<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------------------
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 29, 1997
LORAL SPACE & COMMUNICATIONS LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
ISLANDS OF BERMUDA 1-14180 13-3867424
(STATE OR OTHER (COMMISSION (IRS EMPLOYER
JURISDICTION OF FILE NUMBER) IDENTIFICATION
INCORPORATION) NUMBER)
600 THIRD AVENUE, NEW YORK, NEW YORK 10016
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 697-1105
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<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
In connection with the privatization by the Federal Government of Mexico
(the "Mexican Government") of its fixed satellite services business, Loral Space
& Communications Ltd. ("Loral") and Telefonica Autrey, S.A. de C.V. ("Telefonica
Autrey") have formed a joint venture, Firmamento Mexicano, S. de R.L. de C.V.
("Holdings"), which has acquired 75% of the outstanding capital stock of
Satelites Mexicanos, S.A. de C.V. ("SatMex"). On November 17, 1997, Corporativo
Satelites Mexicanos, S.A. de C.V. ("Acquisition Sub"), a special purpose
indirect subsidiary of Holdings formed to effect the acquisition, entered into a
Stock Purchase and Sale Agreement with the Mexican Government providing for the
acquisition at a purchase price of Ps. 5,366.4 million ($638.0 million). On
November 17, 1997, Acquisition Sub paid Ps. 1,609.9 million ($193.6 million) of
the purchase price. On December 29, 1997, Acquisition Sub completed the
acquisition by paying the balance of the purchase price, plus installment
interest, and merged with and into SatMex (the "Merger").
SatMex is the company established by the Mexican Government for purposes of
the privatization and to which the Mexican Government contributed substantially
all of the assets of its fixed satellite services business. SatMex is the
dominant provider of fixed satellite services in Mexico and provides
broadcasting and telecommunications capacity to approximately 180 customers.
SatMex owns and operates three satellites, Solidaridad 1, Solidaridad 2 and
Morelos II, which are located in geostationary orbit at 109.2 degrees WL, 113.0
degrees WL and 116.8 degrees WL, respectively. SatMex holds 20-year concession
titles (the "Concessions") to operate in these three orbital locations at their
associated C- and Ku-band frequencies. The Concessions are renewable, subject to
certain conditions, for an additional 20 years thereafter at no additional cost.
SatMex also owns equipment located at two satellite control facilities and has
entered into contracts for the construction and scheduled 1998 launch of Morelos
III, the replacement satellite for Morelos II.
The Mexican Government retained 25% of the issued and outstanding capital
stock of SatMex in the form of limited voting shares. As a result, Loral and
Telefonica Autrey (the "Sponsors") hold 49% and 26%, respectively, of the
economic interests, and 49% and 51%, respectively, of the voting interests in
SatMex.
The acquisition was funded with (i) cash equity of $141.1 million
contributed to Acquisition Sub by Loral and Telefonica Autrey, pro rata based on
their economic ownership percentage (Loral's portion was made from available
cash); (ii) the proceeds from the purchase by affiliates of Donaldson Lufkin &
Jenrette Securities Corporation and Lehman Brothers Inc. of $295 million of
senior unsecured increasing rate notes issued by Acquisition Sub; and (iii) $275
million of borrowings by Acquisition Sub under senior secured credit facilities
provided by affiliates of Lehman Brothers Inc. and Donaldson Lufkin & Jenrette
Securities Corporation.
On December 29, 1997, as part of the acquisition and in connection with the
Merger, a wholly owned subsidiary of Holdings agreed to pay the Mexican
Government $125.1 million (the "Government Obligation") in consideration for the
assumption by SatMex of the debt incurred by Acquisition Sub in connection with
the acquisition. The Government Obligation accrues deferred interest at the rate
of 6.03% per annum, compounds annually and matures on December 29, 2004. Payment
of the Government Obligation is secured by the interests in Holdings held by
affiliates of Loral and Telefonica Autrey.
Loral, together with Telefonica Autrey, will be responsible for managing
SatMex and will receive an aggregate management fee, based on a sliding scale,
applied to SatMex's quarterly gross revenues up to a maximum of 3.75% of
cumulative gross revenues. In addition, Loral Skynet will license certain
intellectual property to SatMex for a fee of 1.5% of SatMex's gross revenues.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired
Audited Financial Statements of Telecomunicaciones de Mexico, Fixed
Satellite Services (Predecessor Company) as of December 31, 1996 and
September 30, 1997 and for the year ended December 31, 1996 and for the
nine months ended September 30, 1997 and audited Balance Sheet of Satelites
Mexicanos, S.A. de C.V. (Company) as of October 15, 1997 and Reports of
Independent Accountants.
2
<PAGE> 3
(b) Pro Forma Financial Information
Unaudited Pro Forma Condensed Consolidated Financial Statements of
Loral Space & Communications Ltd. ("Loral"), Satelites Mexicanos, S.A. de
C.V. ("SatMex"), Orion Network Systems, Inc. ("Orion"), Space
Systems/Loral, Inc. ("SS/L") and AT&T Skynet Satellite Services ("Skynet")
as of September 30, 1997 and for the nine months ended September 30, 1997
and December 31, 1996.
(c) Exhibits
23 -- Consent of Price Waterhouse
3
<PAGE> 4
FINANCIAL STATEMENTS
TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICES
(PREDECESSOR COMPANY)
AND SATELITES MEXICANOS, S.A. DE C.V.
(COMPANY)
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997 (PREDECESSOR COMPANY)
AND OCTOBER 15, 1997 (COMPANY)
4
<PAGE> 5
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Satelites Mexicanos, S.A. de C.V.
In our opinion, the accompanying balance sheets, statements of operations,
of changes in Telecomm's investment and of cash flows present fairly, in all
material respects, the financial position, the results of operations, changes in
Telecomm's investment and cash flows of the fixed satellite service business of
Telecomunicaciones de Mexico ("Telecomm") (the Predecessor Company of Satelites
Mexicanos, S.A. de C.V.) as of December 31, 1996 and September 30, 1997 and for
the year ended December 31, 1996 and for the nine months ended September 30,
1997, in conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of Telecomm's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Mexico City
December 15, 1997 (except for Note 9
which is as of January 5, 1998)
5
<PAGE> 6
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Satelites Mexicanos, S.A. de C.V.
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of Satelites Mexicanos, S.A. de C.V.
(Successor Company), a wholly-owned subsidiary of the Mexican Government, as of
October 15, 1997, in conformity with accounting principles generally accepted in
the United States. This financial statement is the responsibility of the
Company's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this statement
in accordance with auditing standards generally accepted in the United States
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Mexico City
December 15, 1997 (except for Note 9 which is
as of January 5, 1998)
6
<PAGE> 7
TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
(PREDECESSOR COMPANY)
AND SATELITES MEXICANOS, S.A. DE C.V.
(COMPANY)
BALANCE SHEETS
(Note 1)
(amounts in thousands of US dollars)
<TABLE>
<CAPTION>
COMPANY
-------------------------------
OCTOBER 15,
1997
PREDECESSOR COMPANY -------------------------------
------------------------------ PRO FORMA
DECEMBER 31, SEPTEMBER 30, (UNAUDITED)
1996 1997 (NOTES 4 AND 6)
------------ -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.............. $ 1,860 $ 1,866 $ 1,866
Accounts receivable -- Net (Note 3).... $ 8,054 6,042 963 963
Recoverable value added tax (Note 4)... 138,664 --
Prepaid insurance...................... 7,254 3,087 3,087 3,087
-------- -------- -------- --------
Total current assets................... 15,308 10,989 144,580 5,916
Satellites, machinery and
equipment -- Net (Note 5)............ 361,493 399,833 399,833 399,833
Deferred income tax asset (Note 7)..... 171,496 171,496
-------- -------- -------- --------
Total assets................. $376,801 $ 410,822 $ 715,909 $ 577,245
======== ======== ======== ========
LIABILITIES AND TELECOMM INVESTMENT/
STOCKHOLDER'S EQUITY
Accounts payable and accrued
expenses............................. $ 7,299 $ 5,083 $ 787 $ 787
Notes payable to the Mexican Government
(Note 1)............................. 715,116 --
-------- -------- -------- --------
Total current liabilities.............. 7,299 5,083 715,903 787
-------- -------- -------- --------
Commitments and contingencies (Note 8)
Telecomm Investment and Stockholder's
Equity (Note 6)
Telecomm investment.................... 369,502 405,739
Capital stock.......................... 6 576,458
-------- -------- -------- --------
Total Telecomm investment and
stockholder's equity................. 369,502 405,739 6 576,458
-------- -------- -------- --------
Total liabilities and
Telecomm investment and
stockholder's equity....... $376,801 $ 410,822 $ 715,909 $ 577,245
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
(PREDECESSOR COMPANY)
AND SATELITES MEXICANOS, S. A. DE C. V.
(COMPANY)
STATEMENT OF OPERATIONS
(Note 1)
(amounts in thousands of US dollars)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
<S> <C> <C>
Revenues....................................................... $ 78,207 $80,474
------- -------
Operating expenses:
Separation bonuses and employment costs related to
privatization of Satmex (Note 2f)............................ $ 1,004 $ 4,762
Personnel costs................................................ 2,932 3,075
Materials and supplies......................................... 483 248
General and administrative expenses............................ 2,862 1,629
Depreciation................................................... 34,953 26,214
Insurance...................................................... 10,720 7,461
Miscellaneous expenses......................................... 1,323 222
Provision for uncollectible accounts........................... 1,761 (3,046)
------- -------
56,038 40,565
------- -------
Operating income............................................... 22,169 39,909
Foreign exchange gain (loss)................................... 140 (48)
------- -------
Income before assessment due to the Mexican Government......... 22,309 39,861
Assessment paid to the Mexican Government (Note 7)............. 4,535 4,809
------- -------
Net income..................................................... $ 17,774 $35,052
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE> 9
TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
(PREDECESSOR COMPANY)
AND SATELITES MEXICANOS, S. A. DE C. V.
(COMPANY)
STATEMENT OF CHANGES IN TELECOMM'S
INVESTMENT AND STOCKHOLDER'S EQUITY
(Note 7)
(amounts in thousands of US dollars)
<TABLE>
<CAPTION>
COMPANY
--------------------------
FROM INCEPTION
PREDECESSOR COMPANY ON JULY 26 TO
---------------------------- OCTOBER 15,
NINE MONTHS 1997
YEAR ENDED ENDED --------------------------
DECEMBER SEPTEMBER PRO FORMA
31, 30, (UNAUDITED)
1996 1997 NOTE 6
----------- ------------
<S> <C> <C> <C> <C>
Net investment by Telecomm at the beginning
of period................................. $ 397,530 $369,502
Capitalization of amounts due to Mexican
Government for purchase of net assets of
Predecessor Company less, net assets of
$783 retained by Telecomm................. $ 404,956
Deferred tax assets recorded as a result of
transfer of concession title.............. 171,496
Net advances (to) from Telecomm............. (45,802) 1,185
Issuance of capital stock................... $6 6
Net income during the period................ 17,774 35,052
-------- -------- --- --------
Net investment by Telecomm at the end of
period.................................... $ 369,502 $405,739 $6 $ 576,458
======== ======== === ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE> 10
TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
(PREDECESSOR COMPANY)
AND SATELITES MEXICANOS, S. A. DE C. V.
(COMPANY)
STATEMENTS OF CASH FLOWS
(amounts in thousands of US dollars)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------------------------------
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -----------------
<S> <C> <C>
CASH FLOW PROVIDED BY OPERATING ACTIVITIES
Net income..................................................... $ 17,774 $ 35,052
Items not requiring cash:
Depreciation................................................. 34,953 26,214
Provision for uncollectible accounts......................... 1,761 (3,046)
(Increase) decrease in working capital components:
Accounts receivable.......................................... (2,033) 5,058
Prepaid insurance............................................ 682 4,167
Accounts payable and accrued expenses........................ 3,279 (2,216)
-------- --------
Cash provided by operating activities.......................... 56,416 65,229
-------- --------
CASH FLOW FROM INVESTMENT ACTIVITIES
Acquisition of machinery and equipment and advances for
construction and launch of satellite......................... (10,614) (64,554)
-------- --------
Cash used in investing activities.............................. (10,614) (64,554)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES
Net advances (to) from Telecomm................................ (45,802) 1,185
-------- --------
Cash (used in) provided by financing activities................ (45,802) 1,185
-------- --------
Net change in cash and cash equivalents........................ -- 1,860
Cash and cash equivalents at beginning of period............... -- --
-------- --------
Cash and cash equivalents at end of period..................... $ -- $ 1,860
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
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TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
(PREDECESSOR COMPANY)
AND SATELITES MEXICANOS, S. A. DE C. V.
(COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997 (PREDECESSOR COMPANY)
AND OCTOBER 15, 1997 (COMPANY)
(MONETARY AMOUNTS EXPRESSED IN THOUSANDS OF
US DOLLARS, EXCEPT SHARE AMOUNTS)
NOTE 1--HISTORY AND ACTIVITY OF THE COMPANY
Satelites Mexicanos, S. A. de C. V. (the "Company") was formed by the
Mexican Government on June 26, 1997 and commenced operations on October 15, 1997
for the purpose of completing the privatization process as described below. The
principal activity of the Company is the installation, operation and control of
the Mexican satellite system. The Company is the dominant provider of domestic
Fixed Satellite Services ("FSS") to broadcasting and telecommunications
transmission customers in Mexico.
In June 1995, the Constitution of Mexico was amended to establish the legal
framework for the privatization of certain FSS assets and operations of
Telecomunicaciones de Mexico, ("Telecomm"), a wholly-owned subsidiary of the
Mexican Government, (the "Predecessor Company"). The Predecessor Company managed
the FSS business through October 14, 1997; after such date the FSS business will
be operated by the Company. On October 30, 1997, a joint venture formed by Loral
Space & Communications Ltd. ("Loral") and Telefonica Autrey, S. A. de C. V.
("Telefonica Autrey") agreed to acquire 75% of the issued and outstanding
capital stock of the Company from the Mexican Government (the "Government").
On October 15, 1997, the Government sold to the Company the net assets of
the Predecessor Company based on its historical cost for $404,956, plus $63,003
of value added tax. The net assets consisted principally of three satellites in
orbit, one satellite under construction and equipment located at two ground
control facilities.
Effective October 15, 1997, the Government sold to the Company for
$504,400, plus $75,661 of value added tax, the rights to a 20-year concession
title (the "Concession"), renewable on certain conditions for an additional 20
years thereafter at no additional cost, to operate in the three orbital slots
occupied by the Company's satellites at their associated C- and Ku-band
frequencies. Since the Concession was transferred between commonly controlled
entities the asset is recorded at its historical cost (zero at October 15, 1997)
under accounting principles generally accepted in the United States. The Company
has also received the rights to use the extended C- and Ku-band frequencies at
such locations, subject to successful international coordination and the
satisfaction of certain other conditions. As part of the Concession, the Company
will allow the Government to retain the L-Band transponders and has reserved
certain capacity on each satellite for use by the Government. The Concession
also includes the right to use the buildings and areas in which the control
centers are located, for the purpose of exploiting the orbital slots and
frequency assignments for an annual rental equivalent to 7.5% of their appraised
value, which amounted to $3,427 (unaudited) at September 30, 1997.
NOTE 2--BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Predecessor Company's and the Company's financial statements are
presented in U.S. dollars following generally accepted accounting principles in
the United States of America.
The significant accounting policies are summarized below:
a. Functional currency and translation--
The Predecessor Company and the Company are required to maintain their
books and records in Mexican pesos ("pesos"). The functional currency of the
Predecessor Company and the Company is the U.S.
11
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TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
(PREDECESSOR COMPANY)
AND SATELITES MEXICANOS, S. A. DE C. V.
(COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
dollar, the currency in which the Predecessor Company's and the Company's sales
contracts are denominated and in which they incur a significant portion of their
expenses and acquire their fixed assets.
Monetary assets and liabilities denominated in pesos are translated into
U.S. dollars using current exchange rates. The difference between the exchange
rate on the date of the transaction and the exchange rate on settlement date, or
balance sheet date if not settled, is included in the income statement as a
foreign exchange gain/loss.
Non-monetary assets or liabilities originally denominated in pesos are
translated into U.S. dollars using the historical exchange rate at the date of
the transaction. Capital stock is translated at historical rates.
b. 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 amounts reported in the financial statements. Actual
results could differ from these estimates.
c. Cash equivalents--
Cash equivalents represent investments in short-term deposits and
commercial paper with banks which have original maturities of ninety days or
less.
d. Fixed assets--
Fixed assets, principally satellites and advances for construction and
launching of a new satellite, are stated at historical cost, net of
depreciation. Machinery, equipment, furniture and fixtures were stated at
appraised values determined by a Mexican Government appraiser. Management
believes that such estimates reasonably approximate the net historical cost of
these assets.
e. Depreciation--
Depreciation of satellites, machinery and equipment is computed by the
straight-line method, based on the estimated useful lives of the related assets.
f. Labor benefits and separation bonuses--
As a legal commercial entity the Company will be required to accrue in the
years in which services are rendered seniority premiums to which its employees
are entitled upon termination of employment after fifteen years of service.
Employees who transferred from the Predecessor Company will not receive any
credit for prior service. Predecessor Company employees, as government
employees, were not entitled to the seniority premium benefit.
In preparation for the privatization the Predecessor Company transferred
220 employees to the Company. In connection with the transfer the Predecessor
Company negotiated and paid separation bonuses with the employees who
transferred amounting to $4,012. Employees who did not transfer to the Company
were assigned other responsibilities within Telecomm. Personnel costs related to
employees retained by Telecomm were $1,004 and $750 for the year ended December
31, 1996 and the nine months ended September 30, 1997, respectively.
g. Revenue recognition--
Revenue is recorded when the satellite service is provided. The Predecessor
Company has provided FSS to the teleports business unit of Telecomm amounting to
$3,696 in the year ended December 31, 1996 and $2,772 in the nine months ended
September 30, 1997. Effective November 1, 1997 these services will be
12
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TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
(PREDECESSOR COMPANY)
AND SATELITES MEXICANOS, S. A. DE C. V.
(COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
invoiced by the Company to Telecomm on a monthly basis, for a minimum of $180
per month through December 31, 1997. It is expected this contract will be
renewed by the Government on an annual basis beginning January 1, 1998. In
addition, the Company will invoice Telecomm $40 per month for control services
related to L-Band transponders retained by Telecomm.
Historically, the Predecessor Company has provided satellite services to
the Government with substantial discounts. Revenues for these services have been
included in the results of operations for the year ended December 31, 1996 and
the nine months ended September 30, 1997, net of such discounts.
In connection with the privatization the Company has agreed to provide
certain agencies of the Mexican Government with access to a portion of its
available transponder capacity (the "reserve capacity"), representing
approximately 181.44 MHz in C-band and 151.20 megahertz in Ku-band of its
currently available capacity, at no cost. The capacity will be utilized by
various Government agencies such as the Defense and Education Ministries which
currently receive 100% discounts on services provided.
h. Principal customer--
Revenue from one customer represented 28% of total revenues for the nine
months ended September 30, 1997. No individual customer represented more than
10% of total revenues for the year ended December 31, 1996.
NOTE 3--ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
PREDECESSOR COMPANY COMPANY
------------------------------ -----------
DECEMBER 31, SEPTEMBER 30, OCTOBER 15,
1996 1997 1997
------------ ------------- -----------
<S> <C> <C> <C>
Trade accounts receivable.............. $ 21,683 $15,588 $ 963
Allowance for bad debts................ (13,629) (9,546) --
-------- ------- ----
$ 8,054 $ 6,042 $ 963
======== ======= ====
</TABLE>
At October 15, 1997 the Mexican Government transferred trade receivables
totalling $963 to the Company.
NOTE 4--RECOVERABLE VALUE ADDED TAX AND BALANCE PAYABLE TO THE
MEXICAN GOVERNMENT
In connection with the purchases of the net assets and Concessions on
October 15, 1997 (see Note 1), the Company is permitted to recover from the
Mexican Treasury the value added tax associated with the acquisition of the net
assets of the Predecessor Company and the Concessions. On November 17, 1997 the
value added tax was recovered from the Mexican Treasury and paid to the
Government. The pro forma column of the balance sheet gives effect to the
recovery and the payment of the value added tax to the Government.
13
<PAGE> 14
TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
(PREDECESSOR COMPANY)
AND SATELITES MEXICANOS, S. A. DE C. V.
(COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--SATELLITES, MACHINERY AND EQUIPMENT
<TABLE>
<CAPTION>
PREDECESSOR COMPANY COMPANY
------------------------------ -----------
DECEMBER 31, SEPTEMBER 30, OCTOBER 15,
1996 1997 1997
------------ ------------- -----------
<S> <C> <C> <C>
Satellites.................................... $ 448,193 $ 448,193 $ 448,193
Accumulated depreciation...................... (128,233) (154,447) (154,447)
--------- --------- ----------
319,960 293,746 293,746
Machinery and equipment....................... 20,974 21,012 21,012
Furniture and fixtures........................ 569 1,997 1,997
Construction in process....................... 4,995 1,578 1,578
Advances for the construction and launch of
the Morelos III satellite................... 14,995 81,500 81,500
--------- --------- ----------
$ 361,493 $ 399,833 $ 399,833
========= ========= ==========
</TABLE>
Payments amounting to $81,500, transferred by Telecomm, have been made to
Hughes Communications International, Inc. and Arianespace for the construction
and launch of a new satellite (Morelos III) to replace the Morelos II satellite,
which completes its useful life in 1998. The estimated cost of the project,
including launch and insurance, is approximately $224,400. The launch is
scheduled for late 1998. In connection with the purchase of the net assets and
Concessions on October 15, 1997 (see Note 1), Telecomm assigned to the Company
the Morelos III construction contract with Hughes and the launch contract with
Arianespace. The Company will assume the rights and obligations under such
contracts upon the receipt of the consent of the respective contractors.
NOTE 6--STOCKHOLDER'S EQUITY
At October 15, 1997 the Company's issued and outstanding capital stock was
variable, without par value, with a fixed portion represented by 5,000 shares.
There were 10,000 authorized shares at October 15, 1997.
During special shareholder meetings on October 17 and 27, 1997, the Company
increased the authorized number of shares to 10,000,000 and approved the
capitalization of $576,452 of the notes payable to the Government in exchange
for the issuance of 9,995,000 common shares. The pro forma column of the balance
sheet and statement of changes in stockholder's equity gives effect to this
capitalization.
At October 27, 1997, as a result of the above mentioned modifications to
the Company's capital structure, the authorized and outstanding common shares
consisted of the following:
<TABLE>
<CAPTION>
SERIES SHARES
----------------------------------------------- ----------
<S> <C>
A.............................................. 2,601,000
B.............................................. 2,499,000
N.............................................. 4,900,000
----------
10,000,000
==========
</TABLE>
The principal difference in the series of shares relates to shares with
voting rights (Series "A" and "B") and restricted voting rights (Series "N").
14
<PAGE> 15
TELECOMUNICACIONES DE MEXICO, FIXED SATELLITE SERVICE
(PREDECESSOR COMPANY)
AND SATELITES MEXICANOS, S. A. DE C. V.
(COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--TAX MATTERS
Historically, income of the Predecessor Company from telecommunication
services via satellite was subject to the payment to the Government of an
assessment equivalent to 5.8% of total monthly revenues.
The Company as an independent legal commercial entity will not be subject
to the 5.8% assessment but will be subject to the payment of income tax or asset
tax at the statutory rates of 34% and 1.8%, respectively.
Income tax is determined following interperiod allocation procedures under
the liability method. Under this method, deferred income taxes are recognized
for the estimated future tax effects attributable to temporary differences and
tax loss and tax credit carry forwards. At October 15, 1997 a deferred tax asset
has been recognized related to the estimated future tax benefits from the
Concession transferred to the Company of $171,496. As a new entity the Company
will be exempt from asset tax through December 31, 2000. Pro forma income tax
expense, assuming the Predecessor Company had operated as a commercial entity
for the year ended December 31, 1996 and the nine months ended September 30,
1997 would have been $7,585 and $13,553, respectively.
NOTE 8--COMMITMENTS AND CONTINGENCIES
Loral, together with Telefonica Autrey will be responsible for managing the
Company and will receive an aggregate management fee, based on a sliding scale,
applied to the Company's quarterly gross revenues up to a maximum of 3.75% of
cumulative gross revenues. In addition, Loral Skynet will license certain
intellectual property to the Company for a fee of 1.5% of the Company's gross
revenues.
Management is not aware of any pending litigation against the Company.
Liability for all legal actions or other claims against the Predecessor Company
or the Company prior to October 15, 1997 has been retained by the Government.
NOTE 9--SUBSEQUENT EVENT (UNAUDITED)
On November 17, 1997 the Government sold 75% of its economic interest,
representing 100% of the voting interest in the Company to Corporativo Satelites
Mexicanos S.A. de C.V. ("Corporativo"), a wholly-owned subsidiary of Firmamento
Mexicano, S. de R.L. de C.V. and on December 29, 1997 Corporativo was merged
with and into the Company.
15
<PAGE> 16
PRO FORMA FINANCIAL DATA
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND DECEMBER 31, 1996
The following unaudited pro forma condensed consolidated balance sheet as
of September 30, 1997 and statements of operations for the nine months ended
September 30, 1997 and December 31, 1996 give effect to 1) the acquisition of a
49% indirect economic interest in SatMex completed on December 29, 1997, which
will be accounted for using the equity method of accounting, 2) the acquisition
between March 25, 1997 and June 23, 1997 by Loral of the remaining SS/L common
stock not previously owned, pursuant to agreements negotiated in February 1997,
3) the acquisition by Loral of Skynet on March 14, 1997, and 4) the proposed
acquisition by Loral of Orion which is subject to regulatory and Orion
shareholder approvals and is expected to close in the first quarter of 1998. The
SS/L and Skynet acquisitions are reflected in Loral's historical unaudited
condensed consolidated balance sheet as of September 30, 1997 and the unaudited
pro forma condensed consolidated balance sheet assumes the SatMex acquisition
and the proposed Orion acquisition occurred as of September 30, 1997. The
unaudited pro forma condensed consolidated statements of operations assume that
these acquisitions occurred as of April 1, 1996. The unaudited pro forma
condensed consolidated statement of operations for the nine months ended
September 30, 1997 is based on the historical unaudited condensed consolidated
statement of operations of Loral which includes the results of operations for
SS/L from January 1, 1997 and the related minority interest, and Skynet for the
period March 14, 1997 to September 30, 1997. The historical Loral condensed
consolidated statement of operations for the nine months ended December 31, 1996
reflect the results of operations from the inception of Loral in April 1996
through December 31, 1996. The unaudited pro forma condensed consolidated
statement of operations information for the nine months ended December 31, 1996
is based on the historical condensed consolidated statements of operations of
Loral and Orion as well as the condensed statements of operations of SS/L and
Skynet for that period. The condensed statements of operations for Orion for the
nine months ended December 31, 1996 and September 30, 1997 reflect the pro forma
effects of certain transactions completed by Orion in January 1997, as if such
transactions had occurred January 1, 1996. Equity in the net loss of SatMex has
been included in the unaudited pro forma condensed consolidated statements of
operations for the nine months ended September 30, 1997 and December 31, 1996,
based on Loral's share of the pro forma results of SatMex for such periods. The
unaudited pro forma condensed consolidated financial statements reflect the
purchase method of accounting and the adjustments and assumptions described in
the accompanying notes.
The pro forma adjustments for SS/L, Skynet and SatMex are based upon
preliminary estimates of fair values. The pro forma adjustments for Orion are
based on historical values of assets and liabilities, pending completion of an
independent valuation and allocation of their respective fair values, which are
not expected to result in material adjustments. Actual adjustments will be based
on final appraisals and other analyses of fair values. The unaudited pro forma
condensed consolidated balance sheet and statements of operations should be read
in conjunction with the audited consolidated financial statements and notes of
the respective companies. The unaudited pro forma condensed consolidated
statements of operations data may not be indicative of the results that actually
would have occurred if the acquisitions had taken place on April 1, 1996, or
future results.
16
<PAGE> 17
LORAL SPACE & COMMUNICATIONS LTD.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SATMEX ORION
PRO FORMA PRO FORMA PRO FORMA
LORAL ADJUSTMENTS SUBTOTAL ORION ADJUSTMENTS AS ADJUSTED
---------- ----------- ---------- -------- ------------ -----------
(NOTE 1)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 193,164 $ (91,700)(a) $ 101,464 $ 82,811 $ -- $ 184,275
Contracts in process............ 459,916 -- 459,916 10,616 -- 470,532
Inventories..................... 94,074 -- 94,074 -- -- 94,074
Restricted assets............... -- -- -- 50,064 -- 50,064
Other current assets............ 186,087 -- 186,087 8,076 -- 194,163
---------- -------- -------- ----------
Total current assets.............. 933,241 (91,700) 841,541 151,567 -- 993,108
Property, plant and equipment,
net............................. 768,277 -- 768,277 388,813 -- 1,157,090
Cost in excess of net assets
acquired, less amortization..... 436,632 -- 436,632 21,119 404,253(j),(k) 840,885
(21,119)(j)
Long-term receivables............. 104,574 -- 104,574 -- -- 104,574
Investments in affiliates......... 358,926 91,700(a) 450,626 -- -- 450,626
Restricted and segregated
assets.......................... -- -- -- 309,734 -- 309,734
Other assets...................... 147,004 -- 147,004 30,211 -- 177,215
---------- -------- -------- ----------
$2,748,654 $ -- $2,748,654 $901,444 $ 383,134 $4,033,232
========== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................ $ 227,998 $ -- $ 227,998 $ 3,015 $ -- $ 231,013
Customer advances............... 75,981 -- 75,981 -- -- 75,981
Accrued interest and preferred
dividends..................... 11,005 -- 11,005 11,315 (875)(k) 21,445
Other current liabilities....... 53,909 -- 53,909 18,918 632(k) 73,459
Income taxes payable............ 5,452 -- 5,452 -- -- 5,452
Deferred income taxes........... 64,805 -- 64,805 -- -- 64,805
Current portion of long-term
debt.......................... 2,146 -- 2,146 9,162 -- 11,308
---------- -------- -------- ----------
Total current liabilities......... 441,296 -- 441,296 42,410 (243) 483,463
Deferred income taxes............. 45,108 -- 45,108 -- -- 45,108
Pension and other postretirement
liabilities..................... 57,088 -- 57,088 -- -- 57,088
Long-term liabilities............. 38,238 -- 38,238 21,850 -- 60,088
Long-term debt.................... 229,323 -- 229,323 790,561 (60,000)(k) 959,884
Minority interest................. 11,136 -- 11,136 -- -- 11,136
Commitments and contingencies
Redeemable Convertible Preferred
Stock........................... -- -- -- 117,868 (117,868)(k) --
Shareholders' equity:
Series A convertible preferred
stock, par value $.01......... 459 -- 459 -- -- 459
Series C convertible redeemable
preferred stock, par value
$.01.......................... 731,195 -- 731,195 -- -- 731,195
Common stock, par value $.01.... 2,007 -- 2,007 -- 215(j) 2,222
Paid-in capital................. 1,214,850 -- 1,214,850 -- 489,785(j) 1,704,635
Treasury stock.................. (1,680) -- (1,680) -- -- (1,680)
Retained deficit................ (20,366) -- (20,366) -- -- (20,366)
Orion preacquisition deficit.... -- -- -- (71,245) 71,245(j) --
---------- -------- -------- ----------
Total shareholders' equity........ 1,926,465 -- 1,926,465 (71,245) 561,245 2,416,465
---------- -------- -------- ----------
$2,748,654 $ -- $2,748,654 $901,444 $ 383,134 $4,033,232
========== ======== ======== ==========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
17
<PAGE> 18
LORAL SPACE & COMMUNICATIONS LTD.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIODS COVERED:
Loral and Orion January 1 -- September 30, 1997
Skynet January 1 -- March 14, 1997 (Pre-acquisition period)
<TABLE>
<CAPTION>
PRO ORION
PRO FORMA FORMA PRO FORMA
LORAL SKYNET ADJUSTMENTS SUBTOTAL ORION ADJUSTMENTS
---------- ------- ----------- -------- -------- ---------
(NOTE 1) (NOTE 1)
<S> <C> <C> <C> <C> <C> <C>
Revenues................... $1,002,619 $17,938 $ (24,829)(d) $995,728 $ 54,539 $ --
Costs and expenses......... 993,466 14,066 (20,878)(d) 986,654 85,459 5,629(j)
---------- ------- -------- -------- -------- --------
Operating income
(loss)................. 9,153 3,872 (3,951) 9,074 (30,920) (5,629)
Interest income (expense),
net...................... 23,106 (2,500) (6,470)(a),(d),(g) 14,136 (52,841) (1,892)(i)
Other income (expenses).... -- -- -- -- 21 --
---------- ------- -------- -------- -------- --------
Pre-tax income (loss).... 32,259 1,372 (10,421) 23,210 (83,740) (7,521)
Income taxes............... 17,582 535 (3,155)(a),(e),(f) 14,962 -- (27,760)(m)
---------- ------- -------- -------- -------- --------
Income (loss) before
equity in net loss of
affiliates............. 14,677 837 (7,266) 8,248 (83,740) 20,239
Equity in net loss of
affiliates............... (24,320) -- (12,392)(a),(d) (36,712) -- --
Minority interest.......... (5,021) -- 4,975(b) (46) -- --
---------- ------- -------- -------- -------- --------
Net income (loss)........ (14,664) 837 (14,683) (28,510) (83,740) 20,239
Preferred dividends........ (14,580) -- -- (14,580) (6,933) 6,933(i)
---------- ------- -------- -------- -------- --------
Net income (loss)
attributable to common
shares................. $ (29,244) $ 837 $ (14,683) $(43,090) $(90,673) $ 27,172
========== ======= ======== ======== ======== ========
Earnings (loss) per share
(Note 2):
Primary.................. $ (0.12) $ (0.18)
========== ========
Fully Diluted............ $ (0.12) $ (0.18)
========== ========
Weighted average shares
outstanding;
Primary.................. 240,539 245,665
========== ========
Fully Diluted............ 240,539 245,665
========== ========
<CAPTION>
PRO FORMA
AS ADJUSTED
-----------
<S> <C> <C>
Revenues................... $ 1,050,267
Costs and expenses......... 1,077,742
----------
Operating income
(loss)................. (27,475)
Interest income (expense),
net...................... (40,597)
Other income (expenses).... 21
----------
Pre-tax income (loss).... (68,051)
Income taxes............... (12,798)
----------
Income (loss) before
equity in net loss of
affiliates............. (55,253)
Equity in net loss of
affiliates............... (36,712)
Minority interest.......... (46)
----------
Net income (loss)........ (92,011)
Preferred dividends........ (14,580)
----------
Net income (loss)
attributable to common
shares................. $ (106,591)
==========
Earnings (loss) per share
(Note 2):
Primary.................. $ (0.40)
==========
Fully Diluted............ $ (0.40)
==========
Weighted average shares
outstanding;
Primary.................. 267,203
==========
Fully Diluted............ 267,203
==========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
18
<PAGE> 19
LORAL SPACE & COMMUNICATIONS LTD.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ORION
PRO FORMA PRO FORMA PRO FORMA
LORAL SS/L SKYNET ADJUSTMENTS SUBTOTAL ORION ADJUSTMENTS
-------- ---------- -------- ----------- --------- --------- -----------
(NOTE 1) (NOTE 1)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............ $ 5,088 $1,017,653 $ 84,435 $ (96,488)(d) $1,010,688 $ 34,201 $ --
Costs and
expenses.......... 17,606 963,517 39,051 (59,951)(d) 960,223 64,149 5,629(j)
------- ---------- -------- -------- -------- --------- --------
Operating income
(loss).......... (12,518) 54,136 45,384 (36,537) 50,465 (29,948) (5,629)
Interest income
(expense), net.... 28,699 6,081 (11,305) (30,755) (d),(g) (7,280) (68,549) (4,517)(1)
Other income
(expenses)........ -- -- -- -- -- -- --
------- ---------- -------- -------- -------- --------- --------
Pre-tax income
(loss).......... 16,181 60,217 34,079 (67,292) 43,185 (98,497) (10,146)
Income taxes........ 2,912 27,643 13,369 (23,534)(e),(f) 20,390 -- (19,128)(m)
------- ---------- -------- -------- -------- --------- --------
Income (loss)
before equity in
net loss of
affiliates...... 13,269 32,574 20,710 (43,758) 22,795 (98,497) 8,982
Extraordinary
loss.............. -- -- -- -- -- -- --
Equity in net loss
of affiliates..... (4,392) (1,549) -- (38,396)(a),(d) (44,337) -- --
------- ---------- -------- -------- -------- --------- --------
Net income
(loss).......... 8,877 31,025 20,710 (82,154) (21,542) (98,497) 8,982
Preferred
dividends......... -- -- -- -- -- (6,945) 6,945(d)
------- ---------- -------- -------- -------- --------- --------
Net income (loss)
attributable to
common shares... $ 8,877 $ 31,025 $ 20,710 $ (82,154) $ (21,542) $(105,442) $ 15,927
======= ========== ======== ======== ======== ========= ========
Earnings (loss) per
share (note 2):
Primary........... $ 0.04 $ (0.09)
======= ========
Fully Diluted..... $ 0.04 $ (0.09)
======= ========
Weighted average
shares
outstanding:
Primary........... 229,396 241,026
======= ========
Fully Diluted..... 229,396 241,026
======= ========
<CAPTION>
PRO FORMA
AS ADJUSTED
------------
<S> <C>
Revenues............ $1,044,889
Costs and
expenses.......... 1,030,001
---------
Operating income
(loss).......... 14,888
Interest income
(expense), net.... (80,346)
Other income
(expenses)........ --
---------
Pre-tax income
(loss).......... (65,458)
Income taxes........ 1,262
---------
Income (loss)
before equity in
net loss of
affiliates...... (66,720)
Extraordinary
loss.............. --
Equity in net loss
of affiliates..... (44,337)
---------
Net income
(loss).......... (111,057)
Preferred
dividends......... --
---------
Net income (loss)
attributable to
common shares... $ (111,057)
=========
Earnings (loss) per
share (note 2):
Primary........... $ (0.42)
=========
Fully Diluted..... $ (0.42)
=========
Weighted average
shares
outstanding:
Primary........... 262,564
=========
Fully Diluted..... 262,564
=========
</TABLE>
See notes to unaudited pro forma condensed consolidated financial statements.
19
<PAGE> 20
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
AND DECEMBER 31, 1996
1. The following facts and assumptions in note (a) were used in
determining the pro forma effect of the investment in SatMex.
(a) Through Acquisition Sub, the Sponsors acquired 75% of the
outstanding capital stock of SatMex for $638.0 million, paid in two
installments. The first installment was paid on November 17, 1997 using
$141.1 million of equity contributed by the Sponsors and $52.5 million of
debt incurred by Acquisition Sub. Loral's investment was $91.7 million for
a 49% indirect economic interest in SatMex. The final installment plus
interest, financed with debt incurred by Acquisition Sub, was paid on
December 29, 1997. Loral will account for this investment under the equity
method of accounting. The unaudited pro forma condensed consolidated
balance sheet reflects a reduction in cash and increase in investments in
affiliates to record Loral's investment in SatMex.
Pro forma adjustments were made to the unaudited pro forma condensed
consolidated statements of operations for the nine months ended December
31, 1996 and September 30, 1997 to reflect the equity in earnings of SatMex
as if the investment was made April 1, 1996. The pro forma adjustments were
based on the unaudited pro forma financial statements of SatMex for the
nine months ended September 30, 1997 and the year ended December 31, 1996.
The SatMex unaudited pro forma financial statements were not available for
the nine months ended December 31, 1996. Therefore, the pro forma
adjustment for the nine months ended December 31, 1996 was determined by
calculating the nine month results of operations on a pro rata basis.
Management believes that this method provides a reasonable approximation of
SatMex's results of operations for the nine months ended December 31, 1996.
The pro forma adjustment for equity in net loss of affiliates was
calculated as follows (amounts in thousands of U.S. dollars):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Historical net income of SatMex.................... $ 13,330 $ 35,052
Pro forma adjustments:
Amortization of Concessions........................ (8,265) (8,265)
Interest expense................................... (46,625) (46,625)
Amortization of deferred financing costs........... (1,637) (1,637)
Financing fees..................................... (8,850) --
Amortization of offering costs..................... (704) (704)
Adjustments to reflect post-acquisition
operations....................................... (4,406) (3,942)
Reversal of Government assessment.................. 3,401 4,809
Income tax benefit................................. 11,145 3,144
-------- --------
Total pro forma adjustments........................ (55,941) (53,220)
-------- --------
Pro forma net loss of SatMex....................... (42,611) (18,168)
Loral indirect ownership interest in SatMex........ 49% 49%
-------- --------
Loral share of SatMex pro forma net loss........... (20,879) (8,902)
Loral share of management and intellectual property
fees............................................. 868 1,499
Loral share of Holdings' interest on Government
Obligation....................................... (4,989) (4,989)
-------- --------
Pro forma adjustment to equity in net loss of
affiliates....................................... $(25,000) $ (12,392)
======== ========
</TABLE>
20
<PAGE> 21
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
The excess of purchase price over book value of net assets has been
assigned to the Concessions and is being amortized over 40 years. Interest has
been reflected at rates ranging from 9.75% to 11% plus Mexican withholding tax,
and deferred financing and offering costs are being amortized over 6 to 7 years,
when the related debt matures. Other pro forma adjustments have been made to
reflect revenue and expenses on a post-acquisition basis. Revenue adjustments
reflect reduced revenues from Telecomm based upon new contracts entered into
concurrent with the acquisition. Operating expense adjustments include increased
payroll cost to post-acquisition pay scales, increased in-orbit insurance
premiums driven by higher levels of insurance required due to the financings,
incremental lease costs, reversal of non-recurring bad debt recoveries recorded
in 1997, management and intellectual property fees to be paid to the Sponsors
and elimination of non-recurring bonuses and employment costs related to the
privatization. Pro forma adjustments have been made to eliminate assessments
from the Mexican Government. A pro forma tax benefit has been reflected on the
pro forma adjustments and historical income.
Pro forma adjustments related to affiliates of Loral other than SatMex
include Loral's share of the Government Obligation interest expense which
accrues at 12% per year applied to the discounted amount of $85.3 million and
management and intellectual property fees payable from SatMex to other Loral
affiliates.
The unaudited pro forma condensed consolidated statements of operations
reflect charges for interest expense of 7% on the cash portion of the purchase
price.
The following facts and assumptions in notes (b) through (e) were used in
determining the pro forma effect of the increase in Loral's ownership of SS/L to
100%.
(b) Pursuant to agreements negotiated in December 1996 and February
1997, Loral acquired 49% of SS/L from four international aerospace and
communications companies (the "Alliance Partners") between March 25, 1997
and June 23, 1997 for $374 million. These transactions, in which Loral
acquired 24.5% of SS/L for $93.5 million in cash and $93.5 million in
convertible preferred equivalent obligations ("CPEOs"), and the remaining
24.5% of SS/L acquired on June 23, 1997 for 8,042,922 shares of Loral
Common Stock and 1,063,663 shares of Loral Series C Preferred Stock are
reflected in Loral's historical unaudited condensed consolidated balance
sheet as of September 30, 1997. On June 5, 1997, the CPEOs were exchanged
into shares of Loral's Series C Preferred Stock after approval by
shareholders.
In August 1996, Loral increased its ownership of SS/L to 51% through
the acquisition of an 18.3% interest held by certain partnerships
affiliated with Lehman Brothers (the "Lehman Partnerships") for $110.0
million including cash of $4 million, 7.5 million shares of Loral Common
Stock, and 267,256 shares of common stock of Globalstar Telecommunications
Limited previously held by a Loral subsidiary. In accordance with the terms
of Loral's agreement with the Lehman Partnerships, the purchase price was
increased by $9.2 million in April 1997.
Loral increased its ownership of SS/L to 75.5% during 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.
The acquisition of SS/L common stock has been accounted for as a
purchase. The cost in excess of net assets acquired arising from this
acquisition is being amortized over 40 years. A pro forma adjustment of
$2.1 million to amortization expense was made to the unaudited pro forma
condensed consolidated statement of operations for the nine months ended
December, 31, 1996. Loral's historical unaudited condensed consolidated
statement of operations for the nine months ended September 30, 1997
reflects the results of operations of SS/L from January 1, 1997 and the
related minority interest of the SS/L equity not owned by Loral during the
period. Loral's historical unaudited condensed consolidated statement of
operations for the nine months ended December 31, 1996 includes SS/L's
operations using the equity method of accounting. Pro forma adjustments
assume that Loral had acquired 100% of the common stock of SS/L as of April
1, 1996.
21
<PAGE> 22
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(c) The purchase price for SS/L was determined through arm's length
bargaining between Loral and the Alliance Partners and Loral and the Lehman
partnerships. The cash portion of the acquisition was financed with cash on
hand. The unaudited pro forma condensed consolidated statements of
operations reflect charges for interest expense of 7% on the cash portion
of the purchase price and 6% on the CPEOs and preferred stock portion of
the purchase price.
(d) Other pro forma adjustments to the unaudited pro forma condensed
consolidated statement of operations for the nine months ended September
30, 1997, include elimination of SS/L's sales to Skynet of $24.8 million
and related costs and expenses of $22.5 million for the period January 1,
1997 through March 14, 1997. Other pro forma adjustments to the unaudited
pro forma condensed consolidated statement of operations for the nine
months ended December 31, 1996 include elimination of SS/L's sales to
Skynet of $96.5 million and related cost of sales of $82.1 million and
elimination of Loral's equity in the net income of SS/L based on its
historical ownership interest during the period. Other adjustments related
to differences between fair values of assets acquired and their carrying
amounts are already reflected in the September 30, 1997 historical
unaudited condensed consolidated balance sheet.
(e) A statutory (Federal and state) tax rate of 41%, adjusted for
non-deductible interest and goodwill, was assumed with respect to the pro
forma adjustments.
The following facts and assumptions in notes (f) through (i) were used in
determining the pro forma effect of the acquisition of Skynet from AT&T.
(f) On March 14, 1997 Loral 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 arising from an
adjustment resulting from the failure of Skynet's Telstar 401 satellite 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. Loral's
historical unaudited condensed consolidated statement of operations for the
nine months ended September 30, 1997 reflects the operations of Skynet from
the date of acquisition through September 30, 1997. The Skynet
preacquisition period January 1, 1997 through March 14, 1997 presented in
the unaudited pro forma condensed consolidated statement of operations for
the nine months ended September 30, 1997, excludes the loss of the Telstar
401 satellite. The Skynet historical unaudited condensed consolidated
statement of operations included in the unaudited pro forma condensed
consolidated statement of operations for the nine months ended December 31,
1996 includes the operations of Skynet for the entire period. 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.
(g) The purchase price for Skynet was determined through arm's length
bargaining between Loral 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 adjusted purchase price of $478.1
million for the period January 1, 1997 through March 14, 1997 and an
unadjusted price of $712.5 million for the nine months ended December 31,
1996 at an assumed interest rate of 7%, reduced for capitalized interest of
$2.9 million for the period January 1, 1997 through March 14, 1997 and $7.5
million for the nine months ended December 31, 1996 and interest expense
recorded by Skynet of $2.5 million for the period January 1, 1997 through
March 14, 1997 and $11.3 million for the nine months ended December 31,
1996. The unadjusted purchase price of $712.5 million was used as the basis
of the interest expense calculation during the nine months ended December
31, 1996 because Telstar 401 was operating and generating revenues during
that entire period.
22
<PAGE> 23
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(h) The estimated excess of purchase price over net assets acquired of
$100.1 million is being amortized over 40 years. Other purchase accounting
adjustments to the unaudited pro forma condensed consolidated statement of
operations for the period January 1, 1997 through March 14, 1997, pursuant
to the provisions of Accounting Principles Board Opinion No. 16, include
charges for depreciation over an estimated weighted average 12.5 year life
of the excess of fair value of depreciable fixed assets over the historical
book value of $53.1 million. Other purchase accounting adjustments to the
unaudited pro forma condensed consolidated statement of operations for the
nine months ended December 31, 1996 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 $243.3 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.
(i) A statutory (Federal and state) tax rate of 39% was assumed with
respect to the pro forma adjustments.
The following facts and assumptions in notes (j) through (m) were used in
determining the pro forma effect of the proposed acquisition of Orion.
(j) On October 7, 1997, Loral agreed to acquire 100% of Orion's
outstanding capital stock for Loral common stock. Based on Orion's fully
diluted shares of approximately 28 million shares, the value of the
transaction, including expenses, 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 capital stock will be converted into $17.50 worth of Loral
common stock assuming the "determination price", as defined, of Loral
common stock is between $16.305 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 common 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 of Loral common stock for each
share of Orion. Based on a closing price of $22.75 of Loral common stock on
December 2, 1997, 21.5 million shares of Loral common stock will be issued.
The unaudited pro forma condensed consolidated balance sheet has been
prepared as if the acquisition of Orion's net assets had been completed on
September 30, 1997.
This acquisition will be accounted for as a purchase. Pro forma
adjustments to the unaudited condensed consolidated statement of operations
have been calculated for the nine month periods ended December 31, 1996 and
September 30, 1997, respectively. These unaudited pro forma condensed
consolidated statement of operations adjustments have been prepared as if
the proposed acquisition of Orion had occurred on April 1, 1996. Orion
operations have been calculated by deducting the Orion operations for the
three month period ended March 31, 1996 from the Orion operations for the
year ended December 31, 1996. Such operations give effect on a pro forma
basis to certain transactions completed by Orion in January 1997, as if
such transactions had been completed January 1, 1996. Revenues, operating
loss and net loss attributable to common shareholders for Orion on a pro
forma basis for the three months ended March 31, 1996 were $7.6 million,
$11.1 million and $37.4 million, respectively.
(k) The estimated excess of purchase price over the fair market value
of net assets acquired of $404.3 million is being amortized over 40 years.
Orion's identifiable assets and liabilities used in the preparation of
these unaudited pro forma condensed consolidated financial statements were
based on historical cost, pending the completion of an independent
valuation and allocation of their respective fair values, which are not
expected to result in material adjustments. Other pro forma adjustments to
the unaudited condensed consolidated balance sheet include (i) the assumed
conversion to equity at September 30, 1997 of Orion's Series A 8%
Cumulative Redeemable Convertible Preferred Stock aggregating $16.9 million
at September 30, 1997 including accrued dividends; Series B 8% Cumulative
23
<PAGE> 24
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
Redeemable Convertible Preferred Stock aggregating $5.1 million at
September 30, 1997 including accrued dividends; Series C 6% Cumulative
Redeemable Convertible Preferred Stock aggregating $95.9 million at
September 30, 1997 including accrued dividends and $60.0 million, 8.75%
convertible debentures dated January 31, 1997 and the elimination of the
accrued interest thereon; (ii) the elimination of Orion's goodwill
aggregating $21.1 million at September 30, 1997; and (iii) the accrual of
$.6 million relating to the assumed acceleration of vesting of Non-Employee
Director unvested stock options in connection with the Merger.
(l) Other pro forma adjustments to the unaudited condensed
consolidated statement of operations include goodwill amortization,
minority interest, preferred dividends and interest expense on the
convertible debentures from the historical Orion results.
(m) A tax benefit was recorded as an adjustment to the unaudited pro
forma condensed consolidated statement of operations for the nine months
ended December 31, 1996 and September 30, 1997 related to the Orion loss
which would have been available to Loral on its US income tax return. A
statutory (federal and state) tax rate of 40% was applied to certain pro
forma adjustments for the nine months ended September 30, 1997.
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 (Loral Series A Preferred Stock) outstanding, after giving pro forma
effect to the shares issued for the transactions described above. The Loral
Series C Preferred Stock was excluded from the earnings per share calculations
as their effect would have been anti-dilutive.
24
<PAGE> 25
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.
/s/ LORAL SPACE & COMMUNICATIONS LTD.
--------------------------------------
(Registrant)
By: /s/ MICHAEL P. DEBLASIO
------------------------------------
Michael P. DeBlasio
Senior Vice President and
Chief Financial Officer
Date: January 13, 1998
25
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EXHIBIT INDEX
23 -- Consent of Price Waterhouse
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statement on Form S-3/A (No. 333-26517)
and on Form S-8 (No. 333-14863) of Loral Space & Communications Ltd. of our
report on the financial statements of the fixed satellite service business of
Telecomunicaciones de Mexico (the "Predecessor Company" of Satelites Mexicanos,
S.A. de C.V.) dated December 15, 1997, except for Note 9 which is as of January
5, 1998, and our report on the balance sheet of Satelites Mexicanos, S.A. de
C.V. dated December 15, 1997, except for Note 9 which is as of January 5, 1998,
which appear in the Current Report on Form 8-K of Loral Space & Communications
Ltd. dated January 13, 1998.
Price Waterhouse
Mexico City
January 13, 1998
