<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
COMMISSION FILE NUMBER 1-14180
LORAL SPACE & COMMUNICATIONS LTD.
C/O LORAL SPACECOM CORPORATION
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
TELEPHONE: (212) 697-1105
JURISDICTION OF INCORPORATION: BERMUDA
IRS IDENTIFICATION NUMBER: 13-3867424
The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
has been subject to such filing requirements for the past 90 days.
As of April 30, 1999, there were 244,089,361 shares of Loral Space &
Communications Ltd. common stock outstanding.
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<PAGE> 2
PART 1. FINANCIAL INFORMATION
LORAL SPACE & COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues from satellite sales............................... $247,830 $267,531
Revenues from satellite services............................ 58,096 27,682
-------- --------
Total revenues............................................ 305,926 295,213
Costs of satellite sales.................................... 215,299 243,276
Costs of satellite services................................. 44,952 16,127
Selling, general and administrative expenses................ 46,841 34,828
-------- --------
Operating income (loss)..................................... (1,166) 982
Interest and investment income.............................. 14,804 8,666
Interest expense............................................ (17,839) (1,720)
-------- --------
Income (loss) before income taxes, equity in net loss of
affiliates and minority interest.......................... (4,201) 7,928
Income tax expense.......................................... (2,397) (3,063)
-------- --------
Income (loss) before equity in net loss of affiliates and
minority interest......................................... (6,598) 4,865
Equity in net loss of affiliates............................ (32,781) (20,370)
Minority interest........................................... 878 62
-------- --------
Net loss.................................................... (38,501) (15,443)
Preferred dividends and accretion........................... (11,607) (11,606)
-------- --------
Net loss applicable to common stockholders.................. $(50,108) $(27,049)
======== ========
Loss per share:
Basic and diluted......................................... $ (0.17) $ (0.11)
======== ========
Weighted average shares outstanding:
Basic and diluted......................................... 289,703 249,336
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 3
LORAL SPACE & COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 565,485 $ 546,772
Restricted cash........................................... 48,699 50,180
Accounts receivable, net.................................. 24,045 23,637
Contracts in process...................................... 399,709 378,685
Inventories............................................... 182,986 191,245
Other current assets...................................... 29,022 35,197
---------- ----------
Total current assets.............................. 1,249,946 1,225,716
Property, plant and equipment, net.......................... 1,793,324 1,667,508
Cost in excess of net assets acquired, net.................. 960,463 966,260
Long-term receivables....................................... 329,901 317,665
Restricted cash............................................. 22,675
Investments in affiliates................................... 882,171 707,917
Deposits.................................................... 124,470 140,970
Other assets................................................ 172,697 180,504
---------- ----------
$5,512,972 $5,229,215
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt................................... $ 41,674 $ 22,736
Accounts payable.......................................... 182,013 213,507
Accrued employment costs.................................. 43,648 44,256
Customer advances......................................... 145,943 158,192
Accrued interest and preferred dividends.................. 27,264 37,860
Other current liabilities................................. 16,711 34,890
Income taxes payable...................................... 17,706 17,630
---------- ----------
Total current liabilities......................... 474,959 529,071
Deferred income taxes....................................... 38,038 38,370
Pension and other postretirement liabilities................ 51,720 50,470
Long-term liabilities....................................... 126,846 113,840
Long-term debt.............................................. 1,918,777 1,533,039
Minority interest........................................... 27,736 28,704
Commitments and contingencies (Notes 4, 6 and 8)
Shareholders' equity:
Series A convertible preferred stock, $.01 par value...... 459 459
Series B preferred stock, $.01 par value..................
6% Series C convertible redeemable preferred stock
($745,472 redemption value)............................ 735,861 735,437
Common stock, $.01 par value.............................. 2,441 2,439
Paid-in capital........................................... 2,335,444 2,330,755
Treasury stock, at cost................................... (3,360) (3,360)
Unearned compensation..................................... (7,430) (8,231)
Retained deficit.......................................... (212,765) (162,657)
Accumulated other comprehensive income.................... 24,246 40,879
---------- ----------
Total shareholders' equity........................ 2,874,896 2,935,721
---------- ----------
$5,512,972 $5,229,215
========== ==========
</TABLE>
- ---------------
Note: The December 31, 1998 balance sheet has been derived from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
2
<PAGE> 4
LORAL SPACE & COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities:
Net loss.................................................. $(38,501) $(15,443)
Equity in net loss of affiliates.......................... 32,781 20,370
Minority interest......................................... (878) (62)
Deferred taxes............................................ 1,936 719
Non-cash interest income.................................. (297) (375)
Non-cash interest expense................................. 8,210
Depreciation and amortization............................. 37,793 17,428
Change in operating assets and liabilities:
Accounts receivable and contracts in process.............. (21,432) (88,570)
Inventories............................................... 8,259 (20,887)
Deposits.................................................. 16,500 (54,093)
Long-term receivables..................................... (12,236) 3,409
Other assets.............................................. (1,154) (5,270)
Accounts payable.......................................... (31,494) 63,558
Accrued expenses and other current liabilities............ (29,383) (9,336)
Income taxes payable...................................... 76 404
Customer advances......................................... (12,249) (8,481)
Long-term liabilities..................................... 13,007 1,337
Other..................................................... 2,871 1,177
-------- --------
Cash used in operating activities........................... (26,191) (94,115)
-------- --------
Investing activities:
Cash acquired in connection with Orion acquisition........ 53,801
Investments in affiliates................................. (208,678) (9,339)
Use and transfer of restricted cash....................... 24,919
Capital expenditures...................................... (155,264) (62,132)
-------- --------
Cash used in investing activities........................... (339,023) (17,670)
-------- --------
Financing activities:
Net proceeds from issuance of 9 1/2% Senior Notes......... 343,875
Borrowings under revolving credit facility, net........... 45,000 98,000
Borrowings under note purchase facility................... 1,922 6,972
Repayments of other long-term obligations................. (454)
Proceeds from exercise of stock options and issuances to
employee savings plan.................................. 4,767 6,889
Contributions from minority partners...................... 9,996
Preferred dividends....................................... (11,183) (11,182)
-------- --------
Cash provided by financing activities....................... 383,927 110,675
-------- --------
Increase (decrease) in cash and cash equivalents............ 18,713 (1,110)
Cash and cash equivalents -- beginning of period............ 546,772 226,547
-------- --------
Cash and cash equivalents -- end of period.................. $565,485 $225,437
======== ========
Non-cash activities:
Common stock issued to acquire Orion...................... $469,025
========
Unrealized gain (loss) on available-for-sale securities... $(15,720) $ 9,408
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 5
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION AND PRINCIPAL BUSINESS
Loral Space & Communications Ltd. together with its subsidiaries, ("Loral"
or the "Company") is one of the world's leading satellite communications
companies with substantial activities in satellite manufacturing and
satellite-based communications services. Loral is developing the building blocks
necessary to create a seamless, global networking capability for the information
age. Loral is organized into four distinct operating segments (see Note 9):
Satellite Manufacturing and Technology: Designing and manufacturing
satellites and other space systems and developing satellite technology for
a broad variety of customers and applications through Space Systems/Loral,
Inc. ("SS/L"),
Fixed Satellite Services ("FSS"): Leasing transponder capacity and
providing value-added services to customers for a wide variety of
applications, including the distribution of broadcast programming, news
gathering, business television, distance learning and direct-to-home
("DTH") services, through the activities of Loral Skynet, Loral Orion, Inc.
("Loral Orion"), Satelites Mexicanos, S.A. de C.V. ("Satmex") and the
recently formed Europe*Star Limited ("Europe*Star"),
Data Services: Business in development, providing managed communications
networks and Internet and intranet services through Loral Orion and
delivering high-speed broadband data communications through CyberStar, L.P.
("CyberStar"), using transponder capacity on the Telstar and Loral Orion
fleets, and
Global Mobile Telephony: Will provide worldwide wireless mobile telephony
and narrow-band data communications through a constellation of low-earth
orbiting ("LEO") satellites (the "Globalstar(TM) System") operated by
Globalstar, L.P. ("Globalstar").
2) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Loral pursuant to the rules of the Securities and Exchange
Commission ("SEC") and, in the opinion of the Company, include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
results of operations, financial position and cash flows. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such SEC rules. The Company believes that the disclosures
made are adequate to keep the information presented from being misleading. The
results of operations for the three months ended March 31, 1999, are not
necessarily indicative of the results to be expected for the full year. It is
suggested that these financial statements be read in conjunction with the
audited consolidated financial statements and notes thereto of Loral included in
Loral's latest Annual Report on Form 10-K.
3) ACCOUNTING POLICIES
Comprehensive loss
Loral follows Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130"). SFAS 130 requires unrealized gains
or losses on the Company's available-for-sale securities
4
<PAGE> 6
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and foreign currency translation adjustments to be included in accumulated other
comprehensive income. Comprehensive loss for the three months ended March 31,
1999 and 1998 was:
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net loss.................................................... $38,501 $15,443
Unrealized (gain) loss on available-for-sale securities..... 15,720 (9,408)
Cumulative translation adjustment........................... 913
------- -------
Comprehensive loss.......................................... $55,134 $ 6,035
======= =======
</TABLE>
Restricted Cash
In connection with the Orion acquisition, Loral acquired cash and cash
equivalents which are restricted in use to the construction of satellites and
payment of interest on Orion's senior notes. As of March 31, 1999, these
restricted assets aggregated $48.7 million.
Reclassifications
Certain reclassifications have been made to conform prior period amounts to
the current period presentation.
4) ACQUISITIONS AND INVESTMENTS IN AFFILIATES
Acquisitions
On March 20, 1998, Loral acquired all of the outstanding stock, of Orion
Network Systems, Inc. ("Orion") in exchange for Loral common stock. Loral issued
18 million shares of its common stock and assumed existing Orion vested options
and warrants to purchase 1.4 million shares of Loral common stock representing
an aggregate purchase price of $472.5 million. The purchase price represented
$447.7 million in excess of Orion's net book value, which was primarily
allocated to costs in excess of net assets acquired of $619.7 million, and a
fair value adjustment of $153.4 million to increase the carrying value of
Orion's senior notes and senior discount notes. In addition, Loral agreed to
assume Orion's unvested employee stock options, which resulted in a new
measurement date and an unearned compensation charge of $4.5 million, to be
amortized over the remaining vesting periods of the options. Loral accounted for
this acquisition as a purchase as of March 31, 1998. Accordingly, Loral's
consolidated financial statements include Orion's results of operations from
April 1, 1998.
Had the acquisition of Orion occurred on January 1, 1998, the unaudited pro
forma sales, operating loss, net loss applicable to common stockholders and
related basic and diluted loss per share for the three months ended March 31,
1998 would have been: $314 million, $15 million, $47 million and $0.18,
respectively. These results, which are based on various assumptions, are not
necessarily indicative of what would have occurred had the acquisition been
consummated on January 1, 1998.
Investments in Affiliates
Globalstar
In January 1999, Globalstar Telecommunications Limited ("GTL"), a general
partner of Globalstar, completed a private offering of $350 million of
convertible redeemable preferred stock (of which Loral purchased $150 million
face amount, to maintain its ownership percentage). GTL in turn used the net
proceeds from its offering to purchase redeemable preferred partnership
interests of Globalstar, which in turn is using the funds for the construction
and deployment of the Globalstar(TM) System.
5
<PAGE> 7
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of March 31, 1999, Loral owned directly and indirectly 24.7 million
ordinary partnership interests (42.6%) of the total 58.2 million Globalstar
ordinary partnership interests outstanding. During the first quarter of 1999,
Loral capitalized interest of $8.3 million on its investment in Globalstar.
Satmex
In connection with the privatization by the Federal Government of Mexico
(the "Mexican Government") of its fixed satellite services business, Loral and
Principia, S.A. de C.V. ("Principia"), formerly known as Telefonica Autrey, S.A.
de C.V., formed a joint venture, Firmamento Mexicano, S.A. de R.L. de C.V.
("Holdings"). On November 17, 1997, Holdings acquired 75% of the outstanding
capital stock of Satmex for $646.8 million. The purchase price was financed by a
Loral equity contribution of $94.6 million, a Principia equity contribution of
$50.9 million and debt issued by Servicios Corporativos Satelitales, S.A. de
C.V. ("Servicios"), a wholly owned subsidiary of Holdings. As part of the
acquisition, Servicios agreed to issue a $125.1 million seven year obligation
bearing interest at 6.03% to the Mexican Government (the "Government
Obligation") in consideration for the assumption by Satmex of the debt incurred
by Servicios in connection with the acquisition. Holdings and the Mexican
Government have reached an agreement in principle to increase the amount of the
Government Obligation by approximately $5 million. The debt of Satmex and
Servicios is non-recourse to Loral and Principia. However, Loral and Principia
have agreed to maintain assets in a collateral trust in an amount equal to the
value of the Government Obligation through December 30, 2000 and, thereafter, in
an amount equal to 1.2 times the value of the Government Obligation until
maturity. As of March 31, 1999, Loral and Principia have pledged their
respective shares in Holdings in such trust. Loral has a 65% interest in
Holdings and a 49% indirect economic interest in Satmex.
On March 30, 1999, Loral acquired 577,554 shares of preferred stock of
Satmex at a purchase price of approximately $30.3 million. The preferred stock
has limited voting rights, pays a dividend in common stock of Satmex and is
exchangeable, at Satmex's option, into common stock of Satmex based upon a
predetermined exchange ratio.
Europe*Star
In December 1998, Loral finalized its strategic partnership with a
subsidiary of Alcatel to jointly build and operate Europe*Star, a geostationary
satellite system anticipated to provide broadcast and telecommunications
services to Europe, the Middle East, Southeast Asia, India and South Africa.
Alcatel will serve as the primary contractor of the Europe*Star turnkey system.
SS/L will provide the satellite bus and test and integrate the satellites.
Through March 31, 1999, Loral invested $66 million in Europe*Star, including $17
million during the first quarter of 1999. As of March 31, 1999, Loral owned 47%
of Europe*Star.
SkyBridge
In June 1997, Loral and Alcatel formed a strategic partnership to jointly
develop, deploy and operate high-speed global multimedia satellite networks that
will bring high-bandwidth services to businesses and to consumers. The agreement
includes cross investments in Loral's geostationary (GEO) satellite-based
CyberStar project and Alcatel's low-earth-orbit (LEO) satellite-based SkyBridge
project. Each company will participate in the development of the two projects.
The SkyBridge project is currently in the development stage. As of March 31,
1999, Loral owned approximately 17% of the outstanding partnership interests in
SkyBridge.
6
<PAGE> 8
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investments in affiliates is as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Globalstar........................................... $691,344 $555,906
Satmex............................................... 98,432 74,159
Europe*Star.......................................... 61,828 45,413
SkyBridge............................................ 6,283 14,053
Other affiliates..................................... 24,284 18,386
-------- --------
$882,171 $707,917
======== ========
</TABLE>
Equity in net loss of affiliates consists of:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Globalstar, net of tax benefit........................... $17,921 $11,086
Satmex................................................... 6,026 6,910
Europe*Star.............................................. 643
SkyBridge, net of tax benefit............................ 6,799 1,214
Other affiliates......................................... 1,392 1,160
------- -------
$32,781 $20,370
======= =======
</TABLE>
The following table represents the summary of results of operations of
certain of Loral's affiliates for the three months ended March 31, 1999 and 1998
(in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
GLOBALSTAR SATMEX GLOBALSTAR SATMEX
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Sales............................. $ -- $27,977 $ -- $25,908
Operating income (loss)........... (42,681) 7,151 (24,761) 6,730
Net loss.......................... (40,368) (8,497) (19,596) (15,237)
Net loss applicable to ordinary
partnership interests........... (45,118) (24,896)
</TABLE>
7
<PAGE> 9
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5) CONTRACTS IN PROCESS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
U.S. Government contracts:
Amounts billed..................................... $ 10,353 $ 9,099
Unbilled contract receivables...................... 12,472 11,543
-------- --------
22,825 20,642
-------- --------
Commercial contracts:
Amounts billed..................................... 226,790 216,775
Unbilled contract receivables...................... 150,094 141,268
-------- --------
376,884 358,043
-------- --------
$399,709 $378,685
======== ========
</TABLE>
Unbilled amounts include recoverable costs and accrued profit on progress
completed, which have not been billed. Such amounts are billed upon shipment of
the product, achievement of contractual milestones, or completion of the
contract and are reclassified to billed receivables.
6) LONG TERM DEBT
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Term loan, 6.725% and 6.7% at March 31, and
December 31, respectively........................ $ 275,000 $ 275,000
Revolving credit facility, 6.725% and 6.7% at March
31 and December 31, respectively................. 250,000 205,000
Note purchase facility............................. 128,579 126,657
9 1/2% senior notes due 2006....................... 350,000
Export-Import credit facility...................... 15,018 15,018
Other.............................................. 591 605
Non-recourse debt of Orion:
11.25% senior notes due 2007 (principal amount
$443 million)................................. 506,149 507,573
12.5% senior discount notes due 2007 (principal
amount $484 million).......................... 418,446 408,812
Other............................................ 16,668 17,110
---------- ----------
Total debt......................................... 1,960,451 1,555,775
Less, current maturities........................... 41,674 22,736
---------- ----------
$1,918,777 $1,533,039
========== ==========
</TABLE>
In January 1999, Loral sold $350 million principal amount of 9 1/2% Senior
Notes due 2006 ("Senior Notes"). The Senior Notes are general unsecured
obligations of Loral that: (1) are structurally junior in right of payment to
all existing and future indebtedness of Loral's subsidiaries; (2) are equal in
right of payment with all existing and future senior indebtedness of Loral
(except as to assets pledged to secure such Indebtedness); and (3) are senior in
right of payment to any future indebtedness which is by its terms junior in
right of payment to any senior Indebtedness of Loral.
8
<PAGE> 10
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest on the Senior Notes accrue at the rate of 9 1/2% per annum and are
payable semi-annually in arrears on January 15 and July 15, commencing on July
15, 1999. The Senior Notes will mature on January 15, 2006. Loral may redeem all
or part of the Senior Notes on or after January 15, 2003. Prior to January 15,
2002, Loral may redeem up to 35% of the Senior Notes from the proceeds of
certain equity offerings. Upon a change of control (as defined), each holder of
Senior Notes will have the right to require Loral to repurchase such holder's
Senior Notes at a price equal to 101% of the principal amount thereof plus
accrued interest to the date of repurchase.
Loral used a portion of the proceeds from the Senior Notes to purchase $150
million face amount of GTL convertible preferred stock, in order to maintain its
ownership interest in Globalstar (see Note 4).
7) LOSS PER SHARE
Basic loss per share is computed based on the weighted average number of
shares of common stock and the Series A Preferred Stock outstanding. Diluted
loss per share excludes the assumed conversion of the Series C Preferred Stock
and stock options as the effect would have been antidilutive.
The following table sets forth the computation of basic and diluted loss
per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Numerator:
Net loss.................................................. $38,501 $15,443
Preferred dividends and accretion......................... 11,607 11,606
------- -------
Numerator for basic and diluted earnings per share -- net
loss applicable to common stockholders.................... $50,108 $27,049
======= =======
Denominator:
Weighted average shares:
Common stock........................................... 243,806 203,439
Series A Preferred Stock............................... 45,897 45,897
------- -------
Denominator for basic earnings per share.................. 289,703 249,336
Effect of dilutive securities:
Series C Preferred Stock............................... * *
Employee stock options................................. * *
------- -------
Denominator for diluted earnings per share................ 289,703 249,336
======= =======
Basic and diluted loss per share............................ $ 0.17 $ 0.11
======= =======
</TABLE>
- ---------------
* Effect is antidilutive.
8) CONTINGENCIES
In connection with the merger between Loral Corporation and Lockheed Martin
Corporation ("Lockheed Martin"), Lockheed Martin assumed approximately $206
million of a guarantee under a Globalstar credit agreement. The balance of $44
million of the guarantee was assumed by various Globalstar partners, including
$11.7 million by SS/L. In addition, Loral has agreed to indemnify Lockheed
Martin for its liability, if any, in excess of $150 million under its guarantee
of the Globalstar credit agreement. Globalstar is currently financed without
recourse to Loral other than the indemnification and the SS/L guarantee
described above.
9
<PAGE> 11
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Prior to its acquisition by Loral, Loral Skynet sold several transponders
under which title to specific transponders was transferred to the customer.
Under the terms of the sales contracts, Loral Skynet continues to operate the
satellites on which the transponders are located and provides a warranty for a
period of 10 to 14 years, generally the economic life of the satellite.
Depending on the contract, Loral Skynet is required to replace any 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
replacement. The reimbursement value was determined based on the original
purchase price plus an interest factor from the time the payment was received to
acceptance of the transponder by the customer, reduced on a straight-line basis
over the warranty period. In case of satellite failure, the reimbursement value
may be paid from proceeds received from insurance policies.
In 1997, two satellites built by SS/L experienced solar array circuit
failures. One customer asserted that, in light of the failures and uncertainty
as to future failure, it had not accepted the satellite. Loral believes that
this customer was contractually required to accept the satellite at completion
of in-orbit testing and that risk of loss has passed to the customer. SS/L
settled the other customer's claims in 1997. In 1998, another SS/L-built
satellite experienced degradation in the performance of two of its Ku-band
antennae, which SS/L currently estimates could result in the loss of
approximately 25% of the applicable orbital incentives, although additional
warranty claims could be made. Loral's 1998 consolidated financial statements
include the estimated impact of these events. Management believes that these
matters will not have a material adverse effect on the financial condition or
results of operations of Loral.
SS/L is a target of a grand jury investigation being conducted by the
office of the U.S. Attorney for the District of Columbia with respect to
possible violations of export control laws that may have occurred in connection
with the participation of SS/L employees on a committee formed in the wake of
the 1996 crash of a Long March rocket in China and whose purpose was to consider
whether studies of the crash made by the Chinese had correctly identified the
cause of the failure. The Company is not in a position to predict the direction
or outcome of the investigation. If SS/L were to be indicted and convicted of a
criminal violation of the Arms Export Control Act, it would be subject to a fine
of $1 million per violation and could be debarred from certain export privileges
and, possibly, from participation in government contracts. Since many of SS/L's
satellites are built for foreign customers and/or launched on foreign rockets,
such a debarment would have a material adverse effect on SS/L's business, which
is important to the Company. Indictment for such violations would subject SS/L
to discretionary debarment from further export licenses. Whether or not SS/L is
indicted or convicted, SS/L remains subject to the State Department's general
statutory authority to prohibit exports of satellites and related services if it
finds a violation of the Arms Export Control Act that puts SS/L's reliability in
question, and it can suspend export privileges whenever it determines that
grounds for debarment exist and that such suspension "is reasonably necessary to
protect world peace or the security or foreign policy of the United States."
As far as SS/L can determine, no sensitive information or technology was
conveyed to the Chinese, and no secret or classified information was discussed
with or reported to them. SS/L believes that its employees acted openly and in
good faith and that none engaged in intentional misconduct. Accordingly, the
Company does not believe that SS/L has committed a criminal violation of the
export control laws. The Company does not expect the grand jury investigation or
its outcome to result in a material adverse effect upon its business. However,
there can be no assurance as to these conclusions.
Several Congressional committees have held hearings on U.S. satellite
export policy toward China, alleged influence of campaign contributions
(including contributions made by Loral's Chairman and Chief Executive Officer)
on the Clinton Administration's export policy toward China and related matters.
One of the House committees investigating these matters, chaired by
Representative Cox, recently issued a classified report that is said to be
critical of past government and industry technology transfer practices and
policies. This report is also said to contain 38 proposals for legislative and
executive action to address perceived
10
<PAGE> 12
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
concerns. It is possible that adoption of some or all of such proposals could
have an adverse effect upon the ability of U.S.-based satellite manufacturers
such as SS/L, and possibly other U.S. exporters, to market their products abroad
in competition with foreign-based manufacturers, and might adversely affect
their ability to perform existing contracts. In addition, the portions of the
report that have not yet been declassified could contain negative comments about
SS/L's compliance with the export control laws.
On December 23, 1998, the Office of Defense Trade Controls ("ODTC") of the
U.S. Department of State temporarily suspended the previously approved technical
assistance agreement under which SS/L had been preparing for the launch of the
ChinaSat-8 satellite. According to ODTC, the purpose of the temporary suspension
is to permit that agency to review the agreement for conformity with
newly-enacted legislation (Section 74 of the Arms Export Control Act) with
respect to the export of missile equipment or technology. SS/L has complied with
ODTC's instructions, and believes that a review of the agreement will show that
its terms comply with the new law. The ODTC, however, has not yet completed its
review, and the scheduled launch date for ChinaSat-8 is being delayed. If such a
delay were to continue for an extended period, or if the suspension was not
lifted, SS/L's customer could decide to terminate the contract. If such a
termination were to occur, SS/L would have to refund advances received from
ChinaSat ($124 million as of March 31, 1999) and may incur penalties of up to
$12 million and believes it would incur costs of approximately $38 million to
refurbish and retrofit the satellite so that it could be sold to another
customer. There can be no assurance that SS/L will be able to find such a
replacement customer.
In March 1999, jurisdiction for satellite licensing was transferred from
the Commerce Department to the State Department, and the State Department has
issued regulations relating to the export of, and disclosure of technical
information related to, satellites and related equipment. SS/L anticipates that
obtaining licenses and technical assistance agreements under these new
regulations will take more time and will be considerably more burdensome than in
the past. Delays in obtaining the necessary licenses and technical assistance
agreements may delay SS/L's performance on existing contracts, and, as a result,
SS/L may incur penalties or lose incentive payments under these contracts. In
addition, such delays may have an adverse effect on SS/L's ability to compete
against foreign satellite manufacturers for new satellite contracts.
9) SEGMENTS
Loral has four reportable business segments: Satellite Manufacturing and
Technology, Fixed Satellite Services, Data Services and Global Mobile Telephony
(see Note 1).
In evaluating financial performance, management uses revenues and earnings
before interest, taxes and depreciation and amortization ("EBITDA") as the
measure of a segment's profit or loss. Segment results include the results of
Loral's subsidiaries and its affiliates, Satmex, Europe*Star and Globalstar,
which are accounted for using the equity method in these condensed consolidated
financial statements. Intersegment revenues primarily consists of satellites
under construction by SS/L for Loral Skynet, Loral Orion, Globalstar and
Europe*Star.
11
<PAGE> 13
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information concerning the reportable segments is as
follows for the three months ending March 31, 1999 and 1998 (in millions):
1999 SEGMENT INFORMATION
<TABLE>
<CAPTION>
SATELLITE
MANUFACTURING FIXED GLOBAL
AND SATELLITE DATA MOBILE
TECHNOLOGY SERVICES(1) SERVICES(2) TELEPHONY(3) CORPORATE(4) TOTAL
------------- ----------- ----------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
REVENUE AND EBITDA:
Revenue from external customers........... $ 140.7 $ 69.7 $ 16.3 $ 226.7
Intersegment revenue...................... 185.8 2.4 188.2
---------- ---------- ---------- ----------
Gross revenue............................. $ 326.5 $ 72.1 $ 16.3 414.9
========== ========== ==========
Revenue of unconsolidated affiliates(5)... (28.0)
Intercompany revenue(6)................... (81.0)
----------
Consolidated revenue...................... $ 305.9
==========
EBITDA before development and start-up
costs and affiliate and intercompany
eliminations............................ $ 30.6 $ 47.6 $ (2.3) $ (8.2) $ 67.7
Development and start-up costs(7)......... (4.4) $ (42.1) (46.5)
---------- ---------- ---------- ---------- ---------- ----------
EBITDA before affiliate and intercompany
eliminations............................ $ 30.6 $ 47.6 $ (6.7) $ (42.1) $ (8.2) 21.2
========== ========== ========== ========== ==========
EBITDA of unconsolidated affiliates(5).... 21.7
Intercompany EBITDA(6).................... (6.3)
----------
EBITDA(8)................................. 36.6
Depreciation and amortization............. 37.8
----------
Operating loss............................ $ (1.2)
==========
OTHER DATA:
Depreciation and amortization before
affiliate eliminations.................. $ 8.8 $ 38.0 $ 4.2 $ 0.5 $ 0.8 $ 52.3
========== ========== ========== ========== ==========
Depreciation and amortization of
unconsolidated affiliates(5)............ (14.5)
----------
Depreciation and amortization............. $ 37.8
==========
Total assets before affiliate
eliminations............................ $ 1,679.4 $ 3,484.3 $ 130.8 $ 3,005.0 $ 1,459.6 $ 9,759.1
========== ========== ========== ========== ==========
Total assets of unconsolidated
affiliates(5)........................... (4,246.1)
----------
Total assets.............................. $ 5,513.0
==========
</TABLE>
- ---------------
(1) Fixed Satellite Services includes 100% of the following companies: Loral
Skynet; Loral Orion's transponder leasing business acquired on March 20,
1998; Satmex, a 49% equity investee; and Europe*Star, a 47% equity investee,
since December 1998.
(2) Data services includes 100% of CyberStar (in which Loral owns an 82% equity
interest) and 100% of Loral Orion's data services business since its
acquisition on March 20, 1998.
(3) Includes 100% of Globalstar. Loral owned approximately 43% and 40% at March
31, 1999 and 1998, respectively.
(4) Represents unallocated corporate expenses incurred in support of the
Company's operations.
(5) Represents amounts related to unconsolidated affiliates (Satmex, Europe*Star
and Globalstar). These amounts are eliminated in order to arrive at Loral's
consolidated results. Loral's proportionate share of these affiliates is
included in equity in net loss of affiliates in Loral's condensed
consolidated statements of operations.
(6) Represents the elimination of intercompany sales and EBITDA, primarily for
satellites under construction by SS/L for wholly-owned subsidiaries; as well
as eliminating sales for the lease of transponder capacity by Data Services
from Fixed Satellite Services.
(7) Represents EBITDA for operations in the development stage (CyberStar and
Globalstar).
(8) EBITDA (which is equivalent to operating income/loss before depreciation and
amortization) is provided because it is a measure commonly used in the
communications industry to analyze companies on the basis of operating
performance, leverage and liquidity and is presented to enhance the
understanding of Loral's operating results. However, EBITDA should not be
construed as an alternative to net income as an indicator of a company's
operating performance, or cash flow from operations as a measure of a
company's liquidity. EBITDA may be calculated differently and, therefore,
may not be comparable to similarly titled measures reported by other
companies.
12
<PAGE> 14
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 SEGMENT INFORMATION
<TABLE>
<CAPTION>
SATELLITE
MANUFACTURING FIXED GLOBAL
AND SATELLITE DATA MOBILE
TECHNOLOGY SERVICES(1) SERVICES(2) TELEPHONY(3) CORPORATE(4) TOTAL
------------- ----------- ----------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
REVENUES AND EBITDA:
Revenue from external customers........... $ 140.9 $ 53.0 $ 193.9
Intersegment revenue...................... 167.5 0.9 168.4
---------- ---------- ----------
Gross revenue............................. $ 308.4 $ 53.9 362.3
========== ==========
Revenue of unconsolidated affiliates(5)... (25.4)
Intercompany revenue(6)................... (41.7)
----------
Consolidated revenue...................... $ 295.2
==========
EBITDA before development and start-up
costs and affiliate and intercompany
eliminations............................ $ 20.6 $ 35.3 (7.0) $ 48.9
Development and start-up costs(7)......... $ (7.3) $ (24.4) (31.7)
---------- ---------- ---------- ---------- ---------- ----------
EBITDA before affiliate and intercompany
eliminations............................ $ 20.6 $ 35.3 $ (7.3) $ (24.4) $ (7.0) 17.2
========== ========== ========== ========== ==========
EBITDA of unconsolidated affiliates(5).... 4.7
Intercompany EBITDA(6).................... (3.5)
----------
EBITDA(8)................................. 18.4
Depreciation and amortization............. 17.4
----------
Operating income.......................... $ 1.0
==========
OTHER DATA:
Depreciation and amortization before
affiliate eliminations.................. $ 8.9 $ 21.3 $ 0.1 $ 0.3 $ 0.7 $ 31.3
========== ========== ========== ========== ==========
Depreciation and amortization of
unconsolidated affiliates(5)............ (13.9)
----------
Depreciation and amortization............. $ 17.4
==========
Total assets before affiliate
eliminations............................ $ 1,650.4 $ 3,225.3 $ 91.2 $ 2,189.9 $ 582.1 $ 7,738.9
========== ========== ========== ========== ==========
Total assets of unconsolidated
affiliates(5)........................... (3,202.6)
----------
Total assets.............................. $ 4,536.3
==========
</TABLE>
13
<PAGE> 15
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10) SUBSEQUENT EVENT
On May 4, 1999, the Company's Orion 3 broadcast video and data
communications satellite was placed into a lower-than-expected orbit after its
launch on a Boeing Delta III rocket from Cape Canaveral Air Station, Florida.
According to Boeing, the Delta III's second stage apparently failed to complete
its second stage burn, and, as a result, the satellite, manufactured by Hughes
Space and Communications Corporation, achieved an orbit well below the planned
final altitude. Data from the satellite is still being received and analyzed to
determine the cause of the failure. Based on current information, however, it
appears unlikely that the satellite will be useable.
The satellite and launch were fully insured for approximately $265 million.
DACOM Corporation, a Korean communications company which had purchased eight
transponders on Orion 3 for a total of $89 million, had already made prepayments
of approximately $35 million to the Company. Under Loral's agreement with DACOM,
the amount prepaid is subject to refund in the event that Orion 3 fails to
commence commercial operation by June 30, 1999. In addition, Loral Orion's debt
covenants require that the insurance proceeds be used to build and launch a
replacement satellite within 15 months of receipt of such proceeds, or to pay
down such debt (see Note 6). The Company is currently evaluating its options
with regard to this matter. For 1999, expected earnings from Orion 3, which will
now not be received, will be offset, in part, by reduced depreciation as well as
reduced interest expense and operating costs.
14
<PAGE> 16
LORAL SPACE & COMMUNICATIONS LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
from time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but are not limited to, various filings made by
the Company with the Securities and Exchange Commission, press releases or oral
statements made by or with the approval of an authorized executive officer of
the Company. Actual results could differ materially from those projected or
suggested in any forward-looking statements as a result of a wide variety of
factors and conditions. See the section of Loral's registration statement on
Form S-4 (File No. 333-75655) entitled "Risk Factors". In addition, with respect
to Loral's interest in Globalstar, L.P. ("Globalstar") and Globalstar
Telecommunications Limited ("GTL"), see the section of GTL's and Globalstar's
most recent Annual Report on Form 10-K entitled "Certain Factors That May Affect
Future Results" and the section of GTL's registration statement on Form S-3
(File No. 333-75677) entitled "Risk Factors". With regard to forward-looking
statements concerning Loral Orion, Inc. ("Loral Orion") see the section of Loral
Orion's most recent Annual Report on Form 10-K, entitled "Certain Factors That
May Effect Future Results". With regard to forward-looking statements of
Satelites Mexicanos, S.A. de C.V. ("Satmex") see the section of Satmex's 1998
Form 20-F entitled "Certain Factors That May Affect Future Results".
Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Results of
Operations and Financial Condition of the Company, Globalstar, Satmex and Orion,
are forward-looking statements that involve risks and uncertainties, many of
which may be beyond the companies' control. The actual results that the
companies achieve may differ materially from any forward-looking projections due
to such risks and uncertainties.
Loral is one of the world's leading satellite communications companies,
with substantial activities in satellite manufacturing and satellite-based
communications services. Loral is developing the building blocks necessary to
create a seamless, global networking capability for the information age. In
1998, Loral advanced its strategy significantly by acquiring Orion Network
Systems, Inc. ("Orion"), increasing its ownership in Globalstar, forming the
Loral Global Alliance, including the formation of Europe*Star Limited
("Europe*Star"), and organizing and integrating its businesses to form four
distinct operating segments. As of March 31, 1999, Loral's satellite fleet
consisted of seven satellites in orbit (including three owned by Satmex, Loral's
49% owned affiliate). Loral will expand the geographic coverage and capacity of
its fixed satellite services by launching two additional satellites for the
Telstar and Loral Orion fleets in 1999. Loral's four operating segments are:
Satellite Manufacturing and Technology. Designing and manufacturing
satellites and other space systems and developing satellite technology for
a broad variety of customers and applications through Space Systems/Loral,
Inc. ("SS/L"),
Fixed Satellite Services. Leasing transponder capacity and providing
value added services to customers for a wide variety of applications,
including the distribution of broadcast programming, news gathering,
business television, distance learning and direct-to-home ("DTH") services.
The Company's fixed satellite service ("FSS") assets, managed by Loral
Skynet and marketed under the Loral Global Alliance banner, consist of
seven high-power geosynchronous ("GEO") satellites as of March 31, 1999 -
three Loral Skynet Telstar satellites and one satellite of Loral Orion,
Inc. ("Loral Orion"), as well as three Satmex satellites. The two
satellites expected to be launched by the recently formed Europe*Star joint
venture with Alcatel, in which Loral owns a 47% interest, also will be part
of the Loral Global Alliance and form a component of the Company's FSS
business segment,
Data Services. Business in development, providing managed
communications networks and Internet and intranet services through Loral
Orion and delivering high-speed broadband data
15
<PAGE> 17
communications through CyberStar, L.P. ("CyberStar"), using transponder
capacity on the Telstar and Loral Orion fleets, and
Global Mobile Telephony. Providing worldwide wireless mobile
telephony and narrow-band data communications through a constellation of
low-earth orbiting ("LEO") satellites (the "Globalstar(TM) System")
operated by Globalstar, which is expected to commence service in September
1999. Loral is the managing general partner and owned approximately 43% of
Globalstar as of March 31, 1999.
CONSOLIDATED OPERATING RESULTS
In evaluating financial performance, management uses revenues and earnings
before interest, taxes, depreciation and amortization ("EBITDA") as a measure of
a segment's profit or loss. The following discussion of revenues and EBITDA
reflects the results of Loral's operating segments for the three months ended
March 31, 1999 and 1998. See Note 9 to Loral's condensed consolidated financial
statements for additional information on segment results. The remainder of the
discussion relates to the consolidated results of Loral, unless otherwise noted.
Operating revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
-------- --------
(IN MILLIONS)
<S> <C> <C>
Satellite manufacturing and technology...................... $ 326.5 $ 308.4
Fixed satellite services(1)................................. 72.1 53.9
Data services(2)............................................ 16.3
-------- --------
Operating segment revenues.................................. 414.9 362.3
Affiliate eliminations(3)................................... (28.0) (25.4)
Intercompany eliminations(4)................................ (81.0) (41.7)
-------- --------
Operating revenues.......................................... $ 305.9 $ 295.2
======== ========
</TABLE>
EBITDA(5):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
------- -------
(IN MILLIONS)
<S> <C> <C>
Satellite manufacturing and technology...................... $ 30.6 $ 20.6
Fixed satellite services(1)................................. 47.6 35.3
Data services(2)............................................ (2.3)
Corporate expenses(6)....................................... (8.2) (7.0)
------- -------
EBITDA for operating segments before development and
start-up costs, and affiliate and intercompany
eliminations.............................................. 67.7 48.9
Development and start-up costs(7):
Data services(2).......................................... (4.4) (7.3)
Global mobile telephony(8)................................ (42.1) (24.4)
------- -------
Total development and start-up costs........................ (46.5) (31.7)
------- -------
Segment EBITDA.............................................. 21.2 17.2
Affiliate eliminations(3)................................... 21.7 4.7
Intercompany eliminations(4)................................ (6.3) (3.5)
------- -------
EBITDA as reported.......................................... $ 36.6 $ 18.4
======= =======
</TABLE>
- ---------------
(1) Fixed Satellite Services includes 100% of the following companies: Loral
Skynet; Loral Orion's transponder leasing business acquired on March 20,
1998; Satmex, a 49% equity investee; and Europe*Star, a 47% equity investee,
since December 1998.
16
<PAGE> 18
(2) Data services includes 100% of CyberStar (in which Loral owns an 82% equity
interest) and 100% of Loral Orion's data services business since its
acquisition on March 20, 1998.
(3) Represents amounts related to unconsolidated affiliates (Satmex, Europe*Star
and Globalstar). These amounts are eliminated in order to arrive at Loral's
consolidated results. Loral's proportionate share of these affiliates is
included in equity in net loss of affiliates in Loral's condensed
consolidated statements of operations.
(4) Represents the elimination of sales and EBITDA primarily for satellites
under construction by SS/L for wholly owned subsidiaries; as well as
eliminating sales for the lease of transponder capacity by Data Services
from Fixed Satellite Services.
(5) EBITDA (which is equivalent to operating income (loss) before depreciation
and amortization) is provided because it is a measure commonly used in the
communications industry to analyze companies on the basis of operating
performance, leverage and liquidity and is presented to enhance the
understanding of Loral's operating results. However, EBITDA should not be
construed as an alternative to net income as an indicator of a company's
operating performance, or cash flow from operations as a measure of a
company's liquidity. EBITDA may be calculated differently and, therefore,
may not be comparable to similarly titled measures reported by other
companies.
(6) Represents unallocated corporate expenses incurred in support of the
Company's operations.
(7) Represents EBITDA for operations in the development stage (CyberStar and
Globalstar).
(8) Includes 100% of Globalstar. Loral owned approximately 43% and 40% as of
March 31, 1999 and 1998, respectively.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH MARCH 31, 1998
Total revenues for Loral's operating segments were $415 million for 1999
versus $362 million in 1998, before intercompany and affiliate eliminations of
$109 million in 1999 and $67 million in 1998. The increase in revenues was due
primarily to growth in fixed satellite services as a result of including Loral
Orion's leasing business in 1999 (acquired on March 20, 1998), increased
utilization of Loral Skynet's Telstar satellites and increased sales at Satmex,
increased sales in satellite manufacturing and due to including the results of
Loral Orion's data business in 1999. The increase in intercompany eliminations
in 1999 primarily reflects increased investment in satellite construction by
SS/L for Loral's FSS segment.
EBITDA for operating segments before development and start-up costs, and
affiliate and intercompany eliminations, increased in 1999 to $68 million from
$49 million in 1998, an increase of 38%. This increase arose primarily from
growth in fixed satellite services due to increased utilization of Loral
Skynet's Telstar satellites, including the results of Loral Orion's leasing
business in 1999 and increases at Satmex and from growth in satellite
manufacturing and technology due to increased sales and margins in satellite
manufacturing. These increases were partially offset by including the results of
Loral Orion's data services business in 1999 and increased corporate expenses.
The increase in corporate expenses primarily resulted from costs incurred for
the additional resources required to manage the substantial growth in Loral's
businesses, along with increased legal and other costs in support of the
Company's operations. Total investment in development and start-up costs
increased 47% in 1999 to $47 million, from 1998 spending of $32 million. While
the investment required for CyberStar decreased from $7 million in 1998 to $4
million in 1999, costs related to the further development of Globalstar rose to
$42 million in 1999 from $24 million in 1998, due to increased activities in
anticipation of the commencement of commercial service. Affiliate eliminations
increased in 1999, primarily as a result of increased Globalstar costs in 1999.
Intercompany eliminations increased in 1999, primarily from increased investment
in satellite construction by SS/L for Loral's FSS segment. As a result of the
above, EBITDA as reported doubled to $37 million in 1999 from $18 million in
1998.
Depreciation and amortization rose to $38 million in 1999 from $17 million
in 1998, and excludes depreciation and amortization of unconsolidated affiliates
of $15 million and $14 million for 1999 and 1998, respectively, primarily for
Satmex. The increase primarily results from the inclusion of Loral Orion's
depreciation, and the amortization of cost in excess of Loral Orion's net assets
acquired in 1999.
Interest and investment income increased to $15 million in 1999 from $9
million in 1998, principally due to higher cash balances available for
investment in 1999.
Interest expense of $18 million in 1999, net of capitalized interest of $22
million, reflects interest on borrowings under Loral's credit agreement and
other facilities and interest on Loral Orion's debt. Interest expense of $2
million in 1998, net of capitalized interest of $10 million, reflects interest
on borrowings under Loral's Credit Agreement. The increase in interest expense
in 1999, was primarily due to including interest expense for Loral Orion in
1999.
17
<PAGE> 19
For 1999, the Company recorded an income tax provision of $2.4 million on a
loss before income taxes of $4.2 million, primarily because of the effect of
certain permanent adjustments such as the non-deductible amortization of costs
in excess of net assets acquired and losses in non-taxable jurisdictions during
the current period. In 1998, the Company recorded an income tax provision of
$3.1 million on income before income taxes of $7.9 million. The tax provision on
the Company's net loss before income taxes for 1999 as compared to an effective
rate of 38.6% for 1998 results from an increase to the percentage of the
Company's net loss attributable to non-taxable jurisdictions and an increase to
the non-deductible amortization of costs in excess of net assets acquired due to
the Loral Orion acquisition in March 1998.
The minority interest benefit in 1999 primarily reflects the reduction of
CyberStar's loss attributed to CyberStar's other investor, who owned 17.6% as of
March 31, 1999.
The equity in net loss of affiliates was $33 million in 1999 compared to
$20 million in 1998. Loral's share of Globalstar's losses, net of the related
tax benefit was $18 million in 1999 compared to $11 million in 1998. This
increase was primarily due to Globalstar's increased development and start-up
costs and Loral's increased ownership percentage in Globalstar in 1999 (42.6% as
of March 31, 1999 versus 40.1% as of March 31, 1998). Loral's share of Satmex's
loss was $6 million for 1999 and $7 million for 1998. Also included as equity in
net loss of affiliates for 1999 is Loral's share of Europe*Star's loss of $1
million and Loral's share of SkyBridge Limited Partnership's losses, net of the
related tax benefit of $7 million for 1999 compared to $1 million for 1998 and
Loral's share of losses from other affiliates of $1 million in 1999 compared to
$2 million in 1998 (see Note 4 to Loral's condensed consolidated financial
statements).
Preferred distributions of $12 million for 1999 and 1998, relate to the
Series C Preferred Stock.
As a result of the above, the net loss applicable to common stockholders
for 1999 was $50 million or $0.17 per basic and diluted share, compared to the
net loss of $27 million or $0.11 per basic and diluted share for 1998. Basic and
diluted weighted average shares were 289.7 million for 1999 and 249.3 million
for 1998. This increase was primarily due to the 23 million shares issued to the
public in June 1998 and the 18 million shares issued to acquire Orion in March
1998.
RESULTS BY OPERATING SEGMENT
Satellite Manufacturing and Technology
Revenues at SS/L, the Company's satellite manufacturing and technology
subsidiary, before intercompany eliminations were $326 million in 1999 versus
$308 million in 1998. EBITDA in 1999 rose to $31 million from $21 million in
1998, due to higher margins. Funded backlog for SS/L as of March 31, 1999 and
1998, was $1.5 billion and $1.3 billion, respectively, including intercompany
backlog of $292 million in 1999 and $147 million in 1998.
Fixed Satellite Services
FSS revenue for 1999 (including Loral Skynet, 100% of Satmex, and Loral
Orion's revenues from leasing) was $72 million versus $54 million last year.
EBITDA was $48 million in 1999, or 66% of revenues, up from EBITDA of $35
million, or 65% of revenues, in 1998. Funded backlog for the fixed satellite
services segment totaled $889 million at March 31, 1999, an increase of 24% over
the $715 million as of March 31, 1998, including affiliate and intercompany
backlog of $182 million in 1999 and $166 million in 1998.
During the fourth quarter of 1998, Loral completed its integration plan for
Loral Orion and transferred management of Loral Orion's satellite capacity
leasing and satellite operations to Loral Skynet, effective January 1, 1999. In
addition to increasing the operational efficiency, capacity, flexibility and
marketing reach of Loral's FSS services, the realignment permits Loral Orion to
focus on and leverage its experience in the global data services market.
18
<PAGE> 20
Data Services
In order to align all of Loral's resources and activities in the developing
data services area, CyberStar's broadband business and Loral Orion's Internet
and corporate data networking businesses were reorganized and in 1999 began
reporting to a group vice president. This alignment allows the business units to
continue to operate independently while taking advantage of the synergies they
share. The reported results for the data services segment include Loral Orion's
operations relating to data services, exclusive of transponder leasing, along
with the results of CyberStar.
Revenues for the data services segment in 1999 were approximately $16
million, primarily from Loral Orion's corporate data networking and Internet and
intranet services businesses. EBITDA before development costs in 1999 was a loss
of approximately $2.3 million. Total development and start-up costs for
CyberStar (a development stage business) were reduced to $4.4 million in 1999
from $7.3 million in 1998. As of March 31, 1999, funded backlog for the segment
increased to $165 million from $117 million as of March 31, 1998 (all from
external sources).
In the fourth quarter of 1998, CyberStar announced the commercial
availability of its broadband satellite-based business communications service.
One of its first customers selected CyberStar to deliver in-theater media to its
nationwide cinema network. CyberStar is conducting pilot programs with other
enterprise customers in markets such as entertainment, finance, real estate,
training, insurance and retail.
Global Mobile Telephony
Loral manages and is the largest equity owner of Globalstar, the global
mobile telephony segment of Loral. Globalstar is a development stage partnership
scheduled to commence commercial service operations in September 1999.
Globalstar's development and start-up costs were $42 million in 1999 as compared
to $24 million for 1998. The rise in costs relates primarily to increased
activities in anticipation of the start of service. Globalstar is expending
significant funds for the construction, testing and deployment of the Globalstar
System and expects such losses to continue through commencement of revenue
generating service operations.
ACQUISITIONS AND INVESTMENTS IN AFFILIATES
Globalstar
In January 1999, GTL completed a private offering of $350 million of
convertible redeemable preferred stock (of which Loral purchased $150 million
face amount, to maintain its prior ownership percentage). GTL in turn used the
net proceeds from its offering to purchase redeemable preferred partnership
interests of Globalstar, which in turn is using the proceeds for the development
and deployment of the Globalstar(TM) System.
As of March 31, 1999, Loral had a 42.6% interest in Globalstar ordinary
partnership interests.
Satmex
On March 30, 1999, Loral acquired 577,554 shares of preferred stock of
Satmex at a purchase price of approximately $30.3 million. The preferred stock
has limited voting rights, pays a dividend in common stock of Satmex and is
exchangeable, at Satmex's option, into common stock of Satmex based upon a
predetermined exchange ratio.
Orion
On March 20, 1998, Loral acquired all of the outstanding stock of Orion. in
exchange for Loral common stock. Loral issued 18 million shares of its common
stock and assumed existing exercisable Orion options and warrants to purchase an
aggregate of 1.4 million shares of Loral common stock. The resulting purchase
price was $472.5 million. Loral accounted for the acquisition as a purchase and
has included the results of operations of Loral Orion from April 1, 1998.
19
<PAGE> 21
Europe*Star
In December 1998, Loral finalized its strategic partnership with a
subsidiary of Alcatel to jointly build and operate Europe*Star, a geostationary
satellite system that will provide broadcast and telecommunications services to
Europe, the Middle East, Southeast Asia, India, and South Africa. Alcatel will
serve as the primary contractor of the Europe*Star turnkey system. SS/L will
provide the satellite bus and test and integrate the satellites. Europe*Star is
a member of the Loral Global Alliance of FSS providers which is led by Loral
Skynet. Through March 31, 1999, Loral invested $66 million in Europe*Star,
including $17 million during the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Loral intends to capitalize on its innovative capabilities, market position
and advanced technologies to offer value-added satellite-based services as part
of the evolving worldwide communications networks and, where appropriate, to
form strategic alliances with major telecommunications service providers and
equipment manufacturers to enhance and expand its satellite-based communications
service opportunities. In order to pursue such opportunities, Loral may seek
funds from strategic partners and other investors, and through incurrence of
debt or the issuance of additional equity.
Debt
In January 1999, Loral completed a private offering of senior notes raising
approximately $350 million, of which a portion was used to invest in $150
million face amount of GTL's $350 million offering of convertible redeemable
preferred stock, thereby maintaining Loral's proportionate ownership position in
Globalstar. The remainder of the funds raised are being used for general
corporate purposes, including investments in its other core businesses and to
pursue emerging satellite services opportunities worldwide.
On November 14, 1997, the Company's wholly owned subsidiary, Loral SpaceCom
Corporation, entered into an $850 million credit facility with a group of banks.
The facility consists of a $500 million revolving credit facility, a $275
million term loan and a $75 million letter of credit facility. The facility
replaced SS/L's existing credit facility. The facility is secured by the stock
of Loral SpaceCom Corporation and SS/L and contains various covenants, including
an interest coverage ratio, debt to capitalization ratios and restrictions on
cash transfers to its parent. As of March 31, 1999, there was $654 million of
borrowings outstanding under this credit facility.
Loral Orion's outstanding debt as of March 31, 1999, was $941 million, is
non-recourse to Loral, and includes certain restrictions on Loral Orion's
ability to pay dividends or make loans to Loral.
Cash and Restricted Cash
As of March 31, 1999, Loral had $565 million of cash and cash equivalents.
Loral intends to utilize its existing capital base and access to the capital
markets to construct and operate additional satellites, make additional
investments in Globalstar and Globalstar service provider opportunities, invest
in its other core businesses, and to pursue emerging satellite service
opportunities worldwide.
As of March 31, 1999, Loral Orion had $49 million of restricted cash, which
will be used for interest payments on Loral Orion's senior notes.
Loral Skynet
Loral Skynet currently has three high-power satellites in orbit. Loral
intends to expand Loral Skynet's business to become a worldwide satellite
service provider through the construction of additional satellites. As of April
30, 1999, Loral Skynet has three satellites under construction by SS/L, one of
which is scheduled to be launched in June 1999. The Company is evaluating its
launch plans in light of the recent Orion 3 launch failure.
20
<PAGE> 22
Loral Orion
Loral Orion currently has one satellite in orbit, and one satellite under
construction (Orion 2) which is expected to be launched in 1999. Loral intends
to fund approximately $60 million of the construction cost of Orion 2. All other
costs related to Orion 2 are fully funded.
On May 4, 1999, the Orion 3 broadcast video and data communications
satellite was placed into a lower-than-expected orbit after its launch on a
Boeing Delta III rocket from Cape Canaveral Air Station, Florida. According to
Boeing, the Delta III's second stage apparently failed to complete its second
stage burn, and, as a result, the satellite, manufactured by Hughes Space and
Communications Corporation, achieved an orbit well below the planned final
altitude. Data from the satellite is still being received and analyzed to
determine the cause of the failure. Based on current information, however, it
appears unlikely that the satellite will be usable.
The satellite and launch were fully insured for approximately $265 million.
DACOM Corporation, a Korean communications company which had purchased eight
transponders on Orion 3 for a total of $89 million, had already made prepayments
of approximately $35 million to the Company. Under the agreement with DACOM, the
amount prepaid is subject to refund in the event that Orion 3 fails to commence
commercial operation by June 30, 1999. In addition, Loral Orion's debt covenants
require that the insurance proceeds be used to build and launch a replacement
satellite within 15 months of receipt of such proceeds, or to pay down such
debt. The Company is currently evaluating its options with regard to this
matter. For 1999, expected earnings from Orion 3, which will now not be
received, will be offset, in part, by reduced depreciation as well as reduced
interest expense and operating costs.
Based upon its current expectations for growth, Loral Orion anticipates it
will have additional funding requirements over the next three years to fund the
purchase of VSATs, senior note interest payments, other capital expenditures and
other operating needs. Interest charges on the senior notes are fully provided
for by restricted cash through January 2000. Loral Orion does not have a
revolving credit facility. Accordingly, Loral Orion will need to secure funding
from Loral, or raise additional financing. Sources of additional capital may
include public or private debt, equity financings or strategic investments. To
the extent that Loral Orion seeks to raise additional debt financing, the
indentures limit the amount of such additional debt (under a variety of
provisions contained in such indentures) and prohibit Loral Orion from using
Orion 1 and Orion 2 or the insurance proceeds from Orion 3 as collateral for
indebtedness for money borrowed. If Loral Orion requires additional financing
and is unable to obtain such financing from Loral or from outside sources in the
amounts and at the times needed, there would be a material adverse effect on
Loral Orion.
Satmex
Satmex currently has three satellites in orbit (Satmex 5, Solidaridad I and
Solidaridad II) and one satellite in inclined orbit (Morelos II). On April 28,
1999, Solidaridad 1 experienced a loss of its primary satellite control
processor. Service was restored after 14 hours, using the back up satellite
control processor. Satmex and the satellite manufacturer, Hughes Space and
Communications, Inc., are investigating the cause of the service interruption.
Failure of the back up satellite control processor would result in the loss of
Solidaridad 1.
On March 31, 1999, Satmex redeemed $35 million of its secured floating rate
notes using proceeds from the sale of preferred stock, of which Loral purchased
$30.3 million. Such redemption reduced Satmex's total indebtedness to $609
million. The related covenants of such debt restrict the ability of Satmex to
pay dividends to Loral.
Globalstar
The Company plans to begin a regional roll-out of commercial service in the
third quarter of 1999 with a minimum of eight gateways in operation. By the end
of 1999, Globalstar expects to have a total of at least 16 gateways in
operation. All of the 38 gateways on order have been manufactured and are ready
for installation.
From January 1, to April 30, 1999, Globalstar had three successful launches
of four satellites each, aboard Soyuz launch vehicles from the Baikonur
Cosmodrome in Kazakhstan, bringing the total satellites in
21
<PAGE> 23
orbit to 20. Globalstar had previously launched its first two groups of four
satellites each in 1998. For the remainder of 1999, Globalstar's current launch
plan includes eight additional launches of four satellites each, using a mix of
Delta and Soyuz rockets. According to the plan, Globalstar will deploy an
operational constellation of a minimum of 32 satellites in September 1999 and a
total of 52 satellites (including four in-orbit spares) by the end of 1999.
Through March 31, 1999, Globalstar incurred costs of approximately $2.9
billion for the design, development and construction of the space and ground
segments. Costs incurred during 1999 were approximately $222 million. Qualcomm
is in the process of completing its revision to cost estimates for its portion
of the ground segment. Due to additional scope and cost growth and based on
preliminary information, Globalstar expects the total project cost to increase
by less than 3%. The Qualcomm estimate is still subject to further review by
Globalstar. As of March 31, 1999, and including the effect of the preliminary
Qualcomm estimate, Globalstar's budgeted expenditures were $3.17 billion for the
design, construction and deployment of the Globalstar System to commence
commercial service and $340 million for budgeted financing costs. In addition to
expenditures for operating costs and debt service, Globalstar anticipates
further expenditures on system software for the improvement of system
functionality and the addition of new features beyond those planned for the
commencement of commercial service. Globalstar expects to achieve positive cash
flow in the third quarter of 2000. Substantial additional financing will be
required if there are delays in the commencement of commercial service and, in
any event, after the commencement of commercial service and before positive cash
flow is achieved. Although Globalstar believes it will be able to obtain these
additional funds, there can be no assurance that such funds will be available on
favorable terms or on a timely basis, if at all.
Globalstar has agreed, subject to its partners' approval, to purchase from
SS/L 12 additional spare satellites for which the cost and payment terms have
not as yet been negotiated. It is anticipated that approximately $100 million
will be expended for these spare satellites by commencement of commercial
service.
In January 1999, GTL sold $350 million of 8% Convertible Redeemable
Preferred Stock due 2011 (the "Preferred Stock"). The Preferred Stock is
convertible into shares of GTL common stock at a conversion price of $23.2563
per share. GTL used the proceeds to purchase redeemable preferred partnership
interests in Globalstar, and Globalstar will use the funds for the construction
and deployment of the Globalstar(TM) System.
As of March 31, 1999, Globalstar has raised or received commitments for
approximately $3.3 billion. Globalstar intends to raise the remaining funds
required, of approximately $600 million, prior to the initiation of commercial
service from a combination of sources, including: high yield debt issuance
(which may include an equity component), bank financing, equity issuance,
financial support from the Globalstar partners, projected service provider
payments and anticipated payments from the sale of gateways and Globalstar
subscriber terminals.
COMMITMENTS AND CONTINGENCIES
In connection with the merger between Loral Corporation and Lockheed Martin
Corporation ("Lockheed Martin"), Lockheed Martin assumed approximately $206
million of the guarantee under the Globalstar credit agreement. The balance of
$44 million of the guarantee was assumed by various Globalstar partners,
including $11.7 million by SS/L. Loral has agreed to indemnify Lockheed Martin
for its liability, if any, in excess of $150 million under its guarantee of the
Globalstar credit agreement. Globalstar is currently financed without recourse
to Loral other than the indemnification and the SS/L guarantee described above.
Loral has also guaranteed a $115 million term loan.
Prior to its acquisition by Loral, Loral Skynet sold several transponders
under which title to specific transponders was transferred to the customer.
Under the terms of the sales contracts, Loral Skynet continues to operate the
satellites on which the transponders are located and provides a warranty for a
period of 10 to 14 years, generally the economic life of the satellite.
Depending on the contract, Loral Skynet is required to replace any 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
replacement. The reimbursement value was determined based on the original
purchase price plus an interest factor from the time the payment is received
22
<PAGE> 24
to acceptance of the transponder by the customer, reduced on a straight-line
basis over the warranty period. In case of satellite failure, the reimbursement
value may be paid from proceeds received from insurance policies.
In 1997, two satellites built by SS/L experienced solar array circuit
failures. One customer asserted that, in light of the failures and uncertainty
as to future failure, it had not accepted the satellite. Loral believes that
this customer was contractually required to accept the satellite at completion
of in-orbit testing and that risk of loss has passed to the customer. SS/L
settled the other customer's claims in 1997. In 1998, another SS/L-built
satellite experienced degradation in the performance of two of its Ku-band
antennae, which SS/L currently estimates could result in the loss of
approximately 25% of the applicable orbital incentives, although additional
warranty claims could be made. Loral's 1998 consolidated financial statements
include the estimated impact of these events. Management believes that these
matters will not have a material adverse effect on the financial condition or
results of operations of Loral.
SS/L is a target of a grand jury investigation being conducted by the
office of the U.S. Attorney for the District of Columbia with respect to
possible violations of export control laws that may have occurred in connection
with the participation of SS/L employees on a committee formed in the wake of
the 1996 crash of a Long March rocket in China and whose purpose was to consider
whether studies of the crash made by the Chinese had correctly identified the
cause of the failure. The Company is not in a position to predict the direction
or outcome of the investigation. If SS/L were to be indicted and convicted of a
criminal violation of the Arms Export Control Act, it would be subject to a fine
of $1 million per violation and could be debarred from certain export privileges
and, possibly, from participation in government contracts. Since many of SS/L's
satellites are built for foreign customers and/or launched on foreign rockets,
such a debarment would have a material adverse effect on SS/L's business, which
is important to the Company. Indictment for such violations would subject SS/L
to discretionary debarment from further export licenses. Whether or not SS/L is
indicted or convicted, SS/L remains subject to the State Department's general
statutory authority to prohibit exports of satellites and related services if it
finds a violation of the Arms Export Control Act that puts SS/L's reliability in
question, and it can suspend export privileges whenever it determines that
grounds for debarment exist and that such suspension "is reasonably necessary to
protect world peace or the security or foreign policy of the United States."
As far as SS/L can determine, no sensitive information or technology was
conveyed to the Chinese, and no secret or classified information was discussed
with or reported to them. SS/L believes that its employees acted openly and in
good faith and that none engaged in intentional misconduct. Accordingly, the
Company does not believe that SS/L has committed a criminal violation of the
export control laws. The Company does not expect the grand jury investigation or
its outcome to result in a material adverse effect upon its business. However,
there can be no assurance as to these conclusions.
Several Congressional committees have held hearings on U.S. satellite
export policy toward China, alleged influence of campaign contributions
(including contributions made by Loral's Chairman and Chief Executive Officer)
on the Clinton Administration's export policy toward China and related matters.
One of the House committees investigating these matters, chaired by
Representative Cox, recently issued a classified report that is said to be
critical of past government and industry technology transfer practices and
policies. This report is also said to contain 38 proposals for legislative and
executive action to address perceived concerns. It is possible that adoption of
some or all of such proposals could have an adverse effect upon the ability of
U.S.-based satellite manufacturers, such as SS/L, and possibly other U.S.
exporters, to market their products abroad in competition with foreign-based
manufacturers, and might adversely affect their ability to perform existing
contracts. In addition, the portions of the report that have not yet been
declassified could contain negative comments about SS/L's compliance with the
export control laws.
On December 23, 1998, the Office of Defense Trade Controls ("ODTC") of the
U.S. Department of State temporarily suspended the previously approved technical
assistance agreement under which SS/L had been preparing for the launch of the
ChinaSat-8 satellite. According to ODTC, the purpose of the temporary suspension
is to permit that agency to review the agreement for conformity with
newly-enacted legislation (Section 74 of the Arms Export Control Act) with
respect to the export of missile equipment or technology. SS/L has complied with
ODTC's instructions, and believes that a review of the agreement will show that
its
23
<PAGE> 25
terms comply with the new law. The ODTC, however, has not yet completed its
review, and the scheduled launch date for ChinaSat-8 is being delayed. If such a
delay were to continue for an extended period, or if the suspension was not
lifted, SS/L's customer could decide to terminate the contract. If such a
termination were to occur, SS/L would have to refund advances received from
ChinaSat ($124 million as of March 31, 1999) and may incur penalties of up to
$12 million and believes it would incur costs of approximately $38 million to
refurbish and retrofit the satellite so that it could be sold to another
customer. There can be no assurance that SS/L will be able to find such a
replacement customer.
In March 1999, jurisdiction for satellite licensing was transferred from
the Commerce Department to the State Department, and the State Department has
issued regulations relating to the export of, and disclosure of technical
information related to, satellites and related equipment. SS/L anticipates that
obtaining licenses and technical assistance agreements under these new
regulations will take more time and will be considerably more burdensome than in
the past. Delays in obtaining the necessary licenses and technical assistance
agreements may delay SS/L's performance on existing contracts, and, as a result,
SS/L may incur penalties or lose incentive payments under these contracts. In
addition, such delays may have an adverse effect on SS/L's ability to compete
against foreign satellite manufacturers for new satellite contracts.
NET CASH USED IN OPERATING ACTIVITIES
Net cash used in operating activities for the three months ended March 31,
1999 was $26 million, primarily due to decreases in accounts payable of $31
million and accrued expenses and other current liabilities of $29 million and an
increase in accounts receivable and contracts in process of $21 million, offset
by funds generated by earnings before depreciation and amortization, taxes,
minority interest and equity in net loss of affiliates of $34 million and a
decrease in customer deposits of $16 million. Net cash used in operating
activities for 1998 was $94 million, primarily due to increases in accounts
receivable and contracts in process of $89 million, inventories of $20 million,
and launch vehicle deposits of $54 million and a decrease in accrued expenses
and other current liabilities and customer advances of $18 million, offset by
funds generated from earnings before depreciation and amortization, taxes,
minority interest and equity in net loss of affiliates of $25 million and an
increase in accounts payable of $64 million.
NET CASH USED IN INVESTING ACTIVITIES
During 1999, net cash used in investing activities was $339 million,
primarily as a result of $155 million of capital expenditures mainly for the
construction of satellites, the $146 million cost of acquiring GTL preferred
stock and $62 million of other investments in affiliates, offset by a reduction
in restricted cash of $ 25 million used for Loral Orion interest payments. Cash
used in investing activities for 1998 was $18 million, primarily due to $62
million of capital expenditures and $9 million of investments in affiliates,
offset by $54 million of cash acquired in connection with the Orion acquisition.
NET CASH PROVIDED BY FINANCING ACTIVITIES
During 1999, net cash provided by financing activities was $384 million,
primarily due to the $344 million of proceeds from the issuance of senior notes,
and borrowings of $45 million under the revolving credit facility. In 1998, net
cash provided by financing activities was $111 million, primarily from
borrowings under the revolving credit facility.
OTHER MATTERS
Effect of Year 2000
The Company's Year 2000 Program is proceeding on schedule. The Year 2000
issue is the result of computer programs which were written using two digits
rather than four to signify a year (i.e., the year 1999 is denoted as "99" and
not "1999"). Computer programs written using only two digits may recognize the
year 2000 as the year 1900. This could result in a system failure or
miscalculations causing disruption of operations.
24
<PAGE> 26
The Company and its operating affiliates, Globalstar and Satmex, have
implemented a Year 2000 program (the "Year 2000 Program") for their internal
products, system and equipment, as well as for key vendor and customer supplied
products, systems and equipment. As part of the Year 2000 Program, the Company
and its operating affiliates are assessing the Year 2000 capabilities of, among
other things, their satellites, ground equipment, research and development
activities, manufacturing processes and facility management systems. The Year
2000 Program consists of the following phases: inventory of Year 2000 items,
assessment (including prioritization), remediation (including modification,
upgrading and replacement), testing and auditing. This five-step program is
divided into six major sections covering both information and non-information
technology systems: 1) business systems, 2) technical systems, 3) products and
services, 4) imbedded hardware/firmware, 5) vendor supplied products and 6)
customer provided products. As of March 31, 1999, the Company and its operating
affiliates had completed approximately 98% of the inventory phase and
approximately 76% of the assessment phase. The Company expects to complete the
first four phases, through the testing phase, of the Year 2000 Program during
the third quarter of 1999, which is prior to any anticipated material impact on
the operations of the Company and its operating affiliates. The fifth phase, the
audit phase, commenced in January 1999 and is expected to continue through the
third quarter of 1999 to accommodate re-audits if deemed necessary.
Both internal and external resources are being utilized to execute the
Company's plan. The program to address Year 2000 has been underway since July
1997. The incremental costs incurred through March 31, 1999 for this effort by
the Company and its operating affiliates were approximately $2.3 million. Based
on the efforts of the Company and its operating affiliates to date, the Company
anticipates additional incremental expenses of approximately $5.1 million will
be incurred to substantially complete the effort.
Based upon the accomplishments to date, no contingency plans are expected
to be needed. As risks are identified, contingency plans will be developed and
implemented as necessary. However, because of the progress achieved to date and
the Company's expectations that its Year 2000 program will be substantially
complete in the third quarter of calendar 1999, the Company believes adequate
time will be available to insure alternatives can be developed, assessed and
implemented prior to a Year 2000 issue having a material negative impact on the
operations of the Company. However, there can be no assurance that such
modifications and conversions, if required, will be completed on a timely basis.
The cost of the program and the dates on which the Company believes it will
substantially complete Year 2000 modifications are based on management's best
estimates. Such estimates were derived using software surveys and programs to
evaluate calendar date exposures and numerous assumptions of future events,
including the continued availability of certain resources, third-party Year 2000
readiness and other factors. Because none of these estimates can be guaranteed,
actual results could differ materially and adversely from those anticipated.
Specific factors that might cause an adjustment of costs are: number of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, the ability to validate supplier certification and similar
uncertainties.
The Company's failure to remediate a material Year 2000 problem could
result in an interruption or failure of certain basic business operations. These
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. The Company and its operating
affiliates are also assessing the Year 2000 readiness of their key third-party
suppliers. Information requests have been distributed to such suppliers and
replies are being evaluated. If the risk is deemed material, on-site visits to
suppliers will be conducted to verify the adequacy of the information received.
However, due to the general uncertainty of the Year 2000 problem, including
uncertainty with regard to third-party suppliers and customers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have an adverse material impact on the Company's results of operations,
liquidity or financial condition. There can be no assurance given that the
Company's Year 2000 Program will be successful in avoiding any interruption or
failure of certain basic business operations, which may have a material adverse
effect on the Company's results of operations or financial position.
25
<PAGE> 27
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings or financial position. The
Company is required to adopt SFAS 133 on January 1, 2000.
PART II -- OTHER INFORMATION
ITEM 2(C). CHANGES IN SECURITIES
On January 21, 1999, Loral sold $350 million principal amount of 9 1/2%
Senior Notes due 2006 in a private offering pursuant to Rule 144A and Regulation
S under the Securities Act of 1933. The initial purchasers of the Notes were
Lehman Brothers Inc., Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, C.E. Unterberg, Towbin, CIBC Oppenheimer Corp. and ING
Baring Furman Selz LLC. The price to the initial purchasers was 98.25% of the
principal amount of the Notes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
Exhibit 12 -- Computation of Deficiency of Earnings to Cover Fixed
Charges
Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K
<TABLE>
<CAPTION>
DATE OF REPORT DESCRIPTION
-------------- -----------
<S> <C>
January 7, 1999 Item 5 -- Sale of $350 million of Senior Notes due
2006
January 19, 1999 Item 5 -- Sale of $350 million of Senior Notes due
2006
</TABLE>
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LORAL SPACE & COMMUNICATIONS LTD.
--------------------------------------
Registrant
RICHARD J. TOWNSEND
--------------------------------------
Richard J. Townsend
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
and
Registrant's Authorized Officer
Date: May 14, 1999
27
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
Exhibit 12 -- Computation of Deficiency of Earnings to Cover Fixed Charges
Exhibit 27 -- Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 12
LORAL SPACE & COMMUNICATIONS LTD.
COMPUTATION OF DEFICIENCY OF EARNINGS TO COVER FIXED CHARGES
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Earnings
Income (loss) before income taxes, equity in net loss of
affiliates and minority interest....................... $(4,201) $ 7,928
Plus fixed charges:
Interest expense....................................... 39,447 11,225
Interest component of rent expense(1).................. 2,122 1,134
Less: capitalized interest................................ 21,811 9,505
------- -------
Earnings available to cover fixed charges................... $15,557 $10,782
======= =======
Fixed charges............................................... $55,371 $31,309
======= =======
Deficiency of earnings to cover fixed charges............... $39,814 $20,527
======= =======
</TABLE>
- ---------------
(1) The interest component of rent expense is deemed to be approximately 25% of
total rent expense.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF LORAL SPACE & COMMUNICATIONS LTD. FOR THE QUARTER ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 565,485
<SECURITIES> 0
<RECEIVABLES> 423,754
<ALLOWANCES> 2,626
<INVENTORY> 182,986
<CURRENT-ASSETS> 1,249,946
<PP&E> 2,013,122
<DEPRECIATION> 219,798
<TOTAL-ASSETS> 5,512,972
<CURRENT-LIABILITIES> 474,959
<BONDS> 0
0
736,320
<COMMON> 2,441
<OTHER-SE> 2,136,135
<TOTAL-LIABILITY-AND-EQUITY> 5,512,972
<SALES> 247,830
<TOTAL-REVENUES> 305,926
<CGS> 215,299
<TOTAL-COSTS> 260,251
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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