<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 JUNE 30, 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 July 31, 1999, there were 244,422,947 shares of Loral Space &
Communications Ltd. common stock outstanding.
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<PAGE> 2
PART I.
FINANCIAL INFORMATION
LORAL SPACE & COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues from satellite sales................... $315,020 $199,661 $562,850 $467,192
Revenues from satellite services................ 63,417 48,599 121,513 76,281
-------- -------- -------- --------
Total revenues............................. 378,437 248,260 684,363 543,473
Costs of satellite sales........................ 275,825 182,549 491,124 425,825
Costs of satellite services..................... 47,703 40,752 92,655 56,879
Selling, general and administrative expenses.... 52,850 51,225 99,691 86,053
-------- -------- -------- --------
Operating income (loss)......................... 2,059 (26,266) 893 (25,284)
Interest and investment income.................. 18,777 16,524 33,581 25,190
Interest expense................................ (23,983) (21,557) (41,822) (23,277)
-------- -------- -------- --------
Loss before income taxes, equity in net loss of
affiliates and minority interest.............. (3,147) (31,299) (7,348) (23,371)
Income tax benefit.............................. 2,576 9,714 179 6,651
-------- -------- -------- --------
Loss before equity in net loss of affiliates and
minority interest............................. (571) (21,585) (7,169) (16,720)
Equity in net loss of affiliates................ (38,475) (40,957) (71,256) (61,327)
Minority interest............................... 978 3,569 1,856 3,631
-------- -------- -------- --------
Net loss........................................ (38,068) (58,973) (76,569) (74,416)
Preferred dividends and accretion............... (11,606) (11,607) (23,213) (23,213)
-------- -------- -------- --------
Net loss applicable to common stockholders...... $(49,674) $(70,580) $(99,782) $(97,629)
======== ======== ======== ========
Loss per share:
Basic and diluted............................. $ (0.17) $ (0.27) $ (0.34) $ (0.38)
======== ======== ======== ========
Weighted average shares outstanding:
Basic and diluted............................. 290,060 265,769 289,881 257,553
======== ======== ======== ========
</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>
JUNE 30, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 496,612 $ 546,772
Restricted cash........................................... 49,428 50,180
Accounts receivable, net.................................. 27,969 23,637
Contracts in process...................................... 484,795 378,685
Inventories............................................... 170,154 191,245
Insurance proceeds receivable............................. 265,606
Other current assets...................................... 37,269 35,197
---------- ----------
Total current assets................................... 1,531,833 1,225,716
Property, plant and equipment, net.......................... 1,568,284 1,667,508
Cost in excess of net assets acquired, net.................. 953,797 966,260
Long-term receivables....................................... 338,134 317,665
Restricted cash............................................. 22,675
Investments in affiliates................................... 862,181 707,917
Deposits.................................................... 136,695 140,970
Other assets................................................ 205,547 180,504
---------- ----------
$5,596,471 $5,229,215
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt................................... $ 60,442 $ 22,736
Accounts payable.......................................... 217,614 213,507
Accrued employment costs.................................. 41,434 44,256
Customer advances......................................... 84,001 158,192
Accrued interest and preferred dividends.................. 52,585 37,860
Other current liabilities................................. 56,260 34,890
Income taxes payable...................................... 16,819 17,630
---------- ----------
Total current liabilities.............................. 529,155 529,071
Deferred income taxes....................................... 33,224 38,370
Pension and other postretirement liabilities................ 53,204 50,470
Long-term liabilities....................................... 133,468 113,840
Long-term debt.............................................. 1,980,416 1,533,039
Minority interest........................................... 26,857 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)............................ 736,283 735,437
Common stock, $.01 par value.............................. 2,445 2,439
Paid-in capital........................................... 2,340,962 2,330,755
Treasury stock, at cost................................... (3,360) (3,360)
Unearned compensation..................................... (6,489) (8,231)
Retained deficit.......................................... (262,439) (162,657)
Accumulated other comprehensive income.................... 32,286 40,879
---------- ----------
Total shareholders' equity............................. 2,840,147 2,935,721
---------- ----------
$5,596,471 $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>
SIX MONTHS ENDED
JUNE 30,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Operating activities:
Net loss.................................................. $ (76,569) $ (74,416)
Equity in net loss of affiliates.......................... 71,256 61,327
Minority interest......................................... (1,856) (3,631)
Deferred taxes............................................ 7 13,176
Non-cash interest income.................................. (2,086) (4,240)
Non-cash interest expense................................. 16,483 5,467
Depreciation and amortization............................. 79,276 55,869
Change in operating assets and liabilities:
Accounts receivable and contracts in process.............. (110,442) (60,949)
Inventories............................................... 21,091 (30,905)
Other current assets...................................... (3,908) 7,576
Deposits.................................................. 4,275 40,500
Long-term receivables..................................... (20,469) (14,304)
Other assets.............................................. (31,260) 27
Accounts payable.......................................... 4,107 (28,890)
Accrued expenses and other current liabilities............ 33,273 6,128
Income taxes payable...................................... (811) (24,306)
Customer advances......................................... (74,191) (36,549)
Long-term liabilities..................................... 19,628 26,598
Other..................................................... 3,167 1,837
--------- ---------
Cash used in operating activities........................... (69,029) (59,685)
--------- ---------
Investing activities:
Cash acquired in connection with Orion acquisition........ 53,801
Investments in affiliates................................. (228,625) (30,721)
Use and transfer of restricted cash....................... 24,919 199,336
Capital expenditures...................................... (228,060) (304,276)
--------- ---------
Cash used in investing activities........................... (431,766) (81,860)
--------- ---------
Financing activities:
Proceeds from the issuance of common stock, net........... 602,600
Net proceeds from issuance of 9.5% Senior Notes........... 343,875
Borrowings under revolving credit facility, net........... 110,000 165,000
Borrowings (repayments) under note purchase facility...... 10,640 20,196
Borrowings (repayments) of other long term obligations.... (967) 45
Repayments of export-import facility...................... (1,073) (1,073)
Proceeds from exercise of stock options and issuances to
employee savings plan.................................. 10,527 17,141
Contributions from minority partners...................... 9,996
Preferred dividends....................................... (22,367) (22,377)
--------- ---------
Cash provided by financing activities....................... 450,635 791,528
--------- ---------
Increase (decrease) in cash and cash equivalents............ (50,160) 649,983
Cash and cash equivalents -- beginning of period............ 546,772 226,547
--------- ---------
Cash and cash equivalents -- end of period.................. $ 496,612 $ 876,530
========= =========
Non-cash activities:
Common stock issued to acquire Orion...................... $ 469,025
=========
Unrealized gain (loss) on available-for-sale securities... $ (7,207) $ 34,531
========= =========
Insurance proceeds receivable for Orion 3................. $ 265,606
=========
</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"); 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 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 SEC rules. The Company believes that the disclosures made
are adequate to keep the information presented from being misleading. The
results of operations for the three and six months ended June 30, 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 and foreign currency
translation adjustments to be included in accumulated other comprehensive
income.
4
<PAGE> 6
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
------- --------
(IN THOUSANDS)
<S> <C> <C>
Net loss.................................................... $76,569 $ 74,416
Unrealized (gain) loss on available-for-sale securities..... 7,207 (34,531)
Cumulative translation adjustment........................... 1,386 (375)
------- --------
Comprehensive loss.......................................... $85,162 $ 39,510
======= ========
</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 June 30, 1999, these
restricted assets aggregated $49.4 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 six months ended June 30, 1998
would have been: $562.3 million, $41.1 million, $117.4 million and $0.44,
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 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 funds for the construction
and deployment of the Globalstar System.
5
<PAGE> 7
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of June 30, 1999, Loral owned directly and indirectly 24.8 million
ordinary partnership interests (42.6%) of the total 58.2 million Globalstar
ordinary partnership interests outstanding. During the first six months of 1999,
Loral capitalized $16.3 million of interest 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"), 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 June 30, 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.
In June 1999, Loral purchased two transponders from Satmex for
approximately $17 million.
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 June 30, 1999, Loral invested $66 million in Europe*Star, including $17
million in the first quarter of 1999. As of June 30, 1999, Loral owned 47% of
Europe*Star. During the first six months of 1999, Loral capitalized $2.5 million
of interest on its investment in 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 participates in the development of the two projects. The
SkyBridge project is currently in the development stage. As of June 30, 1999,
Loral owned approximately 16% of the outstanding partnership interests in
SkyBridge.
6
<PAGE> 8
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investments in affiliates are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Globalstar........................................... $679,207 $555,906
Satmex............................................... 88,912 74,159
Europe*Star.......................................... 63,003 45,413
SkyBridge............................................ 14,053
Other affiliates..................................... 31,059 18,386
-------- --------
$862,181 $707,917
======== ========
</TABLE>
Equity in net loss of affiliates consists of the followings:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Globalstar, net of tax benefit........................... $37,256 $28,020
Satmex................................................... 15,628 11,848
Europe*Star.............................................. 1,964
SkyBridge, net of tax benefit............................ 12,297 15,891
Other affiliates......................................... 4,111 5,568
------- -------
$71,256 $61,327
======= =======
</TABLE>
The following table represents the summary of results of operations of
certain of Loral's affiliates for the six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
GLOBALSTAR SATMEX GLOBALSTAR SATMEX
---------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Sales................................... $ $ 70,011 $ $ 52,260
Operating income (loss)................. (79,846) 13,256 (53,040) 14,632
Net loss................................ (75,771) (16,461) (43,220) (19,420)
Net loss applicable to ordinary
partnership interests................. (90,461) (65,417)
Net loss applicable to common
stockholders.......................... (16,838) (19,420)
</TABLE>
7
<PAGE> 9
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5) CONTRACTS IN PROCESS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
U.S. Government contracts:
Amounts billed........................................... $ 6,531 $ 9,099
Unbilled contract receivables............................ 16,602 11,543
-------- --------
23,133 20,642
-------- --------
Commercial contracts:
Amounts billed........................................... 271,627 216,775
Unbilled contract receivables............................ 190,035 141,268
-------- --------
461,662 358,043
-------- --------
$484,795 $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 whereupon they are reclassified to billed receivables.
6) LONG TERM DEBT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Term loan, 6.1% and 6.7% at June 30, and December 31,
respectively............................................ $ 275,000 $ 275,000
Revolving credit facility, 6.1% and 6.7% at June 30 and
December 31, respectively............................... 315,000 205,000
Note purchase facility.................................... 137,297 126,657
9.5% senior notes due 2006................................ 350,000
Export-Import credit facility............................. 13,945 15,018
Other..................................................... 585 605
Non-recourse debt of Orion:
11.25% senior notes due 2007 (principal amount $443
million)............................................. 504,716 507,573
12.5% senior discount notes due 2007 (principal amount
$484 million)........................................ 428,152 408,812
Other................................................... 16,163 17,110
---------- ----------
Total debt................................................ 2,040,858 1,555,775
Less current maturities................................... 60,442 22,736
---------- ----------
$1,980,416 $1,533,039
========== ==========
</TABLE>
In January 1999, Loral sold $350 million principal amount of 9.5% 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 accrues at the rate of 9.5% per annum and is
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
prior 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Numerator:
Net loss............................ $ 38,068 $ 58,973 $ 76,569 $ 74,416
Preferred dividends and accretion... 11,606 11,607 23,213 23,213
-------- -------- -------- --------
Numerator for basic and diluted
earnings per share -- net loss
applicable to common stockholders... $ 49,674 $ 70,580 $ 99,782 $ 97,629
======== ======== ======== ========
Denominator:
Weighted average shares:
Common stock..................... 244,163 219,872 243,984 211,656
Series A Preferred Stock......... 45,897 45,897 45,897 45,897
-------- -------- -------- --------
Denominator for basic earnings
per share........................ 290,060 265,769 289,881 257,553
Effect of dilutive securities:
Series C Preferred Stock......... * * * *
Employee stock options........... * * * *
-------- -------- -------- --------
Denominator for diluted earnings per
share............................ 290,060 265,769 289,881 257,553
======== ======== ======== ========
Basic and diluted loss per share...... $ 0.17 $ 0.27 $ 0.34 $ 0.38
======== ======== ======== ========
</TABLE>
- ---------------
* Effect is antidilutive.
8) COMMITMENTS AND 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,
9
<PAGE> 11
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
if any, in excess of $150 million under its guarantee of the Globalstar credit
agreement. 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 which is the estimated economic life of the
satellites. 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 is 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
antennas, 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, and
therefore 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.
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
10
<PAGE> 12
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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 ($134 million as of
July 31, 1999) and may incur penalties of up to $13 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.
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. As a result, the satellite cannot be used for the Company's
intended purpose.
The satellite and launch were fully insured for approximately $266 million.
DACOM Corporation, a Korean communications company which had purchased eight
transponders on Orion 3 for a total of $89 million, had made prepayments of
approximately $34 million to the Company. Under the agreement with DACOM, the
amount prepaid was refunded in July 1999 since Orion 3 failed to commence
commercial operations by June 30, 1999. In addition, Loral Orion's debt
covenants require that the insurance proceeds be used to acquire a replacement
satellite within 15 months of receipt of such proceeds, or to pay down debt. The
Company is currently evaluating options with regard to this matter.
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 for the
three and six months ended June 30, 1999 and 1998, respectively is as follows:
SEGMENT INFORMATION
THREE MONTHS ENDED JUNE 30, 1999
(IN MILLIONS)
<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............. $ 240.8 $ 70.5 $ 17.8 $ 329.1
Intersegment revenues....................... 104.6 19.9 124.5
-------- -------- ------ ---------
Gross revenues.............................. $ 345.4 $ 90.4 $ 17.8 453.6
======== ======== ======
Revenues of unconsolidated affiliates(5).... (42.0)
Intercompany revenues(6).................... (33.2)
---------
Consolidated revenues....................... $ 378.4
=========
EBITDA before development and start-up costs
and affiliate and intercompany
eliminations.............................. $ 31.4 $ 47.4 $ (0.5) $ (8.4) $ 69.9
Development and start-up costs(7)........... (3.6) $ (36.6) (40.2)
-------- -------- ------ -------- -------- ---------
EBITDA before affiliate and intercompany
eliminations.............................. $ 31.4 $ 47.4 $ (4.1) $ (36.6) $ ( 8.4) 29.7
======== ======== ====== ======== ========
EBITDA of unconsolidated affiliates(5)...... 16.3
Intercompany EBITDA(6)...................... (2.5)
---------
EBITDA as reported(8)....................... 43.5
Depreciation and amortization............... (41.4)
---------
Operating income............................ $ 2.1
=========
OTHER DATA:
Depreciation and amortization before
affiliate eliminations.................... $ 10.7 $ 41.4 $ 4.9 $ 0.6 $ 0.8 $ 58.4
======== ======== ====== ======== ========
Depreciation and amortization of
unconsolidated affiliates(5).............. (17.0)
---------
Depreciation and amortization............... $ 41.4
=========
Total assets before affiliate
eliminations.............................. $1,767.1 $3,619.2 $119.8 $3,046.2 $1,409.2 $ 9,961.5
======== ======== ====== ======== ========
Total assets of unconsolidated
affiliates(5)............................. (4,365.0)
---------
Total assets................................ $ 5,596.5
=========
</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. For the three and six months ended June 30, 1999
Satmex's results include $17 million in revenues and $7.5 million in EBITDA
from a sale of transponders to Loral Skynet.
(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 39% at June
30, 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)
SEGMENT INFORMATION
SIX MONTHS ENDED JUNE 30, 1999
(IN MILLIONS)
<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:
Revenues from external
customers....................... $381.5 $140.2 $ 34.3 $ 556.0
Intersegment revenues............. 290.3 22.2 312.5
------ ------ ------ -------
Gross revenues.................... $671.8 $162.4 $ 34.3 868.5
====== ====== ======
Revenues of unconsolidated
affiliates(5)................... (70.0)
Intercompany revenues(6).......... (114.1)
-------
Consolidated revenues............. $ 684.4
=======
EBITDA before development and
start-up costs and affiliate and
intercompany eliminations....... $ 62.0 $ 95.0 $ (2.8) $(16.6) $ 137.6
Development and start-up
costs(7)........................ ( 8.0) $(78.7) (86.7)
------ ------ ------ ------ ------ -------
EBITDA before affiliate and
intercompany eliminations....... $ 62.0 $ 95.0 $(10.8) $(78.7) $(16.6) 50.9
====== ====== ====== ====== ======
EBITDA of unconsolidated
affiliates(5)................... 37.9
Intercompany EBITDA(6)............ (8.6)
-------
EBITDA as reported(8)............. 80.2
Depreciation and amortization..... (79.3)
-------
Operating income.................. $ 0.9
=======
OTHER DATA:
Depreciation and amortization
before affiliate eliminations... $ 19.5 $ 79.5 $ 9.1 $ 1.1 $ 1.6 $ 110.8
====== ====== ====== ====== ======
Depreciation and amortization of
unconsolidated affiliates(5).... (31.5)
-------
Depreciation and amortization..... $ 79.3
=======
</TABLE>
13
<PAGE> 15
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT INFORMATION
THREE MONTHS ENDED JUNE 30, 1998
(IN MILLIONS)
<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:
Revenues from external
customers...................... $ 108.1 $ 63.0 $ 11.9 $ 183.0
Intersegment revenues............ 222.0 1.1 223.1
-------- -------- ------ --------
Gross revenues................... $ 330.1 $ 64.1 $ 11.9 406.1
======== ======== ======
Revenues of unconsolidated
affiliates(5).................. (26.4)
Intercompany revenues(6)......... (131.4)
--------
Consolidated revenues............ $ 248.3
========
EBITDA before development and
start-up costs and affiliate
and intercompany
eliminations................... $ 19.8 $ 45.3 $ (5.8) $ (7.7) $ 51.6
Development and start-up
costs(7)....................... (8.8) $ (27.9) (36.7)
-------- -------- ------ -------- -------- --------
EBITDA before affiliate and
intercompany eliminations...... $ 19.8 $ 45.3 $(14.6) $ (27.9) $ (7.7) 14.9
======== ======== ====== ======== ========
EBITDA of unconsolidated
affiliates(5).................. 6.7
Intercompany EBITDA(6)........... (9.4)
--------
EBITDA as reported(8)............ 12.2
Depreciation and amortization.... (38.5)
--------
Operating loss................... $ (26.3)
========
OTHER DATA:
Depreciation and amortization
before affiliate
eliminations................... $ 8.7 $ 39.1 $ 3.2 $ 0.4 $ 0.7 $ 52.1
======== ======== ====== ======== ========
Depreciation and amortization of
unconsolidated affiliates(5)... (13.6)
--------
Depreciation and amortization.... $ (38.5)
========
Total assets before affiliate
eliminations................... $1,648.0 $3,267.9 $134.0 $2,555.8 $1,119.0 $8,724.7
======== ======== ====== ======== ========
Total assets of unconsolidated
affiliates(5).................. (3,658.7)
--------
Total assets..................... $5,066.0
========
</TABLE>
14
<PAGE> 16
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT INFORMATION
SIX MONTHS ENDED JUNE 30, 1998
(IN MILLIONS)
<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:
Revenues from external
customers....................... $249.0 $116.6 $ 11.9 $ 377.5
Intersegment revenues............. 389.5 2.0 391.5
------ ------ ------ -------
Gross revenues.................... $638.5 $118.6 $ 11.9 769.0
====== ====== ======
Revenues of unconsolidated
affiliates(5)................... (52.3)
Intercompany revenues(6).......... (173.2)
-------
Consolidated revenues............. $ 543.5
=======
EBITDA before development and
start-up costs and affiliate and
intercompany eliminations....... $ 40.5 $ 81.1 $ (5.8) $(14.6) $ 101.2
Development and start-up
costs(7)........................ (16.7) $(52.3) (69.0)
------ ------ ------ ------ ------ -------
EBITDA before affiliate and
intercompany eliminations....... $ 40.5 $ 81.1 $(22.5) $(52.3) $(14.6) 32.2
====== ====== ====== ====== ======
EBITDA of unconsolidated
affiliates(5)................... 10.9
Intercompany EBITDA(6)............ (12.5)
-------
EBITDA as reported(8)............. 30.6
Depreciation and amortization..... (55.9)
-------
Operating income.................. $ (25.3)
=======
OTHER DATA:
Depreciation and amortization
before affiliate eliminations... $ 17.6 $ 60.4 $ 3.2 $ 0.8 $ 1.5 $ 83.5
====== ====== ====== ====== ======
Depreciation and amortization of
unconsolidated affiliates(5).... (27.6)
-------
Depreciation and amortization..... $ 55.9
=======
</TABLE>
10) SUBSEQUENT EVENT
On August 5, 1999, Globalstar entered into a $500 million credit agreement
with a group of banks for the build-out of the Globalstar system. The credit
agreement provides for a $100 million three-year revolving credit facility
("Revolver"), a $100 million three-year term loan ("Term Loan A") and a $300
million four-year term loan ("Term Loan B"). The Term Loan facilities are
subject to an amortization payment schedule as follows: the Term Loan A facility
requires payments of 10% of the principal amount on each of January 15, 2001,
March 31, 2001, June 30, 2001, September 30, 2001 and December 31, 2001, 15% of
the principal amount on each of March 31, 2002 and June 30, 2002 and a final
payment of 20% of the principal amount on August 15, 2002; the Term Loan B
facility requires payments of 1% of the principal amount on each of January 15,
2001 and June 30, 2001, a payment of 15% of the principal amount on June 30,
2002, a payment of 25% of the principal amount on March 31, 2003 and a final
payment of 58% of the principal amount on August 15, 2003. All amounts
outstanding under the Revolver are due and payable on August 15, 2002.
Borrowings under the facilities bear interest, at Globalstar's option, at
various rates based on margins over the lead bank's base rate or the London
Interbank Offer Rate ("LIBOR") for periods of one to six months. Globalstar pays
a commitment fee on the unused portion of the facilities. The credit agreement
contains customary financial covenants that commence March 31, 2001, including,
minimum revenue thresholds,
15
<PAGE> 17
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maintenance of consolidated net worth, interest coverage ratios and maximum
leverage ratios. In addition, the credit agreement contains customary
limitations on indebtedness, liens, contingent obligations, fundamental changes,
asset sales, dividends, investments, optional payments and modification of
subordinated and other debt instruments and transactions with affiliates.
The credit facility is guaranteed by Loral SatCom Ltd. and Loral Satellite,
Inc., wholly owned subsidiaries of Loral. The guarantee is secured by the pledge
of certain assets of Loral and its subsidiaries, including the Telstar 6 and
Telstar 7 satellites and the stock of the guarantors. The guarantee agreement
contains customary financial covenants of the guarantors, including maintenance
of a minimum collateral coverage ratio and maintenance of a combined minimum net
worth and combined EBITDA. In addition, the guarantee agreement contains
customary limitations on indebtedness, liens, fundamental changes, asset sales,
dividends (except that the guarantors may pay dividends to their parents
provided that combined aggregate cash on hand at the guarantors is at least
equal to $50 million and the guarantors hold an intercompany note due from Loral
for at least $100 million), investments, capital expenditures, creating liens
other than those created pursuant to the guarantee and transactions with
affiliates.
In consideration for the guarantee, Loral and certain Loral subsidiaries
received warrants to purchase an aggregate of 3,450,000 Globalstar partnership
interests (equivalent to approximately 13,800,000 shares of common stock of GTL)
at an exercise price of $91.00 per partnership interest (equivalent to $22.75
per share of GTL common stock, the average of the high and low trading prices of
GTL common stock on August 5, 1999, the closing date of the credit facility).
The warrants vest in stages (provided that the guarantee is then in effect): 50%
on February 5, 2000, 25% on August 5, 2000 and the remaining 25% on August 5,
2001. The warrants are immediately exercisable after vesting and have a
seven-year term. Globalstar may call the warrants after August 5, 2001 if the
market price of GTL common stock exceeds $45.50 for a certain period. After
giving effect to the issuance of the warrants, Loral's interest in Globalstar on
a fully-diluted basis increased from 42% to 45%.
16
<PAGE> 18
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 statements on Form S-3
(File Nos. 333-75677 and 333-83239) 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, Orion and Satmex,
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. ("Loral 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 June 30, 1999, Loral's fixed satellite
services 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 June 30, 1999:
three Loral Skynet Telstar satellites and one satellite of 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;
17
<PAGE> 19
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"); 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 System") operated by
Globalstar, which is expected to start service in several regions of the
world beginning this fall. Loral is the managing general partner and owned
approximately 43% of Globalstar as of June 30, 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 and six months
ended June 30, 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
1999 1998 1999 1998
------- -------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Satellite manufacturing and technology............... $345.4 $ 330.1 $ 671.8 $ 638.5
Fixed satellite services(1).......................... 90.4 64.1 162.4 118.6
Data services(2)..................................... 17.8 11.9 34.3 11.9
------ ------- ------- -------
Operating segment revenues........................... 453.6 406.1 868.5 769.0
Affiliate eliminations(3)............................ (42.0) (26.4) (70.0) (52.3)
Intercompany eliminations(4)......................... (33.2) (131.4) (114.1) (173.2)
------ ------- ------- -------
Operating revenues................................... $378.4 $ 248.3 $ 684.4 $ 543.5
====== ======= ======= =======
EBITDA(5):
Satellite manufacturing and technology............... $ 31.4 $ 19.8 $ 62.0 $ 40.5
Fixed satellite services(1).......................... 47.4 45.3 95.0 81.1
Data services(2)..................................... (0.5) (5.8) (2.8) (5.8)
Corporate expenses(6)................................ (8.4) (7.7) (16.6) (14.6)
------ ------- ------- -------
EBITDA for operating segments before development
and start-up costs, and affiliate and intercompany
eliminations....................................... 69.9 51.6 137.6 101.2
------ ------- ------- -------
Development and start-up costs(7):
Data services(2)................................... (3.6) (8.8) (8.0) (16.7)
Global mobile telephony(8)......................... (36.6) (27.9) (78.7) (52.3)
------ ------- ------- -------
Total development and start-up costs................. (40.2) (36.7) (86.7) (69.0)
------ ------- ------- -------
Segment EBITDA before eliminations................... 29.7 14.9 50.9 32.2
Affiliate eliminations(3)............................ 16.3 6.7 37.9 10.9
Intercompany eliminations(4)......................... (2.5) (9.4) (8.6) (12.5)
------ ------- ------- -------
EBITDA as reported................................... $ 43.5 $ 12.2 $ 80.2 $ 30.6
====== ======= ======= =======
</TABLE>
18
<PAGE> 20
- ---------------
(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. For the three and six months ended June 30, 1999
Satmex's results include $17 million in revenues and $7.5 million in EBITDA
from a sale of transponders to Loral Skynet.
(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 39% as of
June 30, 1999 and 1998, respectively.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
Total revenues for Loral's operating segments were $454 million for 1999
versus $406 million in 1998, before intercompany and affiliate eliminations of
$75 million in 1999 and $158 million in 1998. The increase in revenues was
primarily due to increased sales in satellite manufacturing, growth in fixed
satellite services as a result of the service start up of Loral Skynet's Telstar
6 satellite in March 1999, increased sales at Satmex, primarily due to the sale
of transponders to Loral Skynet, and growth in Loral's data segment in 1999. The
decrease in intercompany eliminations in 1999 primarily reflects lower revenue
for satellite construction by SS/L for Loral's FSS segment, as two satellites
are expected to be launched in the fall of 1999.
EBITDA for operating segments before development and start-up costs, and
affiliate and intercompany eliminations, increased in 1999 to $70 million from
$52 million in 1998, an increase of 35%. This increase arose primarily from
growth in satellite manufacturing and technology due to increased sales and
margins in satellite manufacturing and due to growth in data services. The FSS
segment's EBITDA grew modestly in 1999 versus 1998 as expected, as costs
increased for recent and planned satellite launches and as a result of the
investment in Europe*Star in 1999. While Loral Skynet's EBITDA increased in 1999
as a result of the start of service of Telstar 6, Satmex's EBITDA in 1999 would
have been lower than in 1998 if not for the sale of two transponders to Loral
Skynet. Total investment in development and start-up costs increased 10% in 1999
to $40 million, from 1998 spending of $37 million. While the investment required
for CyberStar decreased from $9 million in 1998 to $4 million in 1999, costs
related to the further development of Globalstar rose to $37 million in 1999
from $28 million in 1998, due to increased activities in anticipation of the
start of service this fall. Affiliate eliminations increased in 1999, primarily
as a result of increased Globalstar costs. Intercompany eliminations decreased
in 1999, primarily from lower spending in satellite construction by SS/L for
Loral's FSS segment. As a result of the above, EBITDA as reported more than
tripled to $44 million in 1999 from $12 million in 1998.
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Depreciation and amortization rose to $41 million in 1999 from $39 million
in 1998, and excludes depreciation and amortization of unconsolidated affiliates
of $17 million and $14 million for 1999 and 1998, respectively, primarily for
Satmex. The increase primarily results from the depreciation of Telstar 6 in
1999.
Interest and investment income increased to $19 million in 1999 from $17
million in 1998, principally due to higher cash balances for investment in 1999.
Interest expense was $24 million in 1999, net of capitalized interest of
$19 million, versus $22 million in 1998, net of capitalized interest of $11
million. The increase in interest expense in 1999 was primarily due to the
interest expense on the $350 million 9.5% senior notes issued in January 1999,
mostly offset by higher capitalized interest in 1999 from Loral's investments in
Globalstar and Europe*Star.
The income tax benefit was $2.6 million on a loss before income taxes of
$3.1 million for 1999 and $9.7 million on a loss before income taxes of $31.3
million for 1998. For 1999, the effective rate was 81.8% as compared to 31% for
1998. The change was primarily attributable to an increase in net income from
non-taxable jurisdictions in 1999 and the relative impact of certain permanent
adjustments in 1999.
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
June 30, 1999.
The equity in net loss of affiliates was $38 million in 1999 compared to
$41 million in 1998. Loral's share of Globalstar's losses, net of the related
tax benefit was $19 million in 1999 compared to $17 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 June 30, 1999 versus 38.7% as of June 30, 1998). Loral's share of Satmex's
loss was $10 million in 1999, after eliminating the profit on the sale of
transponders to Loral Skynet, and $5 million in 1998. Also included as equity in
net loss of affiliates is Loral's share of Europe*Star's loss, SkyBridge Limited
Partnership's losses, and losses from other affiliates (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 $71 million or $0.27 per basic and diluted share for 1998. Basic and
diluted weighted average shares were 290.1 million for 1999 and 265.8 million
for 1998. This increase was primarily due to the 23 million shares issued to the
public in June 1998.
RESULTS BY OPERATING SEGMENT FOR THE THREE MONTHS
Satellite Manufacturing and Technology
Revenues at SS/L, the Company's satellite manufacturing and technology
subsidiary, before intercompany eliminations were $345 million in 1999 versus
$330 million in 1998. EBITDA in 1999 rose to $31 million from $20 million in
1998, due to higher margins. Funded backlog for SS/L as of June 30, 1999 and
1998, was $1.3 billion and $1.6 billion, respectively, including intercompany
backlog of $262 million in 1999 and $171 million in 1998.
Fixed Satellite Services
FSS revenue for 1999 was $90 million, including the sale of two
transponders by Satmex to Loral Skynet for $17 million, versus $64 million last
year. EBITDA was $47 million in 1999, up from $45 million, in 1998. Funded
backlog for the fixed satellite services segment totaled $919 million as of June
30, 1999, an increase of 8% over the $849 million as of June 30, 1998, including
affiliate and intercompany backlog of $226 million in 1999 and $172 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
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of Loral's FSS services, the realignment permits Loral Orion to focus on and
leverage its experience in the global data services market.
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 $18
million versus $12 million last year, primarily from Loral Orion's corporate
data networking and Internet and intranet services businesses. EBITDA before
development costs in 1999 was a loss of $1 million as compared to a loss of $6
million in 1998. Total development and start-up costs for CyberStar (a
development stage business) were reduced to $4 million in 1999 from $9 million
in 1998. As of June 30, 1999, funded backlog for the segment increased to $167
million from $120 million as of June 30, 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, technology, 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 start service in several regions of the world beginning this fall.
Globalstar's development and start-up costs were $37 million in 1999 as compared
to $28 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 development, construction, testing and deployment of
the Globalstar System and expects such losses to continue through the year 2000.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
Total revenues for Loral's operating segments were $869 million for 1999
versus $769 million in 1998, before intercompany and affiliate eliminations of
$184 million in 1999 and $226 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 for six months in 1999 (acquired on March 20, 1998),
the service start up of Loral Skynet's Telstar 6 satellite in March 1999 and
increased sales at Satmex, primarily due to the sale of transponders to Loral
Skynet, increased sales in satellite manufacturing and from increased growth in
data services in 1999 and due to including the results of Loral Orion's data
business for six months in 1999. The decrease in intercompany eliminations in
1999 primarily reflects lower revenue for 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 $138 million from
$101 million in 1998, an increase of 36%. This increase arose primarily from
growth in satellite manufacturing and technology due to increased sales and
margins in satellite manufacturing and growth in fixed satellite services due to
the initiation of service of Telstar 6, including the results of Loral Orion's
leasing business for six months in 1999 and increases at Satmex, primarily due
to the sale of transponders to Loral Skynet, which was partially offset by the
investment in Europe*Star in 1999. Total investment in development and start-up
costs increased 26% in 1999 to $87 million, from 1998 spending of $69 million.
While the investment required for CyberStar decreased from $17 million in 1998
to $8 million in 1999, costs related to the further development of Globalstar
rose to $79 million in 1999 from $52 million in 1998, due to increased
activities in anticipation of the start of service. Affiliate eliminations
increased in 1999, primarily as a result of increased Globalstar costs.
Intercompany eliminations
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decreased in 1999, primarily from lower spending in satellite construction by
SS/L for Loral's FSS segment. As a result of the above, EBITDA as reported more
than doubled to $80 million in 1999 from $31 million in 1998.
Depreciation and amortization rose to $79 million in 1999 from $56 million
in 1998, and excludes depreciation and amortization of unconsolidated affiliates
of $32 million and $28 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 for six months in 1999 and the depreciation of Telstar 6 in 1999.
Interest and investment income increased to $34 million in 1999 from $25
million in 1998, principally due to higher cash balances for investment in 1999.
Interest expense was $42 million in 1999, net of capitalized interest of
$41 million, versus $23 million in 1998, net of capitalized interest of $20
million. The increase in interest expense in 1999 was primarily due to including
interest expense for Loral Orion for six months in 1999 versus three months in
1998, the interest expense on the $350 million 9.5% senior notes issued in
January 1999 and interest on increased borrowings under the Loral SpaceCom
credit facility in 1999, partially offset by higher capitalized interest in 1999
on Loral's investments in Globalstar and Europe*Star and from including six
months of capitalized interest for Loral Orion in 1999.
The income tax benefit was $0.2 million on a loss before income taxes of
$7.3 million for 1999 and $6.7 million on loss before income taxes of $23.4
million for 1998. For 1999, the effective rate was 2.4% as compared to 28.5% for
1998. The change was primarily attributable to the effect of 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 $71 million in 1999 compared to
$61 million in 1998. Loral's share of Globalstar's losses, net of the related
tax benefit was $37 million in 1999 compared to $28 million in 1998. This
increase is 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 June 30, 1999 versus 38.7% as of June 30, 1998). Loral's share of Satmex's
loss was $16 million for 1999 and $12 million for 1998. Also included as equity
in net loss of affiliates is Loral's share of Europe*Star loss, SkyBridge
Limited Partnership's losses, and losses from other affiliates (see Note 4 to
Loral's condensed consolidated financial statements).
Preferred distributions of $23 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 $100 million or $0.34 per basic and diluted share, compared to the
net loss applicable to common stockholders of $98 million or $0.38 per basic and
diluted share for 1998. Basic and diluted weighted average shares were 289.9
million for 1999 and 257.6 million for 1998. This increase is 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 FOR THE SIX MONTHS
Satellite Manufacturing and Technology
Revenues for SS/L, the Company's satellite manufacturing and technology
subsidiary, before intercompany eliminations were $672 million in 1999 versus
$639 million in 1998. EBITDA in 1999 rose to $62 million from $41 million in
1998, due to higher margins.
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Fixed Satellite Services
FSS revenue for 1999 was $162 million, including the sale of two
transponders by Satmex to Loral Skynet for $17 million, versus $119 million last
year, EBITDA was $95 million in 1999, up from EBITDA of $81 million, in 1998.
Data Services
Revenues for the data services segment in 1999 were approximately $34
million versus $12 million in 1998, primarily from growth in Loral Orion's
corporate data networking and Internet and intranet services businesses,
acquired in March 1998. EBITDA before development costs in 1999 was a loss of $3
million compared to a loss of $6 million in 1998. Total development and start-up
costs for CyberStar (a development stage business) were reduced to $8 million in
1999 from $17 million in 1998.
Global Mobile Telephony
Globalstar's development and start-up costs were $79 million in 1999 as
compared to $52 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 development, construction, testing and
deployment of the Globalstar System and expects such losses to continue through
the year 2000.
ACQUISITIONS AND INVESTMENTS IN AFFILIATES
Global Mobile Telephony
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 System.
As of June 30, 1999, Loral had a 42.6% interest in Globalstar ordinary
partnership interests.
Fixed Satellite Services
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.
Loral 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.
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
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Skynet. Through June 30, 1999, Loral invested $66 million in Europe*Star,
including $17 million in the first quarter of 1999.
Data Services
See Fixed Satellite Services above (Loral Orion).
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 prior 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 then 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 June 30, 1999, there was
$590 million of borrowings outstanding under this credit facility.
Loral Orion's outstanding debt as of June 30, 1999, was $949 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 June 30, 1999, Loral had $496.6 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 June 30, 1999, Loral Orion had $49.4 million of restricted cash,
which will be used for interest payments on Loral Orion's senior notes.
Fixed Satellite Services
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 June
30, 1999, Loral Skynet has two satellites under construction by SS/L, and one
completed satellite which is scheduled to be launched in September 1999.
Loral Orion
Loral Orion currently has one satellite in orbit, and one satellite under
construction (Orion 2) which is expected to be launched in late 1999. Loral
intends to fund approximately $60 million of the construction cost
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of Orion 2. All other costs related to Orion 2 are fully funded. During June
1999, Loral funded approximately $13 million of the cost of Orion 2.
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. As a result, the satellite cannot be used for the Company's intended
purpose.
The satellite and launch were fully insured for approximately $266 million.
DACOM Corporation, a Korean communications company which had purchased eight
transponders on Orion 3 for a total of $89 million, had made prepayments of
approximately $34 million to the Company. In accordance with the agreement with
DACOM, the amount prepaid was refunded since Orion 3 failed to commence
commercial operations by June 30, 1999. In addition, Loral Orion's debt
covenants require that the insurance proceeds be used to acquire a replacement
satellite within 15 months of receipt of such proceeds, or to pay down 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 VSAT's, 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. The related covenants of such debt restrict the ability of Satmex
to pay dividends to Loral.
Global Mobile Telephony
Globalstar
The Company plans to begin a regional roll-out of service in the fall of
1999 with a minimum of eight gateways in operation. By the end of 1999,
Globalstar expects to have a total of at least 14 gateways in operation. All of
the 38 gateways on order have been manufactured and are ready for installation.
From January 1, to July 31, 1999, Globalstar had six successful launches,
of four satellites each, aboard a combination of Soyuz and Delta launch
vehicles, bringing the total number of satellites in orbit to thirty-two.
Globalstar had previously launched its first two groups of four satellites each
in 1998. The first 26 Globalstar satellites have reached their final orbital
positions and are currently being used to test basic system functionality,
including the system's inter-satellite handoff capabilities. The latest four
satellites are expected
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to reach their final orbital positions and will begin operations testing in
August 1999 and two satellites are intentionally drifting and are expected to
reach their final orbital positions in August and October of 1999. As of July
1999, in addition to the 32 satellites already in orbit, Globalstar had eight
completed satellites on hand and 12 more in final integration and test. For the
remainder of 1999, Globalstar's current launch plan includes five additional
launches of four satellites each, using a mix of Delta and Soyuz rockets.
According to the plan, Globalstar will deploy a minimum of 32 satellites by the
fall of 1999 and a total of 52 satellites (including four in-orbit spares) by
the end of 1999.
Through June 30, 1999, Globalstar incurred costs of approximately $2.9
billion for the design, development, construction and deployment of the space
and ground segments, not including financing costs. Costs incurred during 1999
were approximately $379.2 million. As of June 30, 1999, Globalstar's budgeted
expenditures were $3.17 billion for the design, development, construction and
deployment of the Globalstar System to start service in several regions of the
world beginning this fall 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 start of 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 start of service and, in any event, after the start of
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 to purchase from SS/L eight 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 the start of 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 is using the funds for the construction
and deployment of the Globalstar(TM) System.
As of June 30, 1999, Globalstar has raised or received commitments for
approximately $3.8 billion. Globalstar intends to raise the remaining funds
required, of approximately $100 million, by the start of service in the fall,
from financial support from the Globalstar partners.
In July 1999, Globalstar and GTL filed a shelf registration statement with
the SEC covering up to $500 million of securities. Under the registration
statement, Globalstar may, from time to time, offer debt securities, which may
be either senior or subordinated or secured or unsecured, and GTL may, from time
to time, offer shares of common stock, preferred stock or warrants, all at
prices and on terms to be determined at the time of the offering. Proceeds from
any offering would be used for general corporate purposes, which may include
refinancing of outstanding indebtedness.
On August 5, 1999, Globalstar entered into a $500 million credit agreement
with a group of banks for the build-out of the Globalstar system. The credit
agreement provides for a $100 million three-year revolving credit facility
("Revolver"), a $100 million three-year term loan ("Term Loan A") and a $300
million four-year term loan ("Term Loan B"). The Term Loan facilities are
subject to an amortization payment schedule as follows: the Term Loan A facility
requires payments of 10% of the principal amount on each of January 15, 2001,
March 31, 2001, June 30, 2001, September 30, 2001 and December 31, 2001, 15% of
the principal amount on each of March 31, 2002 and June 30, 2002 and a final
payment of 20% of the principal amount on August 15, 2002; the Term Loan B
facility requires payments of 1% of the principal amount on each of January 15,
2001 and June 30, 2001, a payment of 15% of the principal amount on June 30,
2002, a payment of 25% of the principal amount on March 31, 2003 and a final
payment of 58% of the principal amount on August 15, 2003. All amounts
outstanding under the Revolver are due and payable on August 15, 2002.
Borrowings under the facilities bear interest, at Globalstar's option, at
various rates based on margins over the lead bank's base rate or the London
Interbank Offer Rate ("LIBOR") for periods of one to six months. Globalstar pays
a commitment fee on the unused portion of the facilities. The credit agreement
contains customary financial covenants that commence March 31, 2001, including,
minimum revenue thresholds,
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maintenance of consolidated net worth, interest coverage ratios and maximum
leverage ratios. In addition, the credit agreement contains customary
limitations on indebtedness, liens, contingent obligations, fundamental changes,
asset sales, dividends, investments, optional payments and modification of
subordinated and other debt instruments and transactions with affiliates.
The credit facility is guaranteed by Loral SatCom Ltd. and Loral Satellite,
Inc., wholly owned subsidiaries of Loral. The guarantee is secured by the pledge
of certain assets of Loral and its subsidiaries, including the Telstar 6 and
Telstar 7 satellites and the stock of the guarantors. The guarantee agreement
contains customary financial covenants of the guarantors, including maintenance
of a minimum collateral coverage ratio and maintenance of a combined minimum net
worth and combined EBITDA. In addition, the guarantee agreement contains
customary limitations on indebtedness, liens, fundamental changes, asset sales,
dividends (except that the guarantors may pay dividends to their parents
provided that combined aggregate cash on hand at the guarantors is at least
equal to $50 million and the guarantors hold an intercompany note due from Loral
for at least $100 million), investments, capital expenditures, creating liens
other than those created pursuant to the guarantee and transactions with
affiliates.
In consideration for the guarantee, Loral and certain Loral subsidiaries
received warrants to purchase an aggregate of 3,450,000 Globalstar partnership
interests (equivalent to approximately 13,800,000 shares of common stock of GTL)
at an exercise price of $91.00 per partnership interest (equivalent to $22.75
per share of GTL common stock, the average of the high and low trading prices of
GTL common stock on August 5, 1999, the closing date of the credit facility).
The warrants vest in stages (provided that the guarantee is then in effect): 50%
on February 5, 2000, 25% on August 5, 2000 and the remaining 25% on August 5,
2001. The warrants are immediately exercisable after vesting and have a
seven-year term. Globalstar may call the warrants after August 5, 2001 if the
market price of GTL common stock exceeds $45.50 for a certain period. After
giving effect to the issuance of the warrants, Loral's interest in Globalstar on
a fully-diluted basis increased from 42% to 45%.
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. 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 which is the estimated economic life of the
satellites. 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 is 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
antennaes, 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
27
<PAGE> 29
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, and
therefore 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.
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 ($134 million as of July 31, 1999) and may incur penalties of up to $13
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 six months ended June 30,
1999 was $69 million, primarily due to decreases in customer advances of $74
million and increases in accounts receivable and contracts in process of $110
million, offset by funds generated by earnings before depreciation and
amortization, interest,
28
<PAGE> 30
taxes, minority interest and equity in net loss of affiliates of $80 million and
increases in accrued expenses and other current liabilities of $33 million. Cash
used in operating activities for the six months ended June 30, 1998 was $60
million, primarily due to increases in accounts receivable and contracts in
process of $61 million, and inventories of $31 million and a decrease in
customer advances of $37 million, offset by a decrease in launch vehicle
deposits of $40 million and funds generated by earnings before depreciation and
amortization, interest, taxes, minority interest and equity in net loss of
affiliates of $31 million.
NET CASH USED IN INVESTING ACTIVITIES
During 1999, net cash used in investing activities was $432 million,
primarily as a result of $228 million of capital expenditures mainly for the
construction of satellites, the $146 million cost of acquiring GTL preferred
stock and $83 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 $82 million primarily as a result of
$304 million of capital expenditures and $31 million of investments in
affiliates, offset by a reduction in restricted cash of $199 million and $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 $451 million,
primarily due to the $344 million of proceeds from the issuance of senior notes,
and borrowings of $110 million under the revolving credit facility. Net cash
provided by financing activities for 1998 was $792 million, primarily from the
net proceeds of the equity offering of $603 million and borrowings of $165
million under the revolving credit facility and $20 million under the note
purchase facility.
OTHER MATTERS
Effect of Year 2000
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.
Loral 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, Loral 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 June 30, 1999, Loral and its operating affiliates had completed
approximately 98% of the inventory phase and approximately 88% of the assessment
phase. Loral 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 Loral 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 Loral's
plan. The program to address Year 2000 has been underway since July 1997. The
incremental costs incurred through June 30, 1999 for this effort by Loral and
its operating affiliates were approximately $4.1 million. Based on the efforts
of Loral and its operating affiliates to date, Loral anticipates additional
incremental expenses of approximately $3.2 million will be incurred to
substantially complete the effort.
29
<PAGE> 31
As an added safeguard against the possibility that a Year 2000 related
issue will adversely effect Loral's ability to continue operations, contingency
plans are being developed under the assumption that worst case scenarios are
encountered in critical areas. Emphasis is being placed upon the action to be
taken if there is discontinuance of services and/or lack of delivery of
compliant products from third party suppliers, including utilities which provide
power, water, fuel and telecommunications. Baseline contingency plans are
expected to be completed prior to the end of the third quarter of 1999. Loral
believes that 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 Loral. However, there can be no assurances
that such plans, if required, will be completed on a timely basis.
The cost of the program and the dates on which Loral 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.
Loral'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 Loral's results of operations, liquidity
and financial condition. Loral 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, Loral is unable to determine at this time
whether the consequences of Year 2000 failures will have an adverse material
impact on Loral's results of operations, liquidity or financial condition. There
can be no assurance given that Loral'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 Loral's results of operations or
financial position.
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. Loral has not yet determined the impact that the adoption
of SFAS 133 will have on its earnings or financial position. Loral is required
to adopt SFAS 133 on January 1, 2001.
30
<PAGE> 32
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 18, 1999, at the Company's Annual Meeting of Stockholders, the
following proposals were acted on:
(1) In an uncontested election, three nominees for the Board of
Directors were elected to three year terms expiring in 2002. The votes were
as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
----------- ---------
<S> <C> <C>
Bernard L. Schwartz................................. 209,225,848 1,313,034
Malvin A. Ruderman.................................. 209,234,953 1,303,929
E. Donald Shapiro................................... 209,215,897 1,322,985
</TABLE>
(2) The proposal to authorize and create an additional 20,000,000
preference shares, par value $.01 per share of the Company (The "Preferred
Stock") and to amend the bye-laws to authorize the Board of Directors to
establish the rights, preferences and designations of such Preferred Stock
was approved.
<TABLE>
<S> <C>
For......................................................... 149,925,756
Against..................................................... 40,008,752
Broker non-votes............................................ 65,470,610
Abstentions................................................. 1,030,741
</TABLE>
(3) The selection of Deloitte & Touche LLP to serve as independent
auditors for the fiscal year ending December 31, 1999, was ratified. The
votes were as follows:
<TABLE>
<S> <C>
For......................................................... 255,309,822
Against..................................................... 545,184
Abstentions................................................. 580,853
</TABLE>
31
<PAGE> 33
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> <C>
May 5, 1999 Item 5 -- Other Events Orion 3 launch failure
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LORAL SPACE & COMMUNICATIONS LTD.
Registrant
/s/ RICHARD J. TOWNSEND
--------------------------------------
Richard J. Townsend
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
and
Registrant's Authorized Officer
Date: August 13, 1999
32
<PAGE> 34
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>
SIX MONTHS ENDED
JUNE 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Loss before income taxes, equity in net loss of affiliates
and minority interest..................................... $ (7,348) $(23,371)
Plus fixed charges:
Interest expense.......................................... 82,380 43,499
Interest component of rent expense(1)..................... 2,676 2,127
Less: capitalized interest, net of amortization............. (40,558) (20,222)
-------- --------
Earnings available to cover fixed charges................... $ 37,150 $ 2,033
======== ========
Fixed charges(2)............................................ $108,207 $ 78,926
======== ========
Deficiency of earnings to cover fixed charges............... $ 71,057 $ 76,893
======== ========
</TABLE>
- ---------------
(1) The interest component of rent expense is deemed to be approximately 25% of
total rent expense.
(2) Fixed charges include preferred dividends as adjusted for the Company's
effective tax rate.
<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> JUN-30-1999
<CASH> 496,612
<SECURITIES> 0
<RECEIVABLES> 512,764
<ALLOWANCES> 3,363
<INVENTORY> 170,154
<CURRENT-ASSETS> 1,531,833
<PP&E> 1,816,483
<DEPRECIATION> 248,199
<TOTAL-ASSETS> 5,596,471
<CURRENT-LIABILITIES> 529,155
<BONDS> 0
0
736,283
<COMMON> 2,445
<OTHER-SE> 2,101,419
<TOTAL-LIABILITY-AND-EQUITY> 5,596,471
<SALES> 562,850
<TOTAL-REVENUES> 684,363
<CGS> 491,124
<TOTAL-COSTS> 583,779
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,822
<INCOME-PRETAX> (7,348)
<INCOME-TAX> 179
<INCOME-CONTINUING> (99,782)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (99,782)
<EPS-BASIC> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
