousands)
8. TRANSPONDER SERVICE CONTRACTS:
Future cash payments expected from customers under transponder service
contracts aggregate approximately $800,000 as of December 31, 1996. Such
cash payments may be reduced for outage or transponder failure (See Note
12).
9. EMPLOYEE BENEFIT PLANS:
The Company participates in various employee benefit plans, including
pension, savings, postretirement and postemployment plans, which are
sponsored by AT&T. Detailed information concerning costs or the funded
status of the plan is not available for the Company but is included as part
of the expenses allocated by AT&T as described in Note 2. The specific
charges allocated to the Company and the Company's obligations under these
plans are not separately determinable.
10. CONTINGENCIES:
As noted in Note 2, satellite failures may require the Company to
provide replacement transponder facilities or refund monies related to
transponder sale contracts. At December 31, 1996 the maximum refund
exposure in the unlikely case that the Company would be unable to replace
the transponder facilities aggregates approximately $194,000. The Company
is insured for approximately 85% of the potential refund amounts (See Note
12).
11. SALE OF COMPANY:
On March 14, 1997, AT&T sold the Company to Loral Space &
Communications Ltd. for $478,100, subject to adjustment based on changes in
net assets available for sale (which is total net assets of the Company
exclusive of certain assets and liabilities as defined) as compared to a
specified reference amount.
14
<PAGE> 16
SKYNET SATELLITE SERVICES
(A FULLY INTEGRATED BUSINESS UNIT OF AT&T CORP.)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in thousands)
12. LOSS OF TELSTAR 401:
In January 1997, the Telstar 401 ("T-401") satellite abruptly stopped
functioning. Contact could not be reestablished and the satellite was
declared permanently out of service. As discussed in Notes 2 and 10, the
Company is required to either replace transponder facilities or refund
monies related to transponder sales contracts. The Company is currently
negotiating with its customers to provide replacement transponder
facilities to satisfy the Company's contractual obligation. The Company is
currently providing service to certain of its customers by transferring
their service to the Telstar 402R, and is providing service to the
remainder of its customers by purchasing temporary replacement services
from other satellite operators until such time as a replacement satellite
is launched and becomes operational. In addition, the Company has refunded
one customer approximately $10,000 and is in the process of negotiating a
refund with a second. The pro forma amounts below were calculated based on
the Company's expected resolution of negotiations which assumes that
customers request a combination of refunds and replacement services. Had
the loss occurred on December 31, 1996, the financial statements would have
been adjusted as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS EFFECT
AS REPORTED (UNAUDITED) (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Current assets:
Insurance claim receivable.......... $ 132,000(a) $ 132,000
Accounts receivable................. $ 9,986 9,986
Prepaid expenses.................... 4,036 (1,500)(b) 2,536
-------- -------- --------
Total current assets........ 14,022 130,500 144,522
Property, plant and equipment, net.... 487,000 (69,000)(c) 418,000
Deferred tax asset.................... 19,985 32,000(d) 51,985
-------- -------- --------
Total assets................ 521,007 93,500 614,507
-------- -------- --------
LIABILITIES AND DEFERRED CREDITS:
Current liabilities:
Accrued payables.................... 5,000 5,000
Deferred revenue and profit on
transponder sales -- current
portion.......................... 5,850 (4,850)(e) 1,000
-------- -------- --------
Total current liabilities... 10,850 (4,850) 6,000
Deferred revenue.................... 10,917 (1,350)(e) 9,567
Deferred profit on transponder
sales............................ 34,295 (28,800)(e) 5,495
Deferred tax liability.............. 66,277 30,000(f) 96,277
Estimated obligations on loss of
Telstar 401...................... 117,000(g) 117,000
Other liabilities................... 4,123 4,123
-------- -------- --------
Total liabilities and
deferred credits.......... 126,462 112,000 238,462
-------- -------- --------
Commitments and contingencies
Net assets.................. $ 394,545 $ (18,500) $ 376,045
======== ======== ========
</TABLE>
15
<PAGE> 17
SKYNET SATELLITE SERVICES
(A FULLY INTEGRATED BUSINESS UNIT OF AT&T CORP.)
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
(dollars in thousands)
The pro-forma adjustments reflect the following activity:
a. Recognition of insurance claim receivable on loss of Telstar 401
b. Write off of prepaid insurance related to Telstar 401
c. Write off of the carrying amount of the Telstar 401 satellite
d. Adjustment of the tax asset associated with the deferred revenue
and profit on transponder sales offset by the tax asset associated
with the refund payable
e. Elimination of the deferred revenue and profit on transponder sales
that related to Telstar 401
f. Adjustment of the deferred tax liability related to the difference
between tax depreciation and book depreciation of Telstar 401 and
to record a tax credit on the insurance receivable
g. Recognition of the Company's best estimate of its obligations
associated with loss of Telstar 401
If the above pro forma amounts were calculated based on the assumption
that all customers requested a refund rather than replacement service, the
December 31, 1996 pro forma effect would be as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
PRO FORMA
EFFECT
(UNAUDITED)
------------
<S> <C>
Total assets............................................ $631,507
Total liabilities....................................... 281,362
--------
Net assets.................................... $350,145
========
</TABLE>
In addition, the Company believes that future cash payments from
customers on transponder contracts (See Note 8) will be reduced due to the
loss of T-401. The Company believes that such future payments will be
reduced by $150,000.
16
<PAGE> 18
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
LORAL SPACE & COMMUNICATIONS LTD. AND SKYNET SATELLITE SERVICES
The following unaudited pro forma condensed consolidated statement of
income for the nine months ended December 31, 1996 gives effect to the
acquisition by Loral Space & Communications Ltd. of Skynet Satellite Services on
March 14, 1997. The purchase price of $478.1 million reflects a reduction from
the originally agreed upon purchase price of $712.5 million due to the failure
of the Telstar 401 satellite, one of Skynet's assets, in January 1997. The
unaudited pro forma condensed consolidated statement of income assumes the
acquisition occurred as of April 1, 1996. The pro forma information is based on
the historical financial statements of Loral Space & Communications Ltd. and
Skynet Satellite Services for the nine months ended December 31, 1996 using the
purchase method of accounting and the assumptions and adjustments in the
accompanying notes to the unaudited pro forma condensed consolidated statement
of income. The unadjusted purchase price of $712.5 million was used as the basis
for pro forma adjustments because Telstar 401 was operating and generating
revenues during the nine months ended December 31, 1996.
The pro forma adjustments are based upon preliminary estimates of fair
values. Actual adjustments will be based on final appraisals and other analyses
of fair values. The unaudited pro forma condensed consolidated statement of
income should be read in conjunction with the audited consolidated financial
statements and notes of the respective companies. The pro forma data may not be
indicative of the results that actually would have occurred if the acquisition
had taken place on April 1, 1996 or future results.
A pro forma balance sheet has not been presented since the transaction
described herein has been reflected in the Company's March 31, 1997 balance
sheet included in the Quarterly Report on Form 10-Q of Loral Space &
Communications Ltd..
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED DECEMBER 31, 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
PRO FORMA
LORAL AS ADJUSTED
-------- PRO FORMA -----------
ADJUSTMENTS
-----------
SKYNET (NOTE 1)
--------
(NOTE 1)
<S> <C> <C> <C> <C>
Revenues.................................... $ 5,088 $ 84,435 $ -- $89,523
Costs and expenses.......................... 17,289 39,051 20,129(c) 76,469
-------- -------- ----------- -----------
Operating income (loss)..................... (12,201) 45,384 (20,129) 13,054
Interest income (expense)................... 28,699 (11,305) (18,533)(b) (1,139)
-------- -------- ----------- -----------
Income before taxes and equity in net loss
of affiliates............................. 16,498 34,079 (38,662) 11,915
Income taxes................................ 2,912 13,369 (15,078)(d) 1,203
-------- -------- ----------- -----------
Income before equity in net loss of
affiliates................................ 13,586 20,710 (23,584) 10,712
Equity in net loss of affiliates............ (4,709) -- (4,489)(c)(d) (9,198)
-------- -------- ----------- -----------
Net income.................................. $ 8,877 $ 20,710 $ (28,073) $ 1,514
======== ======== ========= ========
Earnings per share (Note 2):
Primary................................... $ .04 $ .01
======== ========
Fully diluted............................. $ .04 $ .01
======== ========
Weighted average shares outstanding:
Primary................................... 229,396 229,396
======== ========
Fully diluted............................. 229,396 229,396
======== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income
17
<PAGE> 19
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME
1. The following facts and assumptions were used in determining the pro
forma effect of the acquisition of Skynet Satellite Services ("Skynet") from
AT&T.
a) On March 14, 1997 Loral Space & Communications Ltd. acquired
certain assets of Skynet for $478.1 million in cash. The price reflects a
reduction from the $712.5 million price originally agreed upon in September
1996 due to the failure of the Telstar 401 Satellite, one of Skynet's
assets, in January 1997. The price is subject to further adjustment based
upon net assets delivered at closing, as defined.
This acquisition has been accounted for as a purchase. The unaudited
pro forma condensed consolidated statement of income ("pro forma statement
of income") includes the operations of Skynet for the nine months ended
December 31, 1996. The Skynet operations have been calculated by deducting
the Skynet operations for the three month period ended March 31, 1996 from
the Skynet operations for the year ended December 31, 1996. Revenues,
operating income and net income for Skynet for the three months ended March
31, 1996 were $39.9 million, $19.0 million and $9.3 million, respectively.
Pro forma adjustments have been calculated for the nine month period.
b) The purchase price for Skynet was determined through arm's length
bargaining between Loral Space & Communications Ltd. and AT&T. The
acquisition was initially financed with cash on hand. A significant portion
of the purchase price is expected to be refinanced with debt. The pro forma
adjustment for interest expense reflects charges for interest based on an
unadjusted purchase price of $712.5 million at an assumed interest rate of
7%, reduced for capitalized interest of $7.5 million and interest expense
of $11.3 million recorded by Skynet. The unadjusted purchase price of
$712.5 million was used as the basis for the interest expense calculation
because Telstar 401 was operating and generating revenues during the nine
months ended December 31, 1996.
c) The estimated excess of purchase price over net assets acquired of
$96.1 million is being amortized over 40 years. Other purchase accounting
adjustments to the pro forma statement of income, pursuant to the
provisions of Accounting Principles Board Opinion No. 16, include charges
for depreciation over an estimated weighted average ten year life of the
excess of fair value of depreciable fixed assets over the historical book
value of $246.9 million. For purposes of this adjustment fair value of
depreciable fixed assets includes the estimated fair value of Telstar 401,
and historical book value includes the carrying value of Telstar 401. An
additional pro forma adjustment of $4.5 million was made to eliminate Loral
Space & Communications Ltd.'s equity in the net income of its affiliate,
Space Systems/Loral, related to sales from Space Systems/Loral to Skynet.
d) A statutory (Federal and state) tax rate of 39% was assumed on the
pro forma adjustments.
2. Primary and fully diluted earnings per share are computed based upon
the weighted average number of shares of common stock and common equivalent
shares (Series A Convertible Preferred Stock) outstanding.
18
<PAGE> 20
EXHIBIT INDEX
Exhibit No. Description
23 Consent of Coopers & Lybrand L.L.P.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Loral Space & Communications Ltd. on Form S-3 (File No. 333-26517) and Form
S-8 (File No. 333-14863) of our report dated April 15, 1997, on our audits of
the financial statements of Skynet Satellite Services as of December 31, 1996
and 1995 and for each of the three years in the period ended December 31, 1996,
which report is included in this Form 8-K.
Coopers & Lybrand L.L.P.
New York, New York
May 28, 1997
2
