<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, 2000
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 21, 2000, there were 296,537,907 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,
-------------------- --------------------
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues from satellite sales..................... $ 226,384 $315,020 $ 448,906 $562,850
Revenues from satellite services.................. 97,874 63,417 193,438 121,513
--------- -------- --------- --------
Total revenues............................... 324,258 378,437 642,344 684,363
Cost of satellite sales........................... 200,803 275,825 391,777 491,124
Cost of satellite services........................ 73,494 47,703 152,323 92,655
Selling, general and administrative expenses...... 59,838 52,850 114,100 99,691
--------- -------- --------- --------
Operating income (loss)........................... (9,877) 2,059 (15,856) 893
Interest and investment income.................... 31,302 18,777 60,541 33,581
Interest expense.................................. (42,436) (23,983) (85,752) (41,822)
Gain on investments............................... 37,566 52,723
--------- -------- --------- --------
Income (loss) before income taxes, equity in net
loss of affiliates and minority interest........ 16,555 (3,147) 11,656 (7,348)
Income tax (expense) benefit...................... (4,860) 2,576 (15,122) 179
--------- -------- --------- --------
Income (loss) before equity in net loss of
affiliates and minority interest................ 11,695 (571) (3,466) (7,169)
Equity in net loss of affiliates.................. (106,654) (38,475) (215,043) (71,256)
Minority interest................................. 1,044 978 1,564 1,856
--------- -------- --------- --------
Net loss.......................................... (93,915) (38,068) (216,945) (76,569)
Preferred dividends and accretion................. (16,124) (11,606) (35,481) (23,213)
--------- -------- --------- --------
Net loss applicable to common stockholders........ $(110,039) $(49,674) $(252,426) $(99,782)
========= ======== ========= ========
Loss per share:
Basic and diluted............................... $ (0.37) $ (0.17) $ (0.86) $ (0.34)
========= ======== ========= ========
Weighted average shares outstanding:
Basic and diluted............................... 295,909 290,060 294,595 289,881
========= ======== ========= ========
</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,
2000 1999
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 392,354 $ 239,865
Restricted and segregated cash............................ 25,063 187,315
Accounts receivable, net.................................. 89,744 47,899
Contracts-in-process...................................... 313,858 439,921
Inventories............................................... 162,144 111,060
Other current assets...................................... 86,825 47,261
---------- ----------
Total current assets.................................... 1,069,988 1,073,321
Property, plant and equipment, net.......................... 1,921,747 1,884,975
Cost in excess of net assets acquired, net.................. 933,960 946,781
Long-term receivables....................................... 178,406 167,464
Investments in and advances to affiliates................... 1,032,636 1,098,003
Deposits.................................................... 148,895 195,875
Other assets................................................ 126,691 244,002
---------- ----------
$5,412,323 $5,610,421
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 98,759 $ 85,496
Accounts payable.......................................... 109,357 207,362
Satellite purchase price payable.......................... 181,928
Accrued employee costs.................................... 42,582 44,797
Customer advances......................................... 43,176 67,725
Accrued interest and preferred dividends.................. 57,614 49,093
Other current liabilities................................. 46,036 37,770
Income taxes payable...................................... 27,923 19,708
---------- ----------
Total current liabilities............................... 425,447 693,879
Pension and other post-retirement liabilities............... 54,602 51,601
Long-term liabilities....................................... 208,026 177,300
Long-term debt.............................................. 1,850,356 1,913,826
Minority interest........................................... 21,275 23,151
Commitments and contingencies (Notes 4, 6 and 8)
Shareholders' equity:
Series A convertible preferred stock, $.01 par value...... 459
Series B preferred stock, $.01 par value..................
Series C 6% convertible redeemable preferred stock
($674,922 and $745,472 redemption value at June 30, 2000
and December 31, 1999, respectively).................... 665,831 735,437
Series D 6% convertible redeemable preferred stock
($400,000 redemption value)............................. 388,000
Common stock, $.01 par value.............................. 2,964 2,452
Paid-in capital........................................... 2,439,043 2,347,323
Treasury stock, at cost................................... (3,360) (3,360)
Unearned compensation..................................... (751) (1,253)
Retained deficit.......................................... (661,727) (409,301)
Accumulated other comprehensive income.................... 22,617 78,907
---------- ----------
Total shareholders' equity.............................. 2,852,617 2,750,664
---------- ----------
$5,412,323 $5,610,421
========== ==========
</TABLE>
---------------
NOTE: The December 31, 1999 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,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating activities:
Net loss.................................................. $(216,945) $ (76,569)
Non-cash items:
Equity in net loss of affiliates........................ 215,043 71,256
Minority interest....................................... (1,564) (1,856)
Deferred taxes.......................................... 5,314 7
Non-cash interest and investment income................. (20,341) (2,086)
Non-cash interest expense............................... 18,103 16,483
Depreciation and amortization........................... 107,255 79,276
Gain on sale of investments............................. (52,723)
Change in operating assets and liabilities:
Accounts receivable, net................................ (41,845) (4,322)
Contracts-in-process.................................... 85,607 (100,477)
Inventories............................................. (10,628) 21,091
Deposits................................................ 46,980 4,275
Long-term receivables................................... (10,942) (16,121)
Other current assets.................................... (6,392) 607
Other assets............................................ 7,909 (30,016)
Accounts payable........................................ (98,005) 4,107
Accrued expenses and other current liabilities.......... 14,572 33,273
Income taxes payable.................................... 8,215 (811)
Customer advances....................................... (24,549) (74,191)
Long-term liabilities................................... 30,726 19,628
Other................................................... 1,803 3,167
--------- ---------
Cash provided by (used in) operating activities............. 57,593 (53,279)
--------- ---------
Investing activities:
Proceeds from sale of investments......................... 70,940
Investments in and advances to affiliates................. (139,580) (244,375)
Advances repaid by affiliate.............................. 4,473
Use and transfer of restricted and segregated cash........ 162,252 24,919
Capital expenditures...................................... (288,091) (228,060)
--------- ---------
Cash used in investing activities........................... (190,006) (447,516)
--------- ---------
Financing activities:
Proceeds from the issuance of 9.5% senior notes, net...... 343,875
Proceeds from issuance of Series D 6% preferred stock,
net..................................................... 388,000
Borrowings (repayments) under revolving credit facility,
net..................................................... (50,000) 110,000
Borrowings under note purchase facility................... 10,640
Repayments under term loan................................ (37,500)
Repayments of export-import facility...................... (1,073) (1,073)
Repayments of other long-term obligations................. (1,204) (967)
Proceeds from common stock issuances...................... 16,278 10,527
Preferred dividends....................................... (29,599) (22,367)
--------- ---------
Cash provided by financing activities....................... 284,902 450,635
--------- ---------
Increase (decrease) in cash and cash equivalents............ 152,489 (50,160)
Cash and cash equivalents -- beginning of period............ 239,865 546,772
--------- ---------
Cash and cash equivalents -- end of period.................. $ 392,354 $ 496,612
========= =========
Non-cash activities:
Conversion of Series A Preferred Stock to common stock.... $ 459
=========
Conversion of Series C Preferred Stock to common stock and
related issuance of additional common shares on
conversion.............................................. $ 75,449
=========
Unrealized loss on available-for-sale securities.......... $ (2,764) $ (7,207)
========= =========
Capital lease obligation.................................. $ 21,467
=========
</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 has assembled the building blocks
necessary to provide a seamless, global networking capability for the
information age. Loral is organized into four distinct operating segments (see
Note 9):
Fixed Satellite Services ("FSS"): Leasing transponder capacity to
customers for various applications, including broadcasting, news gathering,
Internet access and transmission, private voice and data networks, business
television, distance learning and direct-to-home television ("DTH"),
through the activities of Loral Skynet, Loral CyberStar, Inc. ("Loral
CyberStar"), Satelites Mexicanos, S.A. de C.V. ("Satmex") and Europe*Star
Limited ("Europe*Star");
Data Services: Providing managed communications networks and Internet
and intranet services through Loral CyberStar and delivering high-speed
broadband data communications and business television and infomedia
services through CyberStar, L.P. ("CyberStar LP");
Satellite Manufacturing and Technology: Designing and manufacturing
satellites and space systems and developing satellite technology for a
broad variety of customers and applications through Space Systems/Loral,
Inc. ("SS/L"); and
Global Mobile Telephone Service: Acting as the managing general
partner of Globalstar, L.P. ("Globalstar"), which owns and operates a
global telecommunications network designed to serve virtually every
populated area of the world by means of a 52-satellite constellation,
including four in-orbit spares (the "Globalstar System"). The Globalstar
System commenced operations in the first quarter of 2000.
2) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared 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 as of and for the periods
presented. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the U.S. 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, 2000, 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.
Restricted and Segregated Cash
At June 30, 2000, Loral CyberStar had $25 million of restricted cash for a
July 15, 2000 interest payment on its senior notes.
Reclassifications
Certain reclassifications have been made to conform prior period amounts to
the current period presentation.
4
<PAGE> 6
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3) COMPREHENSIVE LOSS
The components of comprehensive loss for the six months ended June 30, 2000
and 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <C>
Net loss.................................................... $(216,945) $(76,569)
Cumulative translation adjustment........................... (803) (1,386)
Unrealized losses arising during the period................. (2,764) (7,207)
Less, realized gains included in net loss................... (52,723)
--------- --------
Comprehensive loss.......................................... $(273,235) $(85,162)
========= ========
</TABLE>
Realized gains during the six months ended June 30, 2000 arose from the
Company's sale of a portion of its investments in available-for-sale securities.
4) INVESTMENTS IN AND ADVANCES TO AFFILIATES
As of June 30, 2000, Loral owned directly and indirectly 24.8 million
ordinary partnership interests (approximately 40%) of the total 61.9 million
Globalstar ordinary partnership interests outstanding. Loral accounts for its
investment in Globalstar on the equity method, recognizing its allocated share
of net losses based on the direct and indirect ordinary partnership interests it
owns.
Investments in and advances to affiliates are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
Globalstar, including vendor financing arrangements of
$238,515 and $219,823 at June 30, 2000 and December 31,
1999, respectively........................................ $ 789,626 $ 878,140
Satmex...................................................... 54,036 70,747
Europe*Star................................................. 65,604 62,300
Other affiliates............................................ 123,370 86,816
---------- ----------
$1,032,636 $1,098,003
========== ==========
</TABLE>
Equity in net loss of affiliates consists of (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
--------- -------
<S> <C> <C>
Globalstar, net of tax benefit.............................. $ 186,490 $37,256
Satmex...................................................... 11,433 15,628
Europe*Star................................................. 2,434 1,964
SkyBridge, net of tax benefit............................... 300 12,297
Other affiliates, net of tax benefit........................ 14,386 4,111
--------- -------
$ 215,043 $71,256
========= =======
</TABLE>
5
<PAGE> 7
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4) INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)
The condensed consolidated statements of operations include the effects of
the following amounts related to transactions with or investments in affiliates
(in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------
2000 1999
------- --------
<S> <C> <C>
Revenues from satellite sales............................... $86,135 $186,906
Interest and investment income.............................. 30,446 8,260
Interest expense capitalized on development stage
enterprises............................................... 2,294 18,778
Elimination of Loral's proportionate share of intercompany
profits................................................... 3,780 767
Amortization of excess carrying value, capitalized interest
and intercompany profits related to investment in
Globalstar................................................ 15,450
</TABLE>
The following table represents the summary of results of operations of
certain of Loral's affiliates for the six months ended June 30, 2000 and 1999
(in thousands):
<TABLE>
<CAPTION>
2000 1999
--------------------- ---------------------
SATMEX GLOBALSTAR SATMEX GLOBALSTAR
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Revenue........................................ $ 66,253 $ 1,317 $ 70,011
Operating income (loss)........................ 13,693 (267,024) 13,256 $(79,846)
Net loss....................................... (14,739) (417,574) (16,461) (75,771)
Net loss applicable to common shareholders..... (15,493) (16,838)
Net loss applicable to ordinary partnership
interests.................................... (432,854) (90,461)
</TABLE>
On June 30, 2000, Globalstar's $250 million credit facility with The Chase
Manhattan Bank became due, and was thereupon repaid in full by its guarantors,
including Lockheed Martin Corporation ("Lockheed Martin"), Qualcomm, DASA and
SS/L, who had previously received warrants for GTL common stock in consideration
of their guarantee. Pursuant to the relevant agreements entered into in 1996,
Globalstar issued three-year notes in the amounts of $206.3 million, $21.9
million, $11.7 million and $10.1 million to Lockheed Martin, Qualcomm, SS/L, and
DASA, respectively, in satisfaction of their subrogation rights. The notes are
due on June 30, 2003 and bear interest, on a deferred basis, at a rate of LIBOR
plus 3%.
On June 30, 2000, Loral paid $56.3 million on a net basis to Lockheed
Martin in satisfaction of its obligation to indemnify Lockheed Martin for
liability in excess of $150 million under Lockheed Martin's guarantee of
Globalstar's $250 million credit facility. Accordingly, Loral is entitled to
receive notes in respect thereof. The amounts paid by Loral and SS/L are
reflected as investments and advances to affiliates on Loral's condensed
consolidated balance sheet.
Lockheed Martin has rejected the notes it received and is instead asking
Globalstar to issue new securities with additional rights and enhanced value,
without waiving its claim that it is entitled to receive an immediate cash
reimbursement by Globalstar of its $150 million payment to the bank lenders.
Globalstar disputes Lockheed Martin's interpretation of the relevant agreements,
but is, nonetheless, in discussions with Lockheed Martin to resolve the dispute.
If the dispute is not resolved, Globalstar cannot be sure that if the
matter were litigated the court would agree with Globalstar's interpretation of
the agreements. Moreover, if as a result of this dispute, a holder of Globalstar
public bonds claimed a cross default under the applicable indentures, and a
court ruled against Globalstar, the maturity date of the bonds would be
accelerated. Management believes, however, that a court would agree with
Globalstar's interpretation of the relevant agreements.
6
<PAGE> 8
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4) INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)
In May 2000, Satelites Enigma S.A. de C.V., Loral's partner in Satmex,
exercised its option to purchase 104,105 shares of Satmex preferred stock from
Loral for $6 million in cash and Loral realized a gain of $1 million, which is
included in gain on investments on the condensed consolidated statements of
operations.
During 1999, Satmex sold two Ku-band transponders on Satmex 5 to Loral
Skynet for $17 million, resulting in a gain of $7.5 million. Loral's
proportionate share of the profit on these transponders was eliminated in
Loral's consolidated results.
5) CONTRACTS-IN-PROCESS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
U.S. Government contracts:
Amounts billed............................................ $ 8,533 $ 9,003
Unbilled contract receivables............................. 2,255 6,965
-------- --------
10,788 15,968
-------- --------
Commercial contracts:
Amounts billed............................................ 182,079 226,609
Unbilled contract receivables............................. 120,991 197,344
-------- --------
303,070 423,953
-------- --------
$313,858 $439,921
======== ========
</TABLE>
Unbilled amounts include recoverable costs and accrued profit on progress
completed, which have not been billed. Such amounts are billed upon shipment of
the product, achievement of contractual milestones, or completion of the
contract and, at such time, are reclassified to billed receivables.
7
<PAGE> 9
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6) LONG TERM DEBT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
Term loan, 7.1%............................................. $ 218,750 $ 256,250
Revolving credit facility, 7.1%............................. 225,000 275,000
Note purchase facility...................................... 139,238 139,238
9.5% senior notes due 2006.................................. 350,000 350,000
Export-Import credit facility............................... 11,799 12,872
Capital lease obligation.................................... 21,210
Other....................................................... 584 591
Non-recourse debt of Loral CyberStar:
11.25% senior notes due 2007 (principal amount $443
million)............................................... 498,623 501,734
12.5% senior discount notes due 2007 (principal amount at
maturity $484 million and accreted principal amount of
$401 million and $378 million as of June 30, 2000 and
December 31, 1999, respectively)....................... 469,623 448,409
Other..................................................... 14,288 15,228
---------- ----------
Total debt.................................................. 1,949,115 1,999,322
Less, current maturities.................................... 98,759 85,496
---------- ----------
$1,850,356 $1,913,826
========== ==========
</TABLE>
The note purchase facility is due to mature in August 2000 and at such time
the amount outstanding under this facility will be rolled into the revolving
credit facility. This event will not change the availability under the revolving
credit facility.
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,
Series D preferred stock and stock options, as the effect would have been
antidilutive. For the three and six months ended June 30, 2000, weighted options
equating to 1.0 million and 0.5 million shares of common stock, respectively,
and for the three and six months ended June 30, 1999 weighted options equating
to 1.3 million and 1.2 million shares of common stock, respectively, as
calculated using the treasury stock method, were excluded from the calculation
of diluted loss per share, as the effect would have been antidilutive.
8
<PAGE> 10
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7) LOSS PER SHARE -- (CONTINUED)
The following table sets forth the computation of basic and diluted loss
per share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2000 1999 2000 1999
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Numerator:
Net loss............................................ $ 93,915 $38,068 $216,945 $76,569
Preferred dividends and accretion................... 16,124 11,606 35,481 23,213
-------- ------- -------- -------
Numerator for basic and diluted earnings per
share--net loss applicable to common
stockholders..................................... $110,039 $49,674 $252,426 $99,782
======== ======= ======== =======
Denominator:
Weight average shares:
Common stock..................................... 295,909 244,163 272,148 243,984
Series A preferred stock......................... 45,897 22,447 45,897
-------- ------- -------- -------
Denominator for basic loss per share................ 295,909 290,060 294,595 289,881
Effect of dilutive securities:
Series C preferred stock......................... * * * *
Series D preferred stock......................... * * * *
Employee stock options........................... * * * *
-------- ------- -------- -------
Denominator for diluted loss per share.............. 295,909 290,060 294,595 289,881
======== ======= ======== =======
Basic and diluted loss per share...................... $ 0.37 $ 0.17 $ 0.86 $ 0.34
======== ======= ======== =======
</TABLE>
---------------
* Effect is antidilutive.
In the first quarter of 2000, all of the Company's Series A preferred stock
and 1.4 million shares of the Company's Series C preferred stock were converted
into the Company's common stock (see Note 10).
8) COMMITMENTS AND CONTINGENCIES
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
facility is guaranteed by Loral SatCom Ltd. and Loral Satellite, Inc., wholly
owned subsidiaries of Loral, for which Loral received 3,450,000 warrants to
purchase Globalstar partnership interests. The guarantee is secured by the
pledge of certain assets of Loral and its subsidiaries, including the stock of
the guarantors and the Telstar 6 and Telstar 7 satellites. Based on third party
valuations, management believes that the fair value of Telstar 6 and Telstar 7
is in excess of this $500 million credit agreement. As of June 30, 2000, the net
book value of Telstar 6 and Telstar 7 was approximately $370 million. 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 earnings before interest, taxes,
depreciation and amortization ("EBITDA"). In addition, the guarantee agreement
contains customary restrictions, including 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.
9
<PAGE> 11
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Globalstar's $500 million credit facility contains various financial
condition covenants, one of which would require, among other things, that
Globalstar have revenues of $100 million for the 12 month period ended March 31,
2001. Globalstar's revenues for the quarter ended June 30, 2000, the first three
months of this period, were $708,000. Unless Globalstar can satisfy this
covenant or obtain waivers or amendments from a majority of the bank lenders,
Globalstar will be in default under its debt facilities. Moreover, a default by
Globalstar under its $500 million credit facility would result in the bank
lenders exercising their rights under the guarantee agreement.
In May 2000, Globalstar finalized $531.1 million of vendor financing
arrangements (including $31.1 million of capitalized interest) with Qualcomm
that replaced the previous $100 million vendor financing agreement. The vendor
financing bears interest at 6%, matures on August 15, 2003 and requires
repayment pro rata with the term loans under Globalstar's $500 million credit
facility discussed above. As of June 30, 2000, $503 million was outstanding
under this facility. In connection with this agreement, Qualcomm received
warrants to purchase 3,450,000 Globalstar partnership interests at an exercise
price of $42.25 per interest. The exercise price was determined by reference to
the fair market value of GTL's common stock on the closing date of the vendor
financing, based on an approximate one partnership interest for four shares of
GTL common stock. Fifty percent of the warrants vested on the closing date. The
remaining 50% will vest generally in two equal installments on September 1, 2000
and September 1, 2001. The warrants will expire in 2007.
Loral has agreed that if the principal amount (excluding capitalized
interest of $31.1 million at June 30, 2000) outstanding under the Qualcomm
vendor financing facility exceeds the principal amount outstanding under
Globalstar's $500 million credit facility, as determined on certain measurement
dates, then Loral will guarantee 50% of such excess amount. As a result, Loral's
aggregate guarantee liability for debt outstanding under the Qualcomm vendor
financing facility and Globalstar's $500 million credit facility will not exceed
$500 million.
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. 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 late 1998, following the launch of an SS/L-built satellite sold to
PanAmSat, a manufacturing error was discovered that affected the geographical
coverage of the Ku-band transponders on the satellite. On January 6, 2000,
PanAmSat filed an arbitration proceeding in connection with this error claiming
damages of $225 million for lost profits, and increased sales and marketing
costs. SS/L believes it has meritorious defenses to the claim and that its
liability is limited to a loss of a portion of the applicable orbital
incentives, the estimated impact of which is included in Loral's condensed
consolidated financial statements. PanAmSat has received a recovery from its
insurance carrier that should reduce any damage claim. While this proceeding is
in its very early stages, management believes that this matter 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
10
<PAGE> 12
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
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. Under the applicable regulations, SS/L could be
debarred from export privileges without being convicted of any crime if it is
indicted for these alleged violations, and loss of export privileges would harm
SS/L's business. 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. As a
result of the suspension, ChinaSat 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 June 30, 2000) and may incur penalties of up
to $11 million and believes it would incur costs of up to 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 for the satellite or its Chinese launch vehicle. SS/L
will record a charge to earnings of approximately $35 million if it is unable to
find a replacement customer for this launch vehicle.
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.
Under an agreement reached with Eutelsat, Loral CyberStar agreed to operate
Telstar 12, which was originally intended to operate at 12 degrees W.L., at 15
degrees W.L. while Eutelsat will continue to develop its services at 12.5
degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L.
orbital slot and
11
<PAGE> 13
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
will assert its priority rights over such location on Loral CyberStar's behalf.
As part of this coordination effort, Loral CyberStar agreed to provide to
Eutelsat four transponders on Telstar 12 for the life of the satellite and has
retained risk of loss with respect to such transponders. Eutelsat also has the
right to acquire, at cost, four transponders on the next replacement satellite
for Telstar 12. As part of the international coordination process, Loral
continues to conduct discussions with various administrations regarding Telstar
12's operations at 15 degrees W.L. If these discussions are not successful,
Telstar 12's useable capacity may be reduced.
9) SEGMENTS
Loral has four reportable business segments: Fixed Satellite Services, Data
Services, Satellite Manufacturing and Technology and Global Mobile Telephone
Service (see Note 1).
In evaluating financial performance, management uses revenues and earnings
before interest, taxes, 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. Intersegment revenues primarily consists
of satellites under construction by Satellite Manufacturing and Technology for
Fixed Satellite Services and Global Mobile Telephone Service and sales by Fixed
Satellite Services to Data Services and Satellite Manufacturing and Technology
for the lease of transponder capacity.
Summarized financial information concerning the reportable segments is as
follows (in millions):
SEGMENT INFORMATION
THREE MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
SATELLITE GLOBAL
FIXED MANUFACTURING MOBILE
SATELLITE DATA AND TELEPHONE
SERVICES(1) SERVICES(2) TECHNOLOGY(3) SERVICE(4) CORPORATE(5) TOTAL
----------- ----------- ------------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES AND EBITDA:
Revenues from external customers....... $ 102.4 $ 29.2 $ 181.4 $ 0.8 $ 313.8
Intersegment revenues.................. 9.9 116.4 126.3
-------- ------ -------- -------- ---------
Operating segment revenues............. $ 112.3 $ 29.2 $ 297.8 $ 0.8 440.1
======== ====== ======== ========
Revenues of unconsolidated
affiliates(6)........................ (34.6)
Intercompany revenues(7)............... (81.2)
---------
Operating revenues as reported......... $ 324.3
=========
Segment EBITDA before Broadband
investment and eliminations.......... $ 69.9 $ (8.3) $ 25.3 $ (52.3) $ (10.8) $ 23.8
Broadband investment(8)................ (2.7) (2.7)
EBITDA of unconsolidated
affiliates(6)(9)..................... 31.2
Intercompany EBITDA(7)(9).............. (8.0)
---------
EBITDA(9).............................. 44.3
Depreciation and amortization(10)...... (54.2)
---------
Operating loss......................... $ (9.9)
=========
</TABLE>
12
<PAGE> 14
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9) SEGMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SATELLITE GLOBAL
FIXED MANUFACTURING MOBILE
SATELLITE DATA AND TELEPHONE
SERVICES(1) SERVICES(2) TECHNOLOGY(3) SERVICE(4) CORPORATE(5) TOTAL
----------- ----------- ------------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Depreciation and amortization before
affiliate eliminations(10)........... $ 54.9 $ 4.6 $ 9.2 $ 79.9 $ 0.9 $ 149.5
======== ====== ======== ======== ========
Depreciation and amortization of
unconsolidated affiliates(6)(10)..... (95.3)
---------
Depreciation and amortization(10)...... $ 54.2
=========
Total assets before affiliate
eliminations......................... $3,744.5 $213.2 $1,551.5 $4,059.7 $1,192.8 $10,761.7
======== ====== ======== ======== ========
Total assets of unconsolidated
affiliates(6)........................ (5,349.4)
---------
Total assets........................... $ 5,412.3
=========
</TABLE>
---------------
(1) Includes 100% of Europe*Star's EBITDA and 100% of Satmex's revenues and
EBITDA. 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 the sale of
transponders to Loral Skynet.
(2) Data Services consists of 100% of CyberStar LP and 100% of Loral
CyberStar's data services business and consumer broadband services.
(3) Satellite Manufacturing and Technology consists of 100% of SS/L's results.
(4) Includes 100% of Globalstar's results.
(5) Represents unallocated corporate expenses incurred in support of the
Company's operations.
(6) Represents amounts related to unconsolidated affiliates (Satmex,
Europe*Star and Globalstar). These amounts are eliminated in order to
arrive at Loral's condensed consolidated results. Loral's proportionate
share of these affiliates is included in equity in net loss from affiliates
in Loral's condensed consolidated statements of operations.
(7) 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 and Satellite Manufacturing and Technology from Fixed Satellite
Services.
(8) Excludes capital investment in Broadband Services.
(9) EBITDA (which is equivalent to operating income/loss before depreciation
and amortization, including amortization of unearned compensation) 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. EBITDA is not 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.
(10) Includes amortization of unearned stock compensation charges.
13
<PAGE> 15
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9) SEGMENTS -- (CONTINUED)
SEGMENT INFORMATION
SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
SATELLITE GLOBAL
FIXED MANUFACTURING MOBILE
SATELLITE DATA AND TELEPHONE
SERVICES(1) SERVICES(2) TECHNOLOGY(3) SERVICE(4) CORPORATE(5) TOTAL
----------- ----------- ------------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
REVENUES AND EBITDA:
Revenues from external customers... $197.1 $ 61.7 $362.8 $ 1.4 $ 623.0
Intersegment revenues.............. 17.2 183.3 200.5
------ ------ ------ ------- -------
Operating segment revenues......... $214.3 $ 61.7 $546.1 $ 1.4 823.5
====== ====== ====== =======
Revenues of unconsolidated
affiliates(6).................... (67.6)
Intercompany revenues(7)........... (113.6)
-------
Operating revenues as reported..... $ 642.3
=======
Segment EBITDA before Broadband
investment and eliminations...... $131.9 $(17.6) $ 51.7 $(109.7) $(20.3) $ 36.0
Broadband investment(8)............ (3.7) (3.7)
EBITDA of unconsolidated
affiliates(6)(9)................. 69.2
Intercompany EBITDA(7)(9).......... (10.1)
-------
EBITDA(9).......................... 91.4
Depreciation and
amortization(10)................. (107.3)
-------
Operating loss..................... $ (15.9)
=======
OTHER DATA:
Depreciation and amortization
before affiliate
eliminations(10)................. $109.1 $ 9.8 $ 18.1 $ 158.1 $ 1.1 $ 296.2
====== ====== ====== ======= ======
Depreciation and amortization of
unconsolidated
affiliates(6)(10)................ (188.9)
-------
Depreciation and
amortization(10)................. $ 107.3
=======
</TABLE>
14
<PAGE> 16
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9) SEGMENTS -- (CONTINUED)
SEGMENT INFORMATION
THREE MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
SATELLITE GLOBAL
FIXED MANUFACTURING MOBILE
SATELLITE DATA AND TELEPHONE
SERVICES(1) SERVICES(2) TECHNOLOGY(3) SERVICE(4) CORPORATE(5) TOTAL
----------- ----------- ------------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES AND EBITDA:
Revenues from external
customers.................... $ 70.5 $ 17.8 $ 240.8 $ 329.1
Intersegment revenues.......... 19.9 104.6 124.5
-------- ------ -------- ---------
Operating segment revenues..... $ 90.4 $ 17.8 $ 345.4 453.6
======== ====== ========
Revenues of unconsolidated
affiliates(6)................ (42.0)
Intercompany revenues(7)....... (33.2)
---------
Operating revenues as
reported..................... $ 378.4
=========
Segment EBITDA before Broadband
investment and
eliminations................. $ 47.4 $ (4.1) $ 32.4 $ (36.6) $ (9.4) $ 29.7
EBITDA of unconsolidated
affiliates(6)(9)............. 16.3
Intercompany EBITDA(7)(9)...... (2.5)
---------
EBITDA(9)...................... 43.5
Depreciation and
amortization(10)............. (41.4)
---------
Operating income............... $ 2.1
=========
OTHER DATA:
Depreciation and amortization
before affiliate
eliminations(10)............. $ 41.4 $ 4.9 $ 10.7 $ 0.6 $ 0.8 $ 58.4
======== ====== ======== ======== ========
Depreciation and amortization
of unconsolidated
affiliates(6)(10)............ (17.0)
---------
Depreciation and
amortization(10)............. $ 41.4
=========
Total assets before affiliate
eliminations................. $3,619.2 $119.8 $1,767.1 $3,046.2 $1,409.2 $ 9,961.5
======== ====== ======== ======== ========
Total assets of unconsolidated
affiliates(6)................ (4,365.0)
---------
Total assets................... $ 5,596.5
=========
</TABLE>
15
<PAGE> 17
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9) SEGMENTS -- (CONTINUED)
SEGMENT INFORMATION
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
SATELLITE GLOBAL
FIXED MANUFACTURING MOBILE
SATELLITE DATA AND TELEPHONE
SERVICES(1) SERVICES(2) TECHNOLOGY(3) SERVICE(4) CORPORATE(5) TOTAL
----------- ----------- ------------- ---------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
REVENUES AND EBITDA:
Revenues from external customers.... $140.2 $ 34.3 $381.5 $556.0
Intersegment revenues............... 22.2 290.3 312.5
------ ------ ------ ------
Operating segment revenues.......... $162.4 $ 34.3 $671.8 868.5
====== ====== ======
Revenues of unconsolidated
affiliates(6)..................... (70.0)
Intercompany revenues(7)............ (114.1)
------
Operating revenues as reported...... $684.4
======
Segment EBITDA before Broadband
investment and eliminations....... $ 95.0 $(10.8) $ 64.0 $(78.7) $(18.6) $ 50.9
EBITDA of unconsolidated
affiliates(6)(9).................. 37.9
Intercompany EBITDA(7)(9)........... (8.6)
------
EBITDA(9)........................... 80.2
Depreciation and amortization(10)... (79.3)
------
Operating income.................... $ 0.9
======
OTHER DATA:
Depreciation and amortization before
affiliate eliminations(10)........ $ 79.5 $ 9.1 $ 19.5 $ 1.1 $ 1.6 $110.8
====== ====== ====== ====== ======
Depreciation and amortization of
unconsolidated
affiliates(6)(10)................. (31.5)
------
Depreciation and amortization(10)... $ 79.3
======
</TABLE>
16
<PAGE> 18
LORAL SPACE & COMMUNICATIONS LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10) SHAREHOLDERS' EQUITY
Series A Preferred Stock
On March 31, 2000, Lockheed Martin converted 45,896,978 shares of Loral's
Series A preferred stock into 45,896,978 shares of Loral common stock. As a
result, Lockheed Martin may dispose of the common stock. Loral filed a
registration statement to register the shares of common stock acquired by
Lockheed Martin upon the conversion of the Series A preferred stock, which
became effective in May 2000. Loral has agreed to maintain the effectiveness of
such registration until May 19, 2001, subject to certain extensions, and has
agreed to refrain from selling equity securities in the public markets for its
own account until November 2000, subject to certain extensions.
Series C Preferred Stock
In February 2000, 1.4 million shares of Series C preferred stock were
converted into 3.5 million shares of Loral common stock. In connection with this
conversion, Loral issued to the converting shareholders 332,777 additional
shares of its common stock, which approximated the dividend prepayments to which
they would have been entitled if a provisional redemption of those securities
had been made.
Series D Preferred Stock
In February 2000, Loral sold $400 million of Series D 6% convertible
redeemable preferred stock due 2007 in an offering exempt from registration. The
preferred stock is convertible into 20,171,457 shares of common stock at a
conversion price of $19.83 per share.
Stock Option Plan
On April 18, 2000, the Board of Directors of Loral approved a new stock
option plan (the "2000 Plan") in order to provide an inducement to attract and
retain the services of qualified employees. The 2000 Plan is intended to
constitute a "broadly-based plan" as defined in Section 312.04(h) of the New
York Stock Exchange ("NYSE") Listed Company Manual, which provides that at least
50% of grants thereunder exclude senior management. The 2000 Plan provides for
the grant of non-qualified stock options only. Up to 13 million shares of common
stock may be issued under the 2000 Plan, of which approximately 7 million
options at a weighted average exercise price of $8.05 per share were outstanding
as of July 31, 2000. Employees of Loral, its subsidiaries and affiliates are
eligible to participate in the 2000 Plan. The 2000 Plan (but not outstanding
options) will terminate on the tenth anniversary of its adoption.
17
<PAGE> 19
LORAL SPACE & COMMUNICATIONS LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 Loral Space & Communications, Ltd. and its
subsidiaries ("Loral" or the "Company") are not historical facts, but are
"forward-looking statements," as that term is defined in the Private Securities
Litigation Reform Act of 1995. In addition, the Company or its representatives
have made and may continue to make forward-looking statements, orally or in
writing, in other contexts, such as in reports filed with the SEC, press
releases or statements made with the approval of an authorized executive officer
of the Company. These forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "plans," "may,"
"will," "would," "could," "should," "anticipates," "estimates," "project,"
"intend," or "outlook" or the negative of these words or other variations of
these words or other comparable words, or by discussion of strategy that involve
risks and uncertainties. These forward-looking statements are only predictions,
and actual events or results may differ materially as a result of a wide variety
of factors and conditions, many of which are beyond the Company's control. Some
of these factors and conditions include: (i) the Company and its subsidiaries
and affiliates owe significant amounts of money; (ii) the Company's consumer
broadband and streaming media strategies are subject to substantial financing
and execution risks; (iii) Globalstar's subscriber demand to date has been lower
than anticipated and it must achieve revenue quickly in order to meet a
financial covenant that will become effective in March 2001; (iv) launch
failures may delay operations; (v) satellites may fail prematurely; (vi)
dependence on operating subsidiaries, especially Space Systems/Loral, Inc.
("SS/L"), for operating income; (vii) severe competition in the Company's
industries; and (viii) governmental or regulatory changes. For a detailed
discussion of these factors and conditions, please refer to the periodic reports
filed with the SEC by Loral, Globalstar, L.P. ("Globalstar") and Globalstar
Telecommunications Limited ("GTL"), Loral CyberStar, Inc.("Loral CyberStar") and
Satelites de Mexico, S.A. de C.V. ("Satmex"). In addition, we caution you that
the Company operates in an industry sector where securities values may be
volatile and may be influenced by economic and other factors beyond the
Company's control.
Loral is one of the world's leading satellite communications companies,
with substantial activities in satellite manufacturing and satellite-based
communications services. Loral has assembled the building blocks necessary to
create a seamless, global networking capability for the information age. Loral's
four operating segments are:
Fixed Satellite Services ("FSS"). Through the Loral Global Alliance,
which currently consists of Loral Skynet, Loral CyberStar, Loral's 49%
owned affiliate Satmex, and Loral's 47% owned affiliate Europe*Star Limited
("Europe*Star"), Loral has become one of the world's leading providers of
satellite services using geostationary communications satellites. Loral
leases transponder capacity on its satellites to its customers who use the
capacity for various applications, including broadcasting, news gathering,
Internet access and transmission, private voice and data networks, business
television, distance learning and direct-to-home television. The Loral
Global Alliance currently has ten high-powered geosynchronous satellites in
orbit: the seven satellite Telstar fleet and three Satmex satellites, with
footprints covering almost all of the world's population.
Data Services: Through Loral CyberStar and Loral's 82% owned
subsidiary CyberStar, L.P. ("CyberStar LP"), Loral currently (i) delivers
U.S.-based Internet content via satellite to more than 130 Internet Service
Providers ("ISPs") in more than 32 foreign countries, which reach
approximately seven million residential customers around the world, (ii)
distributes high-speed data over private corporate very small aperture
terminal ("VSAT") networks, which reach approximately 2.5 million corporate
desktops around the world, and (iii) offers business television ("BTV") and
infomedia services via satellite to corporations. Loral's broadband
strategy will build on these existing resources and will initially focus on
two attractive opportunities for early market entry: consumer broadband
services and streaming media services.
18
<PAGE> 20
Satellite Manufacturing and Technology. SS/L is one of the world's
leading manufacturers of satellites and space systems, providing its
customers with a full suite of services, including: developing custom
designs to meet their requirements; manufacturing and testing; and
arranging for launch services and insurance.
Global Mobile Telephone Service: Acting as the managing general
partner of Globalstar, which owns and operates a global telecommunications
network designed to serve virtually every populated area of the world by
means of a 52-satellite constellation, including four in-orbit spares (the
"Globalstar System"). The Globalstar System commenced operations in the
first quarter of 2000 and as of June 30, 2000, 39 countries were in full
service, served by 17 gateways. Loral is the managing general partner and
owned approximately 40% of Globalstar as of June 30, 2000.
CONSOLIDATED OPERATING RESULTS
In evaluating financial performance, management uses revenues and earnings
before interest, taxes, depreciation and amortization ("EBITDA") as a measure of
a segment's profit or loss. The following discussion of revenues and EBITDA
reflects the results of Loral's operating segments for the three months and six
months ended June 30, 2000 and 1999. 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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- -----------------
2000 1999 2000 1999
------ ------ ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Fixed satellite services(1)............................... $112.3 $ 90.4 $ 214.3 $ 162.4
Data services(2).......................................... 29.2 17.8 61.7 34.3
Satellite manufacturing and technology.................... 297.8 345.4 546.1 671.8
Global mobile telephone service(3)........................ 0.8 1.4
------ ------ ------- -------
Operating segment revenues................................ 440.1 453.6 823.5 868.5
Affiliate eliminations(4)................................. (34.6) (42.0) (67.6) (70.0)
Intercompany eliminations(5).............................. (81.2) (33.2) (113.6) (114.1)
------ ------ ------- -------
Operating revenues as reported............................ $324.3 $378.4 $ 642.3 $ 684.4
====== ====== ======= =======
EBITDA(6):
Fixed satellite services(1)............................... $ 69.9 $ 47.4 $ 131.9 $ 95.0
Data services(2).......................................... (8.3) (4.1) (17.6) (10.8)
Satellite manufacturing and technology.................... 25.3 32.4 51.7 64.0
Global mobile telephone service(3)........................ (52.3) (36.6) (109.7) (78.7)
Corporate expenses(7)..................................... (10.8) (9.4) (20.3) (18.6)
------ ------ ------- -------
Segment EBITDA before Broadband investment and
eliminations............................................ 23.8 29.7 36.0 50.9
Broadband investment(8)................................... (2.7) (3.7)
Affiliate eliminations(4)................................. 31.2 16.3 69.2 37.9
Intercompany eliminations(5).............................. (8.0) (2.5) (10.1) (8.6)
------ ------ ------- -------
EBITDA as reported........................................ $ 44.3 $ 43.5 $ 91.4 $ 80.2
====== ====== ======= =======
</TABLE>
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(1) Includes 100% of Europe*Star's EBITDA and 100% of Satmex's revenues and
EBITDA. 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 the sale of
transponders to Loral Skynet.
(2) Data Services consists of 100% of CyberStar LP and 100% of Loral CyberStar's
data services business and consumer broadband services and excludes
broadband investment.
(3) Includes 100% of Globalstar's results.
(4) Represents amounts related to unconsolidated affiliates (Satmex, Europe*Star
and Globalstar). These amounts are eliminated in order to arrive at Loral's
condensed 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.
(5) 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 and
Satellite Manufacturing and Technology from Fixed Satellite Services.
(6) EBITDA (which is equivalent to operating income (loss) before depreciation
and amortization, including amortization of unearned compensation) 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.
(7) Represents unallocated corporate expenses incurred in support of the
Company's operations.
(8) Excludes capital investment in Broadband Services.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH JUNE 30, 1999
Total revenues for Loral's operating segments were $440 million for 2000
versus $454 million in 1999, before intercompany and affiliate eliminations of
$116 million in 2000 and $75 million in 1999. The decrease in revenues was due
primarily to lower revenues in satellite manufacturing and technology due to the
timing of revenues under contract, offset in part by strong growth in FSS, as a
result of the service start-up of the Telstar 7, Telstar 10/Apstar IIR and
Telstar 12 satellites after the second quarter of 1999, offset by decreased
revenues at Satmex due to the sale of two transponders to Loral Skynet in 1999,
and from growth in data services in 2000. The increase in intercompany
eliminations in 2000 primarily reflects higher sales by satellite manufacturing
and technology to fixed satellite services.
EBITDA as reported was $44 million in 2000 and in 1999, mainly due to lower
satellite manufacturing and technology EBITDA, primarily from lower revenues,
and increased costs for data services due to the expansion of the business,
offset by a strong increase in FSS EBITDA as a result of the service start-up of
the Telstar 7, Telstar 10/Apstar IIR and Telstar 12 satellites.
Depreciation and amortization rose to $54 million in 2000 from $41 million
in 1999, and excludes depreciation and amortization of unconsolidated affiliates
of $95 million and $17 million for 2000 and 1999, respectively, for Globalstar
and Satmex. The increase primarily results from depreciation of satellites
placed in service after the second quarter of 1999.
Interest and investment income increased to $31 million in 2000 from $19
million in 1999, principally due to the non-cash interest income related to
warrants received in connection with the guarantees provided by Loral's
subsidiaries of Globalstar's 1999 credit agreement.
Interest expense was $42 million in 2000, net of capitalized interest of $4
million, versus $24 million in 1999, net of capitalized interest of $19 million.
Capitalized interest decreased due to the commencement of Globalstar service in
2000 and the successful launches in 1999 of Telstar 7 and Telstar 12.
The Company realized a $38 million gain in 2000, primarily from the sale of
a portion of its investments in available-for-sale securities.
For 2000, the Company recorded an income tax provision of $5 million on
income of $17 million, yielding an effective rate of 29.4%. For 1999, the
Company recorded an income tax benefit of $2.6 million on a loss of $3.1 million
yielding an effective rate of 81.8%. When comparing 2000 to 1999, the change in
the effective rate
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is primarily attributed to a decrease in the percentage of net income generated
from non-taxable jurisdictions in 2000, offset by the relative impact of certain
permanent adjustments in 1999.
The minority interest benefit primarily reflects the reduction of CyberStar
LP's loss attributed to CyberStar LP's other investor, who owned 17.6% as of
June 30, 2000.
The equity in net loss of affiliates was $107 million in 2000 compared to
$38 million in 1999. Loral's share of equity in net loss of affiliates related
to Globalstar activities, net of the related tax benefit, was $102 million in
2000 compared to $22 million in 1999. This increase was primarily due to
Globalstar moving from the development stage into revenue operations, which
initiated depreciation of the Globalstar System and the expensing of interest
and increased operations and marketing, general and administrative costs.
Loral's share of Satmex's losses was $3 million for 2000 and $10 million for
1999, after eliminating the profit on the sale of transponders to Loral Skynet.
Also included in net loss from affiliates is Loral's share of losses from
Europe*Star and from other affiliates (see Note 4 to Loral's condensed
consolidated financial statements).
Preferred distributions were $16 million in 2000 as compared to $12 million
for 1999. The increase was primarily due to the issuance of Loral's Series D 6%
convertible redeemable preferred stock ("Series D Preferred Stock") in February
2000.
As a result of the above, the net loss applicable to common stockholders
for 2000 was $110 million or $0.37 per basic and diluted share, compared to the
net loss of $50 million or $0.17 per basic and diluted share for 1999. Basic and
diluted weighted average shares were 295.9 million for 2000 and 290.1 million
for 1999. The increase in shares primarily relates to the conversion of a
portion of the Series C Preferred Stock into Loral common stock.
RESULTS BY OPERATING SEGMENT FOR THE THREE MONTHS
Fixed Satellite Services
FSS revenue for 2000 was $112 million versus $73 million in 1999, which
excludes the sale of two transponders by Satmex to Loral Skynet for $17 million
in 1999. EBITDA was $70 million in 2000, up from EBITDA of $40 million, in 1999,
which excludes $7.5 million of EBITDA from the transponder sale by Satmex to
Loral Skynet. As of June 30, 2000, FSS had 10 operational satellites (including
three satellites owned by Satmex), up from seven (including three satellites
owned by Satmex) at June 30, 1999. Funded backlog for FSS totaled $1.9 billion
at June 30, 2000, an increase in excess of 100% over the $919 million as of June
30, 1999, including intercompany backlog of $2 million in 2000 and $1 million in
1999 and affiliate backlog for Satmex of $484 million in 2000 and $223 million
in 1999.
Data Services
Revenues for the data services segment in 2000 were $29 million versus $18
million in 1999, primarily from Loral CyberStar's corporate data networking and
Internet and intranet services businesses. EBITDA in 2000 was a loss of $8
million versus a loss of $4 million in 1999. As of June 30, 2000, funded backlog
for the segment increased to $300 million, including $29 million of intercompany
backlog from $167 million as of June 30, 1999.
Total investment in broadband services, which does not include any capital
expenditures, was $3 million in 2000, which primarily relates to streaming media
services.
Satellite Manufacturing and Technology
Revenues at SS/L, the Company's satellite manufacturing and technology
subsidiary, before intercompany eliminations were $298 million in 2000 versus
$345 million in 1999. EBITDA in 2000 was $25 million versus $32 million in 1999.
Funded backlog for SS/L as of June 30, 2000 and 1999, was $1.6 billion and $1.3
billion, respectively, including intercompany backlog of $562 million in 2000
and $262 million in 1999.
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Global Mobile Telephone Service
Loral manages and is the largest equity owner of Globalstar, Loral's global
mobile telephone service segment. Through December 31, 1999, Globalstar was a
development stage partnership and in 2000 began commercial operations. In 2000,
Globalstar realized revenues of $0.7 million on 1,137,000 minutes of billable
service, more than double the usage in the first quarter of 2000. Globalstar's
EBITDA loss increased to $52 million in 2000 from $37 million in 1999, primarily
as a result of increased operations costs and marketing, general and
administrative costs, associated with the commencement of service.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH JUNE 30, 1999
Total revenues for Loral's operating segments were $824 million for 2000
versus $869 million in 1999, before intercompany and affiliate eliminations of
$181 million in 2000 and $184 million in 1999. The decrease in revenues was due
primarily to lower revenues in satellite manufacturing and technology due to the
timing of revenues under contract, offset in part by strong growth in FSS as a
result of the service start-up of Telstar 6 in March 1999, and Telstar 7,
Telstar 10/Apstar IIR and Telstar 12 satellites after the second quarter of 1999
and from growth in data services in 2000.
EBITDA as reported increased to $91 million in 2000 from $80 million in
1999, mainly due to strong growth in FSS EBITDA as a result of the service
start-up of the Telstar 6, Telstar 7, Telstar 10/Apstar IIR and Telstar 12
satellites, offset in part by lower satellite manufacturing and technology
EBITDA, primarily resulting from lower revenues, and increased costs for data
services due to the expansion of the business.
Depreciation and amortization rose to $107 million in 2000 from $79 million
in 1999, and excludes depreciation and amortization of unconsolidated affiliates
of $189 million and $32 million for 2000 and 1999, respectively, for Globalstar
and Satmex. The increase primarily results from depreciation of satellites
recently placed in service.
Interest and investment income increased to $61 million in 2000 from $34
million in 1999, principally due to the non-cash interest income related to the
amortization of the value of the warrants received in connection with the
guarantees provided by Loral's subsidiaries of Globalstar's 1999 credit
agreement.
Interest expense was $86 million in 2000, net of capitalized interest of $6
million, versus $42 million in 1999, net of capitalized interest of $41 million.
Capitalized interest decreased due to the commencement of Globalstar service in
2000 and the successful launches in 1999 of Telstar 6, Telstar 7 and Telstar 12.
The Company realized $53 million of gains in 2000, primarily from the sale
of a portion of its investments in available-for-sale securities.
For 2000, the Company recorded an income tax provision of $15 million on
income of $12 million, yielding an effective rate of 130%. For 1999, the Company
recorded an income tax benefit of $0.2 million on a loss of $7.3 million,
yielding an effective rate of 2.4%. When comparing 2000 to 1999, the change in
the effective rate is primarily attributed to a decrease in net income generated
from non-taxable jurisdictions and an increase in state and local income tax
expense for 2000.
The minority interest benefit primarily reflects the reduction of CyberStar
LP's loss attributed to CyberStar LP's other investor.
The equity in net loss of affiliates was $215 million in 2000 compared to
$71 million in 1999. Loral's share of equity in net loss of affiliates related
to Globalstar activities, net of the related tax benefit, was $191 million in
2000 compared to $41 million in 1999. This increase was primarily due to
Globalstar moving from the development stage into revenue operations, which
initiated depreciation of the Globalstar System, and the expensing of interest
and increased operations and marketing, general and administrative costs.
Loral's share of Satmex's losses was $11 million for 2000 and $16 million for
1999, after eliminating the profit on the sale of transponders to Loral Skynet.
Also included in net loss from affiliates is Loral's share of losses from
Europe*Star and from other affiliates (see Note 4 to Loral's condensed
consolidated financial statements).
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Preferred distributions were $35 million in 2000 as compared to $23 million
for 1999. The increase was primarily due to the issuance of the Series D
Preferred Stock in February 2000 and the 332,777 shares of common stock issued
as dividend prepayments in connection with the conversion of 1.4 million shares
of Loral's Series C Preferred Stock into common stock during the first quarter
of 2000 (see "Liquidity and Capital Resources").
As a result of the above, the net loss applicable to common stockholders
for 2000 was $252 million or $0.86 per basic and diluted share, compared to the
net loss of $100 million or $0.34 per basic and diluted share, for 1999. Basic
and diluted weighted average shares were 294.6 million for 2000 and 289.9
million for 1999. The increase in shares primarily relates to the conversion of
a portion of the Series C Preferred Stock into Loral common stock.
RESULTS BY OPERATING SEGMENT FOR THE SIX MONTHS
Fixed Satellite Services
FSS revenue for 2000 was $214 million versus $145 million in 1999, which
excludes the sale of two transponders by Satmex to Loral Skynet for $17 million
in 1999. EBITDA was $132 million in 2000, up from EBITDA of $87.5 million in
1999, which excludes EBITDA of $7.5 million from the transponder sale by Satmex
to Loral Skynet.
Data Services
Revenues for the data services segment in 2000 were $62 million versus $34
million in 1999, primarily from Loral CyberStar's corporate data networking and
Internet and intranet services businesses. EBITDA in 2000 was a loss of $18
million versus a loss of $11 million in 1999.
Total investment in broadband services, which does not include any capital
expenditures, was $4 million in 2000, which primarily relates to streaming media
services.
Satellite Manufacturing and Technology
Revenues at SS/L, the Company's satellite manufacturing and technology
subsidiary, before intercompany eliminations were $546 million in 2000 versus
$672 million in 1999. EBITDA in 2000 was $52 million versus $64 million in 1999.
Global Mobile Telephone Service
In 2000, Globalstar realized revenues of $1.3 million on 1,687,000 minutes
of billable service and its EBITDA loss increased to $109 million in 2000 from
$79 million in 1999, primarily as a result of increased operations costs and
marketing, general and administrative costs, associated with the commencement of
service.
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
The Amended and Restated Credit Agreement, dated as of November 10, 1999,
among Loral SpaceCom Corporation ("Loral SpaceCom"), SS/L and the banks party
thereto (the "Credit Agreement"), provides for a $275 million term loan
facility, a $500 million revolving credit facility (the "Revolving Credit
Facility"), of
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<PAGE> 25
which up to $175 million can be used for letters of credit and a separate $75
million letter of 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, 2000, there was approximately $583
million of borrowings outstanding under the Credit Agreement (including $139
million under the note purchase facility). Total borrowing availability under
the Credit Agreement was $128 million at June 30, 2000. The Company had
outstanding letters of credit of approximately $17 million as of June 30, 2000.
The Company also had $20 million of Canadian Dollar letters of credit
outstanding at June 30, 2000.
The Company's note purchase facility, which will mature in August 2000,
reduces the availability under the Revolving Credit Facility. Upon maturity of
the note purchase facility, the outstanding debt will be financed under the
Revolving Credit Facility.
Loral CyberStar had $983 million of outstanding debt as of June 30, 2000,
that was non-recourse to Loral, which includes certain restrictions on Loral
CyberStar's ability to pay dividends or make loans to Loral.
Equity
On March 31, 2000, Lockheed Martin Corporation ("Lockheed Martin")
converted 45,896,978 shares of Loral's Series A preferred stock into 45,896,978
shares of Loral common stock. As a result, Lockheed Martin may dispose of the
common stock. Loral filed a registration statement to register the shares of
common stock acquired by Lockheed Martin upon the conversion of the Series A
preferred stock which became effective in May 2000. Loral has agreed to maintain
the effectiveness of such registration until May 19, 2001, subject to certain
extensions, and has agreed to refrain from selling equity securities in the
public markets for its own account until November 2000, subject to certain
extensions.
In February 2000, 1.4 million shares of the Series C Preferred Stock were
converted into 3.5 million shares of Loral common stock. In connection with this
conversion, Loral issued to converting holders 332,777 additional shares of its
common stock, which approximated the dividend prepayments to which they would
have been entitled if a provisional redemption of those securities had been
made.
In February 2000, Loral sold $400 million of the Series D Preferred Stock
in an offering exempt from registration and realized net proceeds of $388
million. The preferred stock is convertible into 20,171,457 shares of common
stock at a conversion price of $19.83 per share.
Cash and Restricted and Segregated Cash
As of June 30, 2000, Loral had $417 million of cash, including $25 million
of restricted cash, for an interest payment on Loral Cyberstar's senior notes
due July 15, 2000. Loral intends to utilize its existing capital base and access
to the capital markets to construct and operate additional satellites, invest in
its other core businesses, expand the Loral Global Alliance, pursue its
broadband strategy and make additional investments in Globalstar and Globalstar
service provider opportunities. In March 2000, Loral CyberStar used $181 million
of cash and segregated cash for the final payment on the purchase of Telstar
10/Apstar IIR.
Net Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities for the six months ended June 30,
2000 was $58 million, primarily due to the net loss as adjusted for non-cash
operating items of $54 million, decreases in contracts-in-process of $86 million
and deposits of $47 million and an increase in long-term liabilities of $31
million, offset by decreases in accounts payable of $98 million, customer
advances of $25 million and an increase in accounts receivable of $42 million.
Net cash used in operating activities for the six months ended June 30,
1999 was $53 million, primarily due to decreases in customer advances of $74
million and an increase in contracts-in-process of $100 million, offset by the
net loss as adjusted for non-cash operating items of $87 million and increases
in accrued expenses and other current liabilities of $33 million.
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Net Cash Used in Investing Activities
Net cash used in investing activities for 2000 was $190 million, primarily
as a result of capital expenditures of $288 million mainly for the construction
or acquisition of satellites (including $181 million for the final payment for
Telstar 10/Apstar IIR), $18 million of advances to affiliates and $122 million
of investments in affiliates, offset by a reduction in restricted and segregated
cash of $162 million and proceeds from sales of available-for-sale securities of
$70 million.
Net cash used in investing activities was $448 million in 1999, 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 $98
million of other investments in and advances to affiliates, offset by a
reduction in restricted cash of $25 million.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for 2000 was $285 million,
primarily due to net proceeds of $388 million from the Company's issuance of the
Series D Preferred Stock, offset by repayments of debt obligations of $90
million.
Net cash provided by financing activities was $451 million in 1999,
primarily due to the $344 million of net proceeds from the issuance of 9.5%
senior notes, and borrowings of $110 million under the Revolving Credit
Facility.
Fixed Satellite Services
Loral Skynet currently has four 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.
Loral CyberStar currently has three satellites in orbit. To replace Orion
3, on September 28, 1999, Loral CyberStar purchased from APT Satellite Company
Limited ("APT") for approximately $273 million, the rights to all transponder
capacity and existing customer leases on the Apstar IIR satellite (except for
one C-band transponder retained by APT), and renamed the satellite the Telstar
10/Apstar IIR satellite. Loral CyberStar has full use of the transponders for
the remaining life of Telstar 10/Apstar IIR. Loral CyberStar will also have the
option to lease from APT replacement satellites upon the end of life of Telstar
10/Apstar IIR. In March 2000, the Company made the final payment of $181 million
to APT.
Satmex currently has three satellites in orbit (Satmex 5, Solidaridad 1 and
Solidaridad 2) and one satellite in inclined orbit (Morelos 2).
On February 16, 2000, Satmex obtained amendments to certain of its debt
agreements which adjusted certain financial covenants. As a result, Satmex
believes that its future operating cash flow and the availability of its
revolving credit facility will be sufficient to service its interest and debt
repayment requirements and ensure compliance with its debt agreements.
In May 2000, Satelites Enigma S.A. de C.V., Loral's partner in Satmex,
exercised its option to purchase 104,105 shares of Satmex preferred stock from
Loral for $6 million in cash and Loral realized a gain of $1 million.
Data Services
Based upon its current expectations for growth, Loral CyberStar anticipates
it will have additional funding requirements over the next three years to fund
the streaming media investment, the purchase of VSATs, senior note interest
payments, other capital expenditures and other operating needs. Interest charges
on the senior notes are fully provided for by restricted cash through July 2000.
Loral CyberStar will need to secure funding from Loral, or raise additional
financing to fund these requirements. Sources of additional capital may include
public or private debt, equity financings or strategic investments. To the
extent that Loral CyberStar seeks to raise additional debt financing, its
indentures limit the amount of such additional debt and prohibit Loral CyberStar
from using Telstar 11, Telstar 10/Apstar IIR and Telstar 12 as collateral for
indebtedness for money borrowed. If Loral CyberStar requires additional
financing and is unable to obtain
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<PAGE> 27
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 CyberStar.
Broadband Investment
Loral's broadband strategy will build on its existing resources to address
both the expanding market for today's broadband services and to become a leading
medium for delivery of even richer Internet content in the future. The Company's
initial focus will be on two attractive opportunities for early market entry:
consumer broadband services and streaming media services.
Consumer Broadband Services. The Company plans to serve the growing
consumer broadband services market, initially in North America, with an
affordable, ubiquitous, two-way, high-speed Internet access service employing a
hybrid satellite/fiber network. The Company intends to serve as the "wholesaler"
of this connectivity service to ISPs, cable companies, and telephone companies
who will market and sell the service to their customers as a high-value extra
feature in their own portfolio of services. The Company currently estimates that
the required investment for the consumer broadband services business in North
America will be approximately $3 billion, with the services implemented and the
associated investments made in several phases over five years.
Streaming Media Services. The Company intends to exploit the technical
advantages of satellites to deliver streaming media services more effectively
than terrestrial alternatives. The Company intends to enter three streaming
media business areas: transport services to the "edge of the net" for content
and applications service providers; content aggregation services for customers
wishing to outsource their streaming media distribution process; and development
of a portal tailored for businesses. The Company currently estimates the
required investment for the streaming media services business at approximately
$500 million over five years.
The Company is seeking strategic partners to enhance the establishment and
prospects of both the planned consumer broadband and streaming media businesses.
The Company expects that such third party strategic partners will bear a
significant portion of the costs of these projects.
The broadband investment by the Company during the six months ended June
30, 2000 was $4 million, which does not include any capital expenditures.
Global Mobile Telephone Service
On June 30, 2000, Globalstar's $250 million credit facility with The Chase
Manhattan Bank became due, and was thereupon repaid in full by its guarantors,
including Lockheed Martin, Qualcomm, DASA and SS/L, who had previously received
warrants for GTL common stock in consideration of their guarantee. Pursuant to
the relevant agreements entered into in 1996, Globalstar issued three-year notes
in the amounts of $206.3 million, $21.9 million, $11.7 million and $10.1 million
to Lockheed Martin, Qualcomm, SS/L and DASA, respectively, in satisfaction of
their subrogation rights. The notes are due on June 30, 2003 and bear interest,
on a deferred basis, at a rate of LIBOR plus 3%.
On June 30, 2000, Loral paid $56.3 million on a net basis to Lockheed
Martin in satisfaction of its obligation to indemnify Lockheed Martin for
liability in excess of $150 million under Lockheed Martin's guarantee of
Globalstar's $250 million credit facility. Accordingly, Loral is entitled to
receive notes in respect thereof.
Lockheed Martin has rejected the notes it received and is instead asking
Globalstar to issue new securities with additional rights and enhanced value,
without waiving its claim that it is entitled to receive an immediate cash
reimbursement by Globalstar of its $150 million payment to the bank lenders.
Globalstar disputes Lockheed Martin's interpretation of the relevant agreements,
but is, nonetheless, in discussions with Lockheed Martin to resolve the dispute.
If the dispute is not resolved, Globalstar cannot be sure that if the
matter were litigated the court would agree with Globalstar's interpretation of
the agreements. Moreover, if as a result of this dispute, a holder of Globalstar
public bonds claimed a cross default under the applicable indentures, and a
court ruled against Globalstar, the maturity date of the bonds would be
accelerated. Management believes, however, that a court would agree with
Globalstar's interpretation of the relevant agreements.
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From July 1, 2000 through December 31, 2000, Globalstar expects to spend
approximately $161 million for the enhancement of its system software, for the
eight spare satellites being constructed by SS/L, for development work completed
but not paid at June 30, 2000, for repayment of vendor financing and for the net
financing provided to Globalstar's service providers to assist in the purchase
of gateways, fixed access terminals and handsets (net of expected receipts of
$129 million from the service providers as repayment of such financing). In
addition, cash interest, preferred dividends and operating costs are expected to
be between $100 million and $125 million per quarter for the remainder of 2000.
Globalstar expects that its cash on hand ($463 million at June 30, 2000) and
remaining available credit as of June 30, 2000 of approximately $29 million
under vendor financing arrangements, will enable it to end 2000 with a cash
surplus in excess of $100 million. Globalstar believes that it will require
additional funds to the extent that cash on hand and revenue does not cover its
expected cash outflows for 2001. While Globalstar believes it will be able to
obtain the additional funds, there can be no assurance, however, that such funds
will be available on favorable terms or on a timely basis, if at all.
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, which was
fully drawn at June 30, 2000. 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 stock of the guarantors and the Telstar 6 and
Telstar 7 satellites. Based on third party valuations, management believes that
the fair value of Telstar 6 and Telstar 7 is in excess of this $500 million
credit agreement. As of June 30, 2000, the net book value of Telstar 6 and
Telstar 7 was approximately $370 million. 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 restrictions, including 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.
Globalstar's $500 million credit facility contains various financial
condition covenants, one of which would require, among other things, that
Globalstar have revenues of $100 million for the 12 month period ended March 31,
2001. Globalstar's revenues for the quarter ended June 30, 2000, the first three
months of this period were $708,000. Unless Globalstar can satisfy this covenant
or obtain waivers or amendments from a majority of the bank lenders, Globalstar
will be in default under its debt facilities. Moreover, a default by Globalstar
under its $500 million credit facility would result in the bank lenders
exercising their rights under the guarantee agreement.
In consideration for the guarantee, Loral received warrants to purchase
3,450,000 Globalstar partnership interests at an exercise price of $91 per
interest, which were valued at $141 million (based on the guarantee provided).
The exercise price was determined by reference to the fair market value of GTL
common stock on the closing date of the credit agreement, based on an
approximate one partnership interest for four shares of GTL common stock
exchange ratio. 50% of the warrants vested in February 2000. Assuming the
guarantee remains in effect, an additional 25% will vest in August 2000 with the
remaining 25% vesting in August 2001. The warrants expire in 2006. Globalstar
may call the warrants after August 5, 2001 if GTL's common stock price exceeds
$45.50 for a defined period.
In February 2000, GTL sold 8,050,000 shares of its common stock to the
public under its shelf registration statement. GTL used the net proceeds from
the offering of approximately $268.5 million to purchase 1,987,654 ordinary
partnership interests in Globalstar. Globalstar intends to use the offering
proceeds for general corporate purposes, including: the acceleration of
Globalstar's roll-out through increased support for service provider marketing
activities and the funding of promotional discounts, development of new service
features, and possible repayment of debt.
In May 2000, Globalstar finalized $531.1 million of vendor financing
arrangements (including $31.1 million of capitalized interest) with Qualcomm
that replaced the previous $100 million vendor financing agreement. The vendor
financing bears interest at 6%, matures on August 15, 2003 and requires
repayment pro
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rata with the term loans under Globalstar's $500 million credit facility
discussed above. As of June 30, 2000, $503 million was outstanding under this
facility. In connection with this agreement, Qualcomm received warrants to
purchase 3,450,000 Globalstar partnership interests at an exercise price of
$42.25 per interest. The exercise price was determined by reference to the fair
market value of GTL's common stock on the closing date of the vendor financing,
based on an approximate one partnership interest for four shares of GTL common
stock. Fifty percent of the warrants vested on the closing date. The remaining
50% will vest generally in two equal installments on September 1, 2000 and
September 1, 2001. The warrants will expire in 2007.
Loral has agreed that if the principal amount (excluding capitalized
interest of $31.1 million at June 30, 2000) outstanding under the Qualcomm
vendor financing facility exceeds the principal amount outstanding under
Globalstar's $500 million credit facility, as determined on certain measurement
dates, then Loral will guarantee 50% of such excess amount. As a result, Loral's
aggregate guarantee liability for debt outstanding under the Qualcomm vendor
financing facility and Globalstar's $500 million credit facility will not exceed
$500 million.
COMMITMENTS AND CONTINGENCIES
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. 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 late 1998, following the launch of an SS/L-built satellite sold to
PanAmSat, a manufacturing error was discovered that affected the geographical
coverage of the Ku-band transponders on the satellite. On January 6, 2000,
PanAmSat filed an arbitration proceeding in connection with this error claiming
damages of $225 million for lost profits, and increased sales and marketing
costs. SS/L believes it has meritorious defenses to the claim and that its
liability is limited to a loss of a portion of the applicable orbital
incentives, the estimated impact of which is included in Loral's consolidated
financial statements. PanAmSat has received a recovery from its insurance
carrier that should reduce any damage claim. While this proceeding is in its
very early stages, management believes that this matter 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. Under the applicable
regulations, SS/L could be debarred from export privileges without being
convicted of any crime if it is indicted for these alleged violations, and loss
of export privileges would harm SS/L's business. 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."
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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. As a
result of the suspension, ChinaSat 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 June 30, 2000) and may incur penalties of up
to $11 million and believes it would incur costs of up to 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 for the satellite or its Chinese launch vehicle. SS/L
will record a charge to earnings of approximately $35 million if it is unable to
find a replacement customer for this launch vehicle.
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.
Under an agreement reached with Eutelsat, Loral CyberStar agreed to operate
Telstar 12, originally intended to operate at 12 degrees W.L., at 15 degrees
W.L. while Eutelsat continues to develop its services at 12.5 degrees W.L.
Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to
assert its priority rights at such location on Loral CyberStar's behalf. As part
of this coordination effort, Loral CyberStar agreed to provide to Eutelsat four
transponders on Telstar 12 for the life of the satellite and has retained risk
of loss with respect to such transponders. Eutelsat also has the right to
acquire, at cost, four transponders on the next replacement satellite for
Telstar 12. As part of the international coordination process, Loral continues
to conduct discussions with various administrations regarding Telstar 12's
operations at 15 degrees W.L. If these discussions are not successful, Telstar
12's useable capacity may be reduced.
OTHER MATTERS
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings or financial position. The
Company is required to adopt SFAS 133 on January 1, 2001.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 16, 2000, 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 2003. The votes were as follows:
<TABLE>
<CAPTION>
FOR WITHHELD
----------- ---------
<S> <C> <C>
Howard Gittis............................................... 266,701,872 3,925,793
Gershon Kekst............................................... 266,586,972 4,040,693
Arthur L. Simon............................................. 266,727,917 3,899,748
</TABLE>
(2) The selection of Deloitte & Touche LLP to serve as independent auditors
for the fiscal year ending December 31, 2000, was approved. The votes were as
follows:
<TABLE>
<S> <C>
For......................................................... 268,622,236
Against..................................................... 1,362,470
Abstentions................................................. 642,959
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibits are filed as part of this report:
<TABLE>
<S> <C> <C>
Exhibit 12 -- Computation of Deficiency of Earnings to Cover Fixed Charges
Exhibit 27 -- Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
DATE OF REPORT DESCRIPTION
-------------- -----------
<S> <C>
May 5, 2000 Item 5 -- Other Events 2000 Stock Option Plan
</TABLE>
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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 11, 2000
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