<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT TO CURRENT REPORT ON FORM 8-K
Filed pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Commission file number: 1-4238
LORAL CORPORATION
600 Third Avenue
New York, New York 10016
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<PAGE> 2
AMENDMENT NO. 1
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its current report on Form 8-K dated
March 1, 1994 as set forth below:
1. Add Item 7--Financial Statements, Pro Forma Financial Information
and Exhibits.
A. Financial Statements:
Audited financial statements of Federal Systems as of December 31,
1993 and 1992 and for the three years ended December 31, 1993.
B. Pro Forma Financial Information:
Unaudited Pro Forma Condensed Consolidated Statement of Income of
Loral Corporation and Federal Systems for the year ended March 31, 1994.
C. Exhibits:
23 Consent of Price Waterhouse
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
LORAL CORPORATION
Registrant
By: MICHAEL P. DEBLASIO
Dated: May 12, 1994
Michael P. DeBlasio
Senior Vice President--Finance
1
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
International Business Machines Corporation
In our opinion, the accompanying combined statement of financial position
and the related combined statements of earnings, of cash flows and of changes in
invested equity present fairly, in all material respects, the financial position
of Federal Systems (a unit of International Business Machines Corporation) at
December 31, 1993 and 1992, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1993, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 8, the Company changed its method of accounting for
certain postemployment benefits in 1993 and nonpension postretirement benefits
in 1991. We concur with these changes.
Federal Systems is a unit of International Business Machines Corporation
and, as disclosed in the financial statements, has extensive transactions and
relationships with International Business Machines Corporation and its
affiliates. Because of these relationships, it is possible that the terms of
these transactions are not the same as those that would result from transactions
among wholly unrelated parties.
PRICE WATERHOUSE
Washington, D.C.
January 31, 1994, except as to Note 14 which is as of March 1, 1994
2
<PAGE> 4
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
COMBINED STATEMENT OF FINANCIAL POSITION
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1993 1992
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents....................................... $ 72,124 $ 72,825
Investments..................................................... 29,886
Accounts and notes receivable
Trade, net of allowance of $50,499 and $93,825,
respectively................................................ 325,158 197,910
Other, net of allowance of $14,193 and $10,746,
respectively................................................ 9,888 18,097
Inventories and costs relating to long-term contracts in
process...................................................... 100,106 149,979
Deferred income taxes........................................... 31,193 32,918
Prepaid expenses and other current assets....................... 3,076 2,592
---------- ----------
Total current assets.................................... 571,431 474,321
Property, plant and equipment, net................................ 469,747 532,190
---------- ----------
Total assets...................................................... $1,041,178 $1,006,511
---------- ----------
---------- ----------
LIABILITIES AND INVESTED EQUITY
Current liabilities
Accounts payable................................................ $ 39,699 $ 47,511
Accrued expenses
Compensation and benefits.................................... 49,544 58,632
Other........................................................ 29,310 16,049
Deferred revenue................................................ 161,830 152,559
---------- ----------
Total current liabilities............................... 280,383 274,751
Deferred income taxes............................................. 37,828 42,952
---------- ----------
318,211 317,703
Commitments and contingencies (Note 13)
Invested equity................................................... 722,967 688,808
---------- ----------
Total liabilities and invested equity............................. $1,041,178 $1,006,511
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
COMBINED STATEMENT OF EARNINGS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Revenue................................................ $2,291,803 $2,189,958 $1,986,939
---------- ---------- ----------
Costs and expenses
Cost of sales........................................ 1,992,642 1,881,153 1,660,574
Selling, general and administrative.................. 99,492 113,445 129,417
Research and development............................. 43,346 51,982 49,847
Restructuring charges................................ 38,795 29,180 124,196
---------- ---------- ----------
2,174,275 2,075,760 1,964,034
---------- ---------- ----------
Operating income....................................... 117,528 114,198 22,905
Interest and other income.............................. 10,986 17,790 5,954
---------- ---------- ----------
Earnings before income taxes and cumulative effect of
accounting change.................................... 128,514 131,988 28,859
Provision for income taxes............................. 54,651 55,131 12,386
---------- ---------- ----------
Earnings before cumulative effect of accounting
change............................................... 73,863 76,857 16,473
Cumulative effect of accounting change................. (15,500) (91,600)
---------- ---------- ----------
Net earnings (loss).................................... $ 58,363 $ 76,857 $ (75,127)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
COMBINED STATEMENT OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Cash flow from operating activities:
Net earnings (loss)...................................... $ 58,363 $ 76,857 $(75,127)
Adjustments to reconcile net earnings (loss) to cash
provided by operating activities:
Depreciation and amortization......................... 93,585 95,032 103,579
Gain on sale of investments........................... (13)
Loss (gain) on sale of property, plant and
equipment........................................... 1,664 (64) 4,098
Gain on foreign currency transactions................. (415) (5,040)
Other changes that provided (used) cash:
Accounts and notes receivable....................... (117,153) 100,917 69,612
Inventories and costs relating to long-term
contracts in process............................. 47,876 44,423 46,095
Prepaid expenses and other current assets........... (483) 1,227 2,561
Accounts payable.................................... (7,812) (445) (4,868)
Accrued expenses.................................... 4,173 (4,142) 2,311
Deferred revenue.................................... 10,564 77,448 39,948
Deferred income taxes............................... (3,415) (69,642) (17,181)
-------- -------- --------
Net cash provided by operating activities.................. 86,934 316,571 171,028
-------- -------- --------
Cash flow from investing activities:
Payments for property, plant and equipment............... (55,392) (72,287) (65,666)
Proceeds from sale of property, plant and equipment...... 1,569 492 448
Purchase of investments.................................. (51,885)
Proceeds from sale of investments........................ 21,620
-------- -------- --------
Net cash used in investing activities...................... (84,088) (71,795) (65,218)
-------- -------- --------
Cash flow from financing activities:
Net change in invested equity............................ (2,857) (187,101) (84,646)
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents.............................................. (690) (6,924)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents....... (701) 50,751 21,164
Cash and cash equivalents at beginning of year............. 72,825 22,074 910
-------- -------- --------
Cash and cash equivalents at end of year................... $ 72,124 $ 72,825 $ 22,074
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
COMBINED STATEMENT OF CHANGES IN INVESTED EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year................................. $688,808 $797,322 $942,091
Net earnings (loss)........................................ 58,363 76,857 (75,127)
Equity translation adjustments............................. (329) (3,994)
Intercompany transactions.................................. (23,875) (181,377) (69,642)
-------- -------- --------
Balance, end of year....................................... $722,967 $688,808 $797,322
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 8
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1992 AND 1991
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 1 -- NATURE OF OPERATIONS AND RELATIONSHIPS WITH IBM
GENERAL
Federal Systems (the Company), a unit of International Business Machines
Corporation (IBM), is in the business of providing advanced information
services, products and technologies primarily to U.S. and non-U.S. government
agencies. The Company is not a legal entity.
The Company derives a substantial portion of its revenue under long-term
contracts for systems integration and related services principally in the broad
areas of defense electronics, air traffic control systems and space systems. The
Company derives no revenue for IBM commercial information equipment and software
sold under its contracts; such revenue accrues to IBM or IBM affiliates.
Significant customers include the U.S. Department of Defense, the Federal
Aviation Administration (FAA), the National Aeronautics and Space Administration
and the United Kingdom (U.K.) Ministry of Defense. Contracts which contributed
10% or more of the Company's revenue for 1993 included a contract with the FAA
for systems integration work relating to the modernization of the air traffic
control system (12% of revenue for 1993 and 1992 and 11% of revenue for 1991)
and a contract with the U.K. Ministry of Defense relating to the systems
integration of helicopters (11%, 8%, and 1% of revenue for 1993, 1992, and 1991,
respectively).
The Company operates in one business segment--systems integration,
information systems and related services.
RELATED PARTY TRANSACTIONS
The Company is an integrated component of IBM's operations and has
extensive relationships and transactions with IBM and IBM affiliates. The
Company receives a number of administrative and support services and
internal-use information systems equipment and software from IBM and IBM
affiliates, participates in a number of IBM employee benefit plans, and occupies
office space in certain IBM buildings. The Company provides certain engineering
and programming services to IBM and IBM affiliates, and provides office space
and occupancy support to IBM and IBM affiliates in certain of its owned
properties. Further information about such relationships and transactions is
included in Notes 2, 3, 6, 8, 9, 13 and 14.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
The combined financial statements of the Company include the accounts of
one IBM operating unit which is not a separate legal entity and three
wholly-owned subsidiaries of IBM. All material intercompany accounts and
transactions have been eliminated in combination.
REVENUE RECOGNITION
The major portion of the Company's revenue results from contract services
performed under a variety of contracts, some of which provide for reimbursement
of cost plus fees and others which are fixed-price or time-and-materials type
contracts. For cost-type contracts and fixed-price type contracts that require
substantial performance over an extended period of time, the percentage of
completion method of accounting is used to record revenue, primarily based on
contract costs incurred to date, compared to estimated costs at contract
completion. Profits expected to be realized on contracts are based on estimates
of total contract revenue and costs at completion. Estimates are reviewed at
least semi-annually, and changes in estimated contract revenue and costs which
result in changes to estimated contract profit are recognized in the period in
which they are determined. Certain contracts contain profit incentives which
provide for increased or decreased fees based
7
<PAGE> 9
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(DOLLAR AMOUNTS IN THOUSANDS)
upon performance as compared to predetermined targets. Incentives based on cost
performance are recorded currently, and other incentives are recorded when
awards or penalties are established or when such amounts can be reasonably
estimated. Under all other contracts, revenue is recorded when deliveries are
made or as work is performed. Provisions for anticipated losses on contracts are
recorded in full as they are identified. Payments received from customers in
advance of recognition of revenue are recorded as deferred revenue in the
accompanying financial statements.
CASH AND CASH EQUIVALENTS
IBM performs cash management on a centralized basis in the U.S. for the
Company as well as other IBM businesses. Activity in the Company's cash balances
supporting its U.S. operations is recorded through the invested equity account
with IBM. The Company maintains certain separate bank accounts and investments
primarily related to its non-U.S. operations; the balances in such accounts are
included in cash and cash equivalents and investments in the accompanying
balance sheet. The Company considers cash and cash equivalents to include cash
on hand and on deposit and highly liquid investments with original maturities at
date of acquisition generally of three months or less.
DEBT AND INTEREST COST
IBM has not allocated any portion of its debt or related interest cost to
the Company, and no portion of IBM's debt is specifically related to the
operations of the Company. Accordingly, the Company's financial statements
include no charges for interest or capitalized interest.
INVESTMENTS
Investments are carried at cost plus accrued interest, which approximates
market value, and consist of certificates of deposit and bonds issued by
non-U.S. commercial banking institutions and non-U.S. government treasury bills
and bonds.
INVENTORIES
Inventories consist principally of unreimbursed costs under fixed-price
contracts that are not accounted for by the percentage of completion method of
accounting, and are stated at total costs incurred reduced by amounts identified
with revenue recognized to date. Inventoried costs include both direct contract
costs and allocable overhead costs (determined on a first-in, first-out basis).
Inventoried hardware costs are valued using the weighted average cost method.
Such costs are allocated to contracts as firm contractual requirements are
identified. All other inventories are stated at the lower of cost (determined on
a first-in, first-out basis) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is recorded using the straight-line method over the
estimated useful lives of the assets (buildings, 50 years; building
improvements, 20 years; machinery and equipment, 7 years; furniture and
fixtures, 10 to 15 years; and information systems equipment, 5 years). Leasehold
improvements are amortized on a straight-line basis over the shorter of the
lease term or the estimated useful lives of the improvements. Transfers of
property and equipment to and from related parties are recorded at book value
through the invested equity account with IBM.
8
<PAGE> 10
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(DOLLAR AMOUNTS IN THOUSANDS)
INCOME TAXES
The operations of the Company are included in the consolidated U.S. federal
income tax return and certain combined and separate state and local income tax
returns of IBM. The foreign operations of the Company file separate tax returns.
However, for purposes of these financial statements, income tax expense is
computed as if the Company were a separate taxpayer, and current income tax
liabilities are paid or considered to have been paid by IBM and are recorded
through the invested equity account with IBM. The Company accounted for income
taxes under Statement of Financial Accounting Standards (SFAS) No. 96 in 1991,
and under SFAS No. 109 in 1992 and 1993; the cumulative effect of the accounting
change in 1992 was not material. Income tax expense is based upon reported
earnings before income taxes, and deferred income taxes reflect the impact of
temporary differences between the amounts of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes;
deferred income taxes are measured by applying tax rates in effect at the end of
the period. In addition, in computing income tax expense, the Company considers
all intercompany charges recorded through the invested equity account to have
been paid currently.
RESEARCH AND DEVELOPMENT EXPENSE
A substantial portion of the Company's research and development costs that
are not incurred directly under specific government contracts are reimbursable
as indirect contract costs through government-mandated cost accounting
procedures. To the extent that such costs are deemed to be reimbursable, they
are recorded as inventory and allocated to cost of sales in accordance with the
contract costs to which they relate. Any research and development costs incurred
in excess of those deemed to be reimbursable are charged against income as
incurred.
FOREIGN CURRENCY
Prior to 1992, non-U.S. operations were not significant and the U.S. dollar
was considered the functional currency. Beginning in 1992, non-U.S. operations
utilize the local currency as the functional currency. Assets and liabilities
are translated into U.S dollars at the year-end exchange rate, while revenue and
costs are translated at the average rates of exchange prevailing during the
year. Translation adjustments are accumulated in invested equity. Foreign
exchange gains and losses incurred on foreign currency transactions are included
in income. The Company has entered into forward exchange contracts to hedge the
effect of foreign currency fluctuations on certain transactions and commitments
denominated in foreign currencies. Gains and losses on commitment hedges are
deferred and included in the basis of the transaction underlying the commitment.
Gains and losses on transaction hedges are recognized in income and offset the
foreign exchange gains and losses on the related transaction.
CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of billed accounts receivable and unbilled
accounts receivable (principally unreimbursed costs and fees under contracts)
and investments. Receivables result primarily from contracts with the U.S. and
non-U.S. governments and from subcontracts with prime contractors to the U.S.
government. Contracts with the U.S. government do not require collateral or
other security. The Company conducts ongoing credit evaluations of
non-government customers and generally does not require collateral or other
security from these customers. The Company generally has negotiated terms and
conditions which provide for non-U.S. government customers to make advance
payments in amounts sufficient to limit the Company's credit risk. Historically,
9
<PAGE> 11
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(DOLLAR AMOUNTS IN THOUSANDS)
the Company has not incurred any significant credit related losses under its
long-term contracts. Because the Company invests only in securities of
creditworthy issuers, credit risk from investments is considered minimal.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash and cash equivalents,
investments, non-trade accounts receivable and notes receivable approximates
fair value. The fair value of forward exchange contracts is estimated using
quoted market prices on comparable instruments.
NOTE 3 -- SPECIAL RESTRUCTURING ACTIONS
IBM has recently taken a series of special actions to reduce costs,
expenses, structure and capacity. As a result, restructuring charges principally
related to workforce reduction of $38,795, $29,180 and $124,196 were recorded by
the Company and charged against income in 1993, 1992 and 1991, respectively. A
portion of the restructuring charges are expected to be recoverable under the
Company's government contracts in future periods pursuant to an agreement
pending with the government on costs of voluntary termination programs as
further discussed in Note 13.
NOTE 4 -- ACCOUNTS RECEIVABLE
Trade accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
-------- --------
<S> <C> <C>
Receivables under government contracts:
Billed....................................................... $129,939 $ 85,118
Unbilled
Costs and accrued profit, including amounts subject to
future negotiation, net of unliquidated progress
payments received of $701,540 and $963,270.............. 237,560 199,740
Retainage................................................. 8,158 6,877
-------- --------
375,657 291,735
Less: Allowance for doubtful and potentially unrecoverable
amounts...................................................... (50,499) (93,825)
-------- --------
$325,158 $197,910
-------- --------
-------- --------
</TABLE>
Unbilled costs and accrued profit consist principally of amounts of revenue
recognized on contracts for which billings have not been presented to the
customers. Such amounts are usually billed and collected within one year, except
to the extent that such amounts result from excess proposed indirect contract
costs over government approved provisional costs. Such indirect costs are
subject to review by the U.S. government and typically take several years to
become finalized. As of December 31, 1993, the last year for which the Company
had reached agreement with the government was 1988.
Balances not paid by customers pursuant to retainage provisions in
contracts will be due upon completion of the contracts. The Company expects to
collect such amounts in future years as follows: 1994--$4,320, 1995--$1,627,
1996--$401, and 1997--$1,810.
Substantially all billed accounts receivable are expected to be collected
within one year.
10
<PAGE> 12
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 5 -- INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1993 1992
-------- --------
<S> <C> <C>
Unreimbursed costs relating to long-term contracts in process
(principally fixed-price type contracts):
Costs of contract services and products, net of amounts
attributed to revenue recognized to date................ $ 56,177 $118,437
Research and development and bid and proposal costs....... 8,871 2,030
Costs incurred in advance of contractual coverage......... 27,807 12,788
-------- --------
92,855 133,255
Raw materials and work-in-process.............................. 539 1,086
Hardware and parts not yet allocated to contracts.............. 6,712 15,638
-------- --------
$100,106 $149,979
-------- --------
-------- --------
</TABLE>
Management of the Company believes that all such amounts will be recovered
in the normal course of business, and that costs incurred in advance of
contractual coverage at December 31, 1993 will receive firm contractual coverage
in 1994.
NOTE 6 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1993 1992
---------- ----------
<S> <C> <C>
Land and land improvements.................................. $ 18,106 $ 20,373
Buildings and building improvements......................... 303,558 302,388
Machinery, equipment, furniture and fixtures................ 719,101 748,271
Leasehold improvements...................................... 60,148 62,882
---------- ----------
1,100,913 1,133,914
Less: accumulated depreciation and amortization............. (638,572) (650,901)
---------- ----------
462,341 483,013
Construction-in-progress.................................... 7,406 49,177
---------- ----------
$ 469,747 $ 532,190
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization expense was $93,585, $95,032, and $103,579 in
1993, 1992 and 1991, respectively. Transfers of property and equipment to (from)
related parties are considered noncash items for purposes of the Combined
Statement of Cash Flows and were, net $21,017, ($5,724) and ($15,004) in 1993,
1992 and 1991, respectively.
11
<PAGE> 13
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 7 -- INCOME TAXES
The sources of earnings (losses) before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1992 1991
-------- -------- -------
<S> <C> <C> <C>
U.S. operations..................................... $133,265 $130,346 $30,677
Non-U.S. operations................................. (4,751) 1,642 (1,818)
-------- -------- -------
$128,514 $131,988 $28,859
-------- -------- -------
-------- -------- -------
</TABLE>
The provision (benefit) for income taxes by taxing jurisdiction consists of
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1992 1991
------- -------- --------
<S> <C> <C> <C>
Current
U.S. federal...................................... $43,683 $ 98,466 $ 23,311
State and local................................... 8,768 19,028 4,356
Non-U.S........................................... 5,615 7,279 1,900
------- -------- --------
58,066 124,773 29,567
------- -------- --------
Deferred
U.S. federal...................................... (3,116) (58,668) (14,722)
State and local................................... (146) (10,238) (2,459)
Non-U.S........................................... (153) (736)
------- -------- --------
(3,415) (69,642) (17,181)
------- -------- --------
Total provision for income taxes.................... $54,651 $ 55,131 $ 12,386
------- -------- --------
------- -------- --------
</TABLE>
A reconciliation from the statutory U.S. federal income tax rate to the
Company's effective income tax rate follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1993 1992 1991
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate........................ 35.0% 34.0% 34.0%
Increase in tax rate from:
State and local income taxes, net of U.S. federal tax
benefit.................................................. 4.4 4.4 4.4
Non-U.S. income taxes, net of U.S. federal tax benefit...... 2.7 3.3 4.3
Other....................................................... .4 .1 .2
---- ---- ----
Effective income tax rate..................................... 42.5% 41.8% 42.9%
---- ---- ----
---- ---- ----
</TABLE>
12
<PAGE> 14
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(DOLLAR AMOUNTS IN THOUSANDS)
The components of deferred tax assets and liabilities included in the
combined statement of financial position are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1993 1992
------- -------
<S> <C> <C>
Liabilities:
Depreciation................................................... $37,828 $41,305
Percentage of completion method of accounting.................. 1,687 28,507
------- -------
39,515 69,812
------- -------
Assets:
Allowances and other........................................... 19,702 38,377
Employee benefit accruals...................................... 8,138 14,841
Inventoried overhead........................................... 5,040 6,560
------- -------
32,880 59,778
------- -------
Net deferred tax liability....................................... $ 6,635 $10,034
------- -------
------- -------
</TABLE>
NOTE 8 -- EMPLOYEE BENEFIT PLANS
RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS
Employees of the Company participate in IBM's U.S. retirement plan, which
is a noncontributory defined benefit plan covering substantially all regular,
full-time and part-time employees. The plan is funded by IBM contributions to an
irrevocable trust fund which is held for the sole benefit of employees.
Retirement benefits are paid monthly and are generally based upon the greater of
a fixed amount per year of service, or a percent of career compensation.
Benefits under the plan become vested upon the completion of five years of
service. IBM funds amounts sufficient to meet the minimum requirements set forth
in applicable employee benefit and tax laws, and such additional amounts as may
be determined appropriate from time to time. The assets of the plan include
corporate equities, government securities, corporate debt securities, and
income-producing real estate. At December 31, 1993, the fair value of the assets
in IBM's U.S. retirement plan exceeded the accumulated benefit obligation.
In addition to participating in IBM's retirement plan, employees of the
Company participate in IBM's defined benefit postretirement plan that provides
medical, dental and life insurance for retirees and eligible dependents. IBM
funds amounts for these benefits with an independent trustee, as deemed
appropriate from time to time. The plan's assets include corporate equities and
government securities. Effective January 1, 1991, IBM implemented on the
immediate recognition basis SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The cumulative effect of adopting
SFAS No. 106 charged to income by the Company in 1991 was $91,600, net of
approximately $57,600 of income tax effects, which represents the Company's
share of IBM's cumulative effect determined based upon headcount. At December
31, 1993, the accumulated postretirement benefit obligation relating to IBM's
plan exceeded the fair value of assets in such plan.
The amounts related to all retirement and other postretirement benefit
plans which are reflected in the Company's financial statements represent
prorata allocations of IBM's cost or credit based on headcount and salaries. The
amounts charged (credited) to earnings by the Company for 1993, 1992 and 1991
were approximately $2,416, ($10,653), and ($11,436), respectively, for the
retirement plan and $41,547, $26,483, and $21,331, respectively, for the other
postretirement benefits plans, exclusive of the charge for the
13
<PAGE> 15
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(DOLLAR AMOUNTS IN THOUSANDS)
cumulative effect of adopting SFAS No. 106 in 1991. In addition, the
restructuring charges for 1992 and 1991 (Note 3) include those elements of
pension cost, other postretirement benefit plan costs, and medical and
associated costs relating to "bridge" periods resulting from termination
incentive expenses related to the 1992 and 1991 restructuring actions. No
portion of IBM's prepaid pension asset or other postretirement benefits
liability is reflected in the Company's financial statements.
OTHER BENEFIT PLANS
Employees of the Company are eligible to participate in a disability plan
sponsored by IBM. Effective January 1, 1993, IBM implemented SFAS No. 112,
"Employers' Accounting for Postemployment Benefits," thereby changing its method
of accounting for such postemployment benefits. The cumulative effect of
adopting SFAS No. 112 charged to income by the Company in 1993 was $15,500, net
of approximately $10,100 of income tax effects, which represents the Company's
share of IBM's cumulative effect, determined based upon specific identification
of the Company's participants as a percentage of the total IBM participants.
Amounts charged to earnings by the Company relating to this plan were $1,034,
$3,148 and $2,168 in 1993, 1992 and 1991, respectively, exclusive of the charge
for the cumulative effect of adopting SFAS No. 112 in 1993.
Employees of the Company meeting certain eligibility requirements may elect
to participate in IBM's Tax Deferred Savings Plan, a savings plan in which
employees may elect to contribute a portion of their eligible compensation on a
tax deferred basis, subject to statutory limitations. IBM matches a portion of
employees' contributions, and allocates the expense to the Company based upon
participation and compensation. Expense recorded by the Company related to this
plan was $7,139, $6,233 and $6,575 in 1993, 1992 and 1991, respectively.
Company employees are also eligible to participate in the IBM Employees
Stock Purchase Plan, which enables employees to purchase stock through payroll
deductions up to 10 percent of eligible compensation. The price an employee pays
for a share of stock is 85 percent of the average market price on the date that
the employee has accumulated enough money to buy a share.
The Company also sponsors an incentive based performance plan which
provides cash awards to all employees based upon the Company's attainment of key
business measurements. Expense of $29,653 and $22,095 was incurred under such
plan for 1993 and 1992, respectively. The Company did not sponsor any such plan
in 1991.
Certain employees of the Company participate in the IBM 1989 Long-Term
Performance Plan which provides for incentive awards to be made to officers and
other key employees. The awards may include stock, stock options, stock
appreciation rights, cash or any combination thereof. Expense related to this
plan was $1,467 in 1993 and $498 in 1992 and 1991.
Employees of the Company participate in various other IBM benefit plans,
including health, life, dental, and travel accident insurance plans and other
employee related programs. During 1993, 1992 and 1991, IBM charged $73,000,
$64,000 and $65,000, respectively, to the Company representing the Company's
proportionate share of IBM's cost, determined on the basis of headcount and
salaries.
NOTE 9 -- RELATED PARTY TRANSACTIONS
The Company has extensive transactions and relationships with IBM and its
affiliates. Generally, services received from such related parties are charged
to the Company at the related party's cost, determined generally on an
allocation basis, and services provided by the Company to related parties are
charged to the
14
<PAGE> 16
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(DOLLAR AMOUNTS IN THOUSANDS)
related party based upon the Company's cost. Accordingly, such transactions may
not generally reflect the costs and revenues which would be derived from
transactions between unrelated entities.
The Company derives no revenue for IBM commercial information systems
equipment and software sold under its contracts. Revenue from any such IBM
equipment or software sold in connection with the Company's contracts is based
generally upon IBM's standard prices established for government sales and
accrues to IBM or its affiliates. For its proposal and other marketing efforts
related to such IBM equipment and software, the Company billed an IBM affiliate
$12,075, $24,800, and $34,500 in 1993, 1992 and 1991, respectively. Billings
were determined based upon annual negotiations with the affiliate as to the
expected proposal and marketing effort required by the Company and the expected
future revenue to be derived by the affiliate from the Company's efforts on its
behalf.
IBM charges the Company for its own internal-use information systems
equipment based upon IBM's cost. IBM has provided certain internal-use software
to the Company at no cost and accordingly the accompanying financial statements
reflect no amounts related to such software. Such software is provided free of
charge to substantially all IBM units in the U.S. and is used for general
purposes throughout IBM. The Company was charged approximately $11,200, $15,400
and $16,900 in 1993, 1992 and 1991, respectively, by IBM and its affiliates for
maintenance services relating to such equipment and software based upon the
Company's usage of such services.
Various administrative services are received from IBM and its affiliates
and include data processing, treasury, legal, accounting, audit, education,
personnel, employee benefit, telecommunications and other general and
administrative support services. Charges from IBM and its affiliates for most
administrative services are based upon IBM's cost. Such cost is generally
determined on the basis of usage, personnel, estimates of time spent to provide
such services, or other appropriate bases. During 1993 and 1992, charges for
data processing services performed by an IBM affiliate totalled approximately
$31,600 and $36,500, respectively. In 1991, this affiliate performed data
processing services for the Company for part of the year only; charges were
approximately $11,100. During 1993, 1992 and 1991, charges from related parties
for various personnel, educational and training programs totalled approximately
$15,800, $10,300 and $6,700, respectively, charges for telecommunications
services totalled approximately $4,600, $4,300 and $3,800, respectively, and
charges for other administrative services totalled approximately $8,300, $6,800
and $6,500, respectively. Management believes such charges are reasonable.
Certain other administrative services, general corporate research and
corporate facilities are not charged by IBM to the Company because they are not
directly allocable to the Company. However, some of these expenses are
recoverable under the Company's government contracts as indirect costs in
accordance with government-mandated cost accounting procedures. Revenue for
1993, 1992 and 1991 reflects recovery of approximately $29,500, $26,500, and
$36,000, respectively, of such costs incurred by IBM, but not charged to the
Company.
IBM-U.K. provides systems, telecommunications and personnel support to the
Company with respect to certain of its non-U.S. operations. The Company was
charged approximately $8,400, $6,400 and $1,300 during 1993, 1992 and 1991,
respectively, for these services.
The Company provides certain services such as engineering and programming
to IBM and its affiliates. The Company charges the receiving related party for
such services based upon its cost, generally determined based upon cost per
labor hour expended plus a provision for general and administrative and overhead
costs, and records such charges as a reimbursement of its expenses. During 1993,
1992 and 1991, the Company charged costs of approximately $21,000, $53,000, and
$83,700, respectively, to related parties for such
15
<PAGE> 17
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(DOLLAR AMOUNTS IN THOUSANDS)
services. The Company also provides certain personnel development and training
programs to IBM employees outside of the Company. In 1993, 1992 and 1991, the
Company charged IBM and IBM affiliates approximately $1,100, $5,500 and $6,000,
respectively for such services, generally based upon costs incurred.
NOTE 10 -- GEOGRAPHIC INFORMATION
A summary of geographic information relating to foreign and domestic
operations is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1992 1991
---------- ---------- ----------
<S> <C> <C> <C>
Sales
U.S.......................................... $1,975,242 $2,004,962 $1,957,321
Non-U.S...................................... 316,561 184,996 29,618
---------- ---------- ----------
$2,291,803 $2,189,958 $1,986,939
---------- ---------- ----------
---------- ---------- ----------
Earnings (loss) before income taxes
U.S.......................................... $ 133,265 $ 130,346 $ 30,677
Non-U.S...................................... (4,751) 1,642 (1,818)
---------- ---------- ----------
$ 128,514 $ 131,988 $ 28,859
---------- ---------- ----------
---------- ---------- ----------
Assets
U.S.......................................... $ 925,109 $ 930,271 $1,071,220
Non-U.S...................................... 123,839 82,605 26,357
---------- ---------- ----------
$1,048,948 $1,012,876 $1,097,577
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTE 11 -- FORWARD EXCHANGE CONTRACTS
At December 31, 1993, the Company had outstanding forward exchange
contracts to buy the U.S. dollar equivalent of $93,176 of foreign currencies and
sell the U.S dollar equivalent of $13,701 of foreign currencies. These contracts
mature in various periods through February 1995 and were entered into to hedge
foreign currency commitments and transactions. The aggregate fair value of these
forward exchange contracts at December 31, 1993 was $84,889 and $13,732 bought
and sold, respectively.
NOTE 12 -- OTHER INCOME
Other income consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993 1992 1991
------- ------- ------
<S> <C> <C> <C>
Interest and investment income......................... $ 4,773 $ 8,001 $ 521
Foreign currency gains and losses, net................. 421 5,042 3,488
Royalties.............................................. 4,213 3,151 1,487
Other.................................................. 1,579 1,596 458
------- ------- ------
$10,986 $17,790 $5,954
------- ------- ------
------- ------- ------
</TABLE>
16
<PAGE> 18
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
The Company leases certain office space, facilities and equipment under
noncancelable operating leases which expire in various years through 1999. These
leases generally provide for renewal options ranging from one to five years. In
addition, certain of such leases require the Company to share in its
proportionate share of building operating costs and real estate taxes and
contain escalation clauses for periodic increases. Rental expense incurred under
such leases was approximately $40,000, $41,500 and $43,300 in 1993, 1992 and
1991, respectively, of which $21,000, $20,900 and $20,500, respectively, was
paid to related parties. Future minimum lease commitments at December 31, 1993,
including approximately $45,300 in the aggregate to related parties, are as
follows:
<TABLE>
<S> <C>
1994............................................................... $29,600
1995............................................................... 24,100
1996............................................................... 17,000
1997............................................................... 8,700
1998............................................................... 5,500
1999 and thereafter................................................ 400
-------
$85,300
-------
-------
</TABLE>
The Company also occupies certain IBM office space for which the Company is
charged its proportionate share of IBM's occupancy costs, including facilities
rental and maintenance, security, and office support. Amounts charged by IBM to
the Company for such office space and services were approximately $24,200,
$21,700 and $18,400 for 1993, 1992 and 1991, respectively. In addition, IBM and
IBM affiliates occupy certain of the Company's office space, primarily in the
Company's owned properties. During 1993, 1992 and 1991, the Company charged
related parties approximately $19,700, $31,100 and $42,500, respectively, for
their proportionate share of occupancy and building operating costs.
All of the costs that are directly or indirectly allocable to the Company's
U.S. government contracts or subcontracts are subject to audit by the Defense
Contract Audit Agency (DCAA) or other government agencies. Payments made to the
Company under the terms of contracts which represent approximately 48% of total
revenue during 1993 are subject to adjustment (including refunds to the
government) in the event that claimed costs are determined to be ineligible for
reimbursement. At December 31, 1993, DCAA audits had been completed through
1988. While there are certain matters involving cost allowability that are
currently under question by the DCAA or other government agencies, the outcome
of which is uncertain, the Company believes that its existing accruals for any
such matters are adequate and that future audits and final adjustments will not
have a significant impact on the Company's financial position.
During the years 1988-1993 the Company made payments aggregating
approximately $160,000 to employees associated with IBM retirement incentive
programs. Such costs are expensed as incurred and are allowable as indirect
costs under the Company's government contracts, but government regulations are
not specific as to the recovery period for certain of the costs. In addition,
the Company is also entitled to time value of money relating to certain of these
unrecovered costs. Based on management's interpretation of government
regulations and preliminary agreements with the government, the Company has been
using a fifteen year amortization period over which to recognize potential
recovery of all such costs and time value of money on all such unrecovered
costs. If a final agreement with the government reflects a shorter amortization
period or immediate inclusion of such costs in indirect cost rates, revenue
recognition would be accelerated and the aggregate time value of money would
decline. Revenue reflects recovery of such costs of $5,764, $4,122 and $2,352 in
1993, 1992 and 1991, respectively; $145,000 is unrecovered at December 31, 1993.
Cost
17
<PAGE> 19
FEDERAL SYSTEMS
(A UNIT OF INTERNATIONAL BUSINESS MACHINES CORPORATION)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1993, 1992 AND 1991
(DOLLAR AMOUNTS IN THOUSANDS)
of sales has been reduced for time value of money on such unrecovered costs by
$10,112, $6,687 and $4,352 in 1993, 1992 and 1991, respectively, and by $25,034
in the aggregate since 1988.
At December 31, 1993, the Company had unused, outstanding letters of credit
with commercial banking institutions in the aggregate amount of $19,699. Such
letters of credit expire in 1994.
In the normal course of its operations, the Company becomes involved in
certain legal proceedings, including contract claims and disputes, employment
related disputes or litigation, environmental matters, and investigations of
compliance with government laws and regulations. In the opinion of management,
based upon information presently available, after consideration of existing
accruals, none of these matters is likely to have a significant effect upon the
financial position of the Company.
During 1993, discussions were held between management of the Company and
FAA officials with respect to certain terms and conditions of a significant air
traffic control contract (see Note 1). This contract has also been the subject
of considerable public and media attention for the past year and on December 13,
1993, the FAA initiated a comprehensive review of the contract. Based upon the
outcome of this comprehensive review, the potential exists for future
modification of the contract terms and conditions. However, the extent of future
contract modifications, if any, is not determinable at this time and
accordingly, these financial statements have been prepared in accordance with
the present contract terms and conditions.
NOTE 14 -- SUBSEQUENT EVENT
On December 12, 1993, IBM and Loral Corporation (Loral) entered into an
Asset Purchase Agreement whereby substantially all of the operations, assets and
liabilities of the Company were sold to Loral effective January 1, 1994. On
March 1, 1994, IBM and Loral consummated the closing of this transaction for
consideration of $1,503,500, which amount is subject to adjustment based upon
the outcome of future developments with respect to the matters referred to in
the last paragraph of Note 13.
18
<PAGE> 20
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
LORAL CORPORATION AND SUBSIDIARIES AND FEDERAL SYSTEMS
The following unaudited pro forma condensed consolidated statement of
income for the year ended March 31, 1994 gives effect to the acquisition of the
Federal Systems Company ("Federal Systems"), a division of International
Business Machines Corporation, by Loral Corporation effective January 1, 1994.
The unaudited pro forma condensed consolidated statement of income assumes the
acquisition occurred as of April 1, 1993. The pro forma information is based on
the historical financial statements of Loral Corporation and Federal Systems for
the periods indicated using the purchase method of accounting and the
assumptions and adjustments in the accompanying notes to the unaudited pro forma
condensed consolidated statement of income.
The pro forma adjustments are based upon preliminary estimates of fair
values. Actual adjustments will be based on final appraisals and other analyses
of fair values. The unaudited pro forma condensed consolidated statement of
income should be read in conjunction with the audited consolidated financial
statements and notes of the respective companies. The pro forma data may not be
indicative of the results that actually would have occurred if the acquisition
had been in effect on the date indicated or results that may be obtained in the
future.
A pro forma balance sheet has not been presented since the transaction
described herein has been reflected in the Company's March 31, 1994 balance
sheet included in the Company's Annual Report on Form 10-K.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED MARCH 31, 1994
Periods combined:
Loral: April 1, 1993 to March 31, 1994
Federal Systems: April 1, 1993 to December 31, 1993 (See Note 1a)
<TABLE>
<CAPTION>
PRO FORMA
FEDERAL ADJUSTMENTS PRO FORMA
LORAL SYSTEMS (NOTE 1) CONSOLIDATED
-------- -------- ----------- ------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Sales........................................... $4,008.7 $1,845.0 $5,853.7
Costs and expenses.............................. 3,607.3 1,764.0 $ 2.1(c) 5,373.4
-------- -------- ----------- ------------
Operating income................................ 401.4 81.0 (2.1) 480.3
Interest income (expense), net.................. (39.0) 4.8 (79.4)(b) (113.6)
-------- -------- ----------- ------------
Income before income taxes and equity in net
income of affiliate........................... 362.4 85.8 (81.5) 366.7
Income taxes.................................... 135.3 36.5 (31.9)(d) 139.9
-------- -------- ----------- ------------
Income before equity in net income of
affiliate..................................... 227.1 49.3 (49.6) 226.8
Equity in net income of affiliate............... 1.2 1.2
-------- -------- ----------- ------------
Net income...................................... $ 228.3 $ 49.3 $ (49.6) $ 228.0
-------- -------- ----------- ------------
-------- -------- ----------- ------------
Earnings per share (Note 2):
Primary....................................... $ 2.72 $ 2.72
-------- ------------
-------- ------------
Fully diluted................................. $ 2.72 $ 2.72
-------- ------------
-------- ------------
Weighted average common shares outstanding:
Primary....................................... 83.9 83.9
-------- ------------
-------- ------------
Fully diluted................................. 83.9 83.9
-------- ------------
-------- ------------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income.
P-1
<PAGE> 21
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF INCOME
1. The following facts and assumptions were used in determining the pro forma
effect of the acquisition of the Federal Systems Company ("Federal Systems"),
a division of International Business Machines Corporation ("IBM").
a. Pursuant to the Asset Purchase Agreement dated December 12, 1993, on March
1, 1994, Loral Corporation ("Loral" or the "Company") purchased effective
January 1, 1994, certain assets and assumed certain liabilities of Federal
Systems for $1,503.5 million in cash, plus estimated acquisition costs of
$8 million. The purchase price is net of a $71.5 million adjustment based
upon subsequent negotiations and the difference of closing net asset values
of Federal Systems determined in accordance with generally accepted
accounting principles, compared to previous projected net asset values.
The acquisition of Federal Systems has been accounted for as a purchase. In
accordance with paragraph 93 of Accounting Principles Board Opinion No. 16,
Loral's consolidated statement of income reflects the operations of Federal
Systems and purchase accounting adjustments from the effective date of
acquisition through March 31, 1994. Pro forma adjustments for the year
ended March 31, 1994 described hereafter, have been reflected for the nine
month period prior to the effective date of the acquisition. The Federal
Systems unaudited condensed consolidated statement of income represents
their operating results from April 1, 1993 through December 31, 1993. Sales
and operating income of Federal Systems for the three months ended March
31, 1993, which are not included in the unaudited pro forma condensed
consolidated statement of income were $446.8 million and $36.5 million,
respectively.
b. The purchase price was determined through arm's length bargaining between
the Company and IBM. The acquisition was financed through cash on hand and
commercial paper borrowings backed by revolving credit facilities totalling
$1.7 billion, with a group of banks. The unaudited pro forma condensed
consolidated statement of income reflects charges for interest expense on
the purchase price plus estimated expenses at an assumed interest rate of
7%.
c. The estimated excess of purchase price over net assets acquired of $806.9
million is being amortized over 40 years. Other purchase accounting
adjustments to the unaudited pro forma condensed consolidated statement of
income, pursuant to the provisions of Accounting Principles Board Opinion
No. 16, include adjustments relating to a net reduction of accumulated
contract costs resulting from valuing acquired contracts in process at
contract price, minus the estimated cost to complete and an allowance for
the Company's normal profit on its effort to complete such contracts. The
impact of this adjustment relates to contract performance, primarily over a
three to four year period. The unaudited pro forma condensed consolidated
statement of income includes a resulting adjustment of $18 million. The
unaudited pro forma condensed consolidated statement of income also
includes charges for depreciation over an estimated weighted average
eighteen-year life of the $72 million excess of fair value of depreciable
fixed assets over the historical net book value and charges for
amortization over an estimated life of 15 years of the $40 million excess
of fair value of intangible assets over the historical net book value.
d. A statutory (federal and state) tax rate of 39.0% was assumed on the pro
forma adjustments.
2. Primary and fully diluted earnings per share are computed based upon the
weighted average number of shares of common stock and common stock
equivalents (stock options) outstanding.
P-2
<PAGE> 22
EXHIBIT INDEX
Exhibit
No. Description
- - - ------- -----------
23 Consent of Price Waterhouse
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (Nos. 2-78421, 2-91193, 33-7589, 33-8822, 33-14516,
33-23757 and 33-37829) and in the Prospectus constituting part of the
Registration Statement on Form S-3 (No. 33-50407) of Loral Corporation of our
report dated January 31, 1994, except as to the asset purchase agreement
described in Note 14 which is as of March 1, 1994, relating to the combined
financial statements of Federal Systems, which appears in the Report on Form
8-K/A of Loral Corporation dated May 12, 1994.
PRICE WATERHOUSE
Washington, D.C.
May 12, 1994
