-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RMKm+TrEIKZVEknoAQDftDtqlrlb7gaZzrXQlPxJxktmWZHyPj40dYu83CWnISqi RXHbHrDMz17h0iFN1qTUow== 0000950123-98-007660.txt : 19980817 0000950123-98-007660.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950123-98-007660 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LORAL SPACE & COMMUNICATIONS LTD CENTRAL INDEX KEY: 0001006269 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 133867424 STATE OF INCORPORATION: D0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14180 FILM NUMBER: 98690707 BUSINESS ADDRESS: STREET 1: 600 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126971105 MAIL ADDRESS: STREET 1: 600 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10016 10-Q 1 LORAL SPACE & COMMUNICATIONS LTD. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1998 COMMISSION FILE NUMBER 1-14180 LORAL SPACE & COMMUNICATIONS LTD. C/O LORAL SPACECOM CORPORATION 600 THIRD AVENUE NEW YORK, NEW YORK 10016 TELEPHONE (212) 697-1105 JURISDICTION OF INCORPORATION: BERMUDA IRS IDENTIFICATION NUMBER: 13-3867424 The registrant has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. As of July 31, 1998, there were 242,986,597 shares of Loral Space & Communications Ltd. common stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART 1. FINANCIAL INFORMATION LORAL SPACE & COMMUNICATIONS LTD. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Revenues........................................ $248,260 $291,148 $543,473 $631,501 Costs and expenses.............................. 274,526 293,653 568,757 624,669 -------- -------- -------- -------- Operating income (loss)......................... (26,266) (2,505) (25,284) 6,832 Interest and investment income.................. 16,524 11,071 25,190 31,165 Interest expense................................ 21,557 5,446 23,277 15,401 -------- -------- -------- -------- Income (loss) before income taxes, minority interest and equity in net loss of affiliates.................................... (31,299) 3,120 (23,371) 22,596 Income tax expense (benefit).................... (9,714) 3,636 (6,651) 12,975 -------- -------- -------- -------- Income (loss) before minority interest and equity in net loss of affiliates.............. (21,585) (516) (16,720) 9,621 Minority interest............................... 3,569 (1,690) 3,631 (5,056) Equity in net loss of affiliates................ (40,957) (8,090) (61,327) (15,267) -------- -------- -------- -------- Net loss........................................ (58,973) (10,296) (74,416) (10,702) Preferred dividends and accretion............... (11,607) (2,947) (23,213) (2,947) -------- -------- -------- -------- Net loss applicable to common stockholders...... $(70,580) $(13,243) $(97,629) $(13,649) ======== ======== ======== ======== Earnings (loss) per share: Basic......................................... $ (0.27) $ (0.06) $ (0.38) $ (0.06) ======== ======== ======== ======== Diluted....................................... $ (0.27) $ (0.06) $ (0.38) $ (0.06) ======== ======== ======== ======== Weighted average shares outstanding: Basic......................................... 265,769 238,186 257,553 237,588 ======== ======== ======== ======== Diluted....................................... 265,769 238,186 257,553 237,588 ======== ======== ======== ========
See notes to condensed consolidated financial statements. 1 3 LORAL SPACE & COMMUNICATIONS LTD. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
JUNE 30, DECEMBER 31, 1998 1997 ----------- ------------ (Unaudited) (Note) ASSETS Current assets: Cash and cash equivalents.............................. $ 876,530 $ 226,547 Contracts in process................................... 452,122 378,134 Inventories............................................ 129,230 98,325 Restricted current assets.............................. 50,068 Other current assets................................... 49,692 51,612 ---------- ---------- Total current assets........................................ 1,557,642 754,618 Property, plant and equipment, net.......................... 1,532,923 926,679 Cost in excess of net assets acquired, net.................. 958,225 361,411 Long-term receivables....................................... 182,943 168,639 Restricted assets........................................... 84,482 Investments in affiliates................................... 472,440 499,235 Deposits.................................................... 114,470 154,970 Other assets................................................ 162,854 139,384 ---------- ---------- $5,065,979 $3,004,936 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of debt................................ $ 5,500 $ 2,146 Accounts payable....................................... 187,109 189,790 Accrued employment costs............................... 45,112 38,797 Customer advances...................................... 31,738 68,287 Accrued interest and preferred dividends............... 40,610 11,192 Other current liabilities.............................. 17,679 25,931 Income taxes payable................................... 11,674 25,934 Deferred income taxes.................................. 1,683 4,187 ---------- ---------- Total current liabilities................................... 341,105 366,264 Deferred income taxes....................................... 51,710 99,696 Pension and other postretirement liabilities................ 51,091 48,398 Long-term liabilities....................................... 121,377 73,117 Long-term debt.............................................. 1,518,266 433,252 Minority interest........................................... 19,380 10,964 Commitments and contingencies (Notes 6 and 9) Shareholders' equity: Series A convertible preferred stock, par value $.01... 459 459 Series B preferred stock, par value $.01............... 6% Series C convertible redeemable preferred stock ($745,472 redemption value).......................... 734,598 733,762 Common stock, par value $.01........................... 2,430 2,010 Paid-in capital........................................ 2,313,290 1,216,377 Treasury stock, at cost................................ (3,360) (1,680) Unearned compensation.................................. (9,679) (249) Cumulative translation adjustment...................... 375 Retained earnings (deficit)............................ (75,063) 22,566 ---------- ---------- Total shareholders' equity.................................. 2,963,050 1,973,245 ---------- ---------- $5,065,979 $3,004,936 ========== ==========
- --------------- Note: The December 31, 1997 balance sheet has been derived from the audited consolidated financial statements at that date. See notes to condensed consolidated financial statements. 2 4 LORAL SPACE & COMMUNICATIONS LTD. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
SIX MONTHS ENDED JUNE 30, ------------------------- 1998 1997 ---------- ----------- Operating activities: Net loss.................................................. $ (74,416) $ (10,702) Equity in net loss of affiliates.......................... 61,327 15,267 Minority interest......................................... (3,631) 5,056 Deferred taxes............................................ 13,176 12,961 Depreciation and amortization............................. 55,869 24,100 Contracts in process and inventories...................... (91,854) (61,837) Deposits.................................................. 40,500 (42,400) Long term receivables..................................... (14,304) 5,498 Accounts payable.......................................... (28,890) 81,294 Accrued expenses.......................................... 6,128 (51,151) Taxes payable............................................. (24,306) (2,212) Customer advances......................................... (36,549) (74,123) Long-term liabilities..................................... 29,291 (1,314) Other..................................................... 305 (16,164) --------- ---------- Cash used in operating activities........................... (67,354) (115,727) --------- ---------- Investing activities: Cash acquired in connection with Orion acquisition........ 53,801 Acquisition of businesses, net of cash acquired........... (561,639) Investments in affiliates................................. (22,216) (132,273) Use of restricted assets.................................. 199,336 Capital expenditures, net................................. (304,276) (129,539) --------- ---------- Cash used in investing activities........................... (73,355) (823,451) --------- ---------- Financing activities: Proceeds from the issuance of common stock, net........... 602,600 Borrowings under revolving credit facility, net........... 185,506 79,048 Repayment of notes payable................................ (265) Repayment of Export-Import credit facility................ (1,073) Contribution from minority partner........................ 9,996 Proceeds from exercise of stock options and issuances to employee savings plan.................................. 17,141 1,228 Preferred dividends....................................... (23,213) (2,947) --------- ---------- Cash provided by financing activities....................... 790,692 77,329 --------- ---------- Increase (decrease) in cash and cash equivalents............ 649,983 (861,849) Cash and cash equivalents -- beginning of period............ 226,547 1,180,752 --------- ---------- Cash and cash equivalents -- end of period.................. $ 876,530 $ 318,903 ========= ========== Non-cash activities: Common stock issued to acquire Orion...................... $ 469,000 ========= Mandatory exchange of Convertible Preferred Equivalent Obligations............................................ $ 583,282 ========== Issuance of Loral Common Stock to acquire equity interest in SS/L................................................ $ 147,260 ========== Issuance of Loral Common Stock to acquire equity interest in Globalstar.......................................... $ 17,487 ========== Supplemental information: Interest paid............................................. $ 23,167 $ 29,823 ========= ========== Taxes paid................................................ $ 4,848 $ 2,322 ========= ==========
See notes to condensed consolidated financial statements. 3 5 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1) ORGANIZATION AND PRINCIPAL BUSINESS Loral Space & Communications Ltd. and subsidiaries (the "Company" or "Loral") is one of the world's leading satellite companies, with substantial activities in satellite manufacturing and satellite-based communications services. Space Systems/Loral, Inc. ("SS/L") is a leading designer and manufacturer of space systems. Loral Skynet ("Skynet"), acquired March 14, 1997, is a leading provider of satellite communications services in the United States. Skynet owns and operates the Telstar satellite network and is expanding its business internationally. Loral Orion, Inc. ("Orion"), acquired on March 20, 1998, provides satellite-based communications services, focused primarily on private communications network services, Internet services and video distribution and other satellite transmission services. On November 17, 1997, a joint venture including Loral and another partner acquired 75% of Satelites Mexicanos, S.A. de C.V. ("SatMex"), a satellite services provider to Mexico and South America. Loral also manages and is the largest equity owner of Globalstar, L.P. ("Globalstar"), a global, mobile satellite telephony system scheduled to begin commercial service in the second quarter of 1999. Loral is pursuing additional satellite-based communications service opportunities including CyberStar, a proposed worldwide high-speed broadband data services system which will initiate service using leased Ku-band transponder capacity on Skynet's Telstar 5 satellite. 2) BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared by Loral pursuant to the rules of the Securities and Exchange Commission ("SEC") and, in the opinion of the Company, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of results of operations, financial position and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules. The Company believes that the disclosures made are adequate to keep the information presented from being misleading. The results of operations for the three and six months ended June 30, 1998, are not necessarily indicative of the results to be expected for the full year. It is suggested that these financial statements be read in conjunction with the audited consolidated financial statements and notes thereto of Loral included in Loral's latest annual report on Form 10-K. 3) ACCOUNTING POLICIES COMPREHENSIVE INCOME As of January 1, 1998, Loral adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 established new rules for the reporting and display of comprehensive income and its components. SFAS 130 requires unrealized gains or losses on the Company's foreign currency translation adjustments to be included in other comprehensive income. 4 6 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Total comprehensive loss for the six months ended June 30, 1998 and 1997 amounted to approximately $97.3 million and $13.6 million, respectively. The following are the components of comprehensive loss:
SIX MONTHS ENDED JUNE 30, -------------------- 1998 1997 -------- -------- (IN THOUSANDS) Net loss applicable to common shareholders............. $(97,629) $(13,649) Cumulative translation adjustment...................... 375 -------- -------- Comprehensive loss applicable to common shareholders... $(97,254) $(13,649) ======== ========
RESTRICTED ASSETS In connection with the Orion acquisition, Loral acquired cash and cash equivalents which are restricted in use to the construction of two satellites and payment of interest on Orion's senior notes. At June 30, 1998, these restricted assets aggregated $134.6 million of which $50.1 million is current. RECLASSIFICATIONS Certain reclassifications have been made to conform prior period amounts to the current period presentation. 4) ACQUISITIONS AND INVESTMENTS IN AFFILIATES ACQUISITIONS In February 1997, Loral agreed to acquire the remaining 49% of the common stock of SS/L held by four international aerospace and communications companies (the "Alliance Partners") for $374 million paid in cash and Loral securities. On March 14, 1997, Loral acquired Skynet for $462.1 million in cash. On March 20, 1998, Loral acquired all of the outstanding stock of Orion in exchange for Loral common stock. Loral issued 17.9 million shares of its common stock and assumed existing Orion options and warrants to purchase 1.9 million shares of Loral common stock representing an aggregate purchase price of $469 million. Orion currently has one satellite in orbit and two satellites under construction. The assets and liabilities recorded in connection with the purchase price allocation based on preliminary estimates were $1.43 billion and $957.2 million, respectively. The acquisition of Skynet and Orion and the remaining equity interest in SS/L have been accounted for as purchases. Loral's consolidated financial statements for the three and six months ended June 30, 1997, reflect the results of operations of SS/L from January 1, 1997, the elimination of the minority interest of the SS/L equity not owned by Loral during the period and the results of operations of Skynet from March 14, 1997. Prior to January 1, 1997, SS/L was accounted for using the equity method of accounting. Loral's condensed consolidated statement of operations reflects the results of Orion commencing on April 1, 1998. Had the acquisitions of SS/L, Skynet, the investment in SatMex (see below -- Investments in Affiliates) and Orion occurred on January 1, 1997, the unaudited pro forma sales, operating loss, net loss applicable to common stockholders and related loss per share data for the six months ended June 30, 1998 and 1997 would have been: $562.3 million and $661.5 million; $44.1 million and $20.9 million; $113.2 million and $75.5 million; and $0.41 and $0.29, respectively. These results, which are based on 5 7 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) various assumptions, are not necessarily indicative of what would have occurred had the acquisitions been consummated on January 1, 1997. INVESTMENTS IN AFFILIATES On April 30, 1998, Loral's holdings of Globalstar Telecommunications Limited ("GTL") Convertible Preferred Equivalent Obligations ("GTL CPEOs") were converted into 6,832,030 shares of GTL common stock including the additional shares issued in satisfaction of the required interest make-whole payment. At June 30, 1998, Loral owned directly and indirectly 22.5 million ordinary partnership interests (38.7%) of the total 58.2 million Globalstar ordinary partnership interests outstanding, (38.1% on a fully diluted basis) see Note 10. Loral's investment in Globalstar includes $32.3 million of capitalized interest at June 30, 1998. In connection with the privatization by the Federal Government of Mexico (the "Mexican Government") of its fixed satellite services business, Loral and Telefonica Autrey, S.A. de C.V. ("Telefonica Autrey") formed a joint venture, Firmamento Mexicano, S. de R.L. de C.V. ("Holdings"). Holdings acquired 75% of the outstanding capital stock of SatMex for $646.8 million. The purchase price was financed by a Loral equity contribution of $94.6 million, a Telefonica Autrey equity contribution of $50.9 million and debt issued by Holdings. As part of the acquisition, Servicios Corporativos Satelitales, S.A. de C.V. ("Servicios"), a wholly owned subsidiary of Holdings issued a $125.1 million seven year obligation bearing interest at 6.03% to the Mexican Government (the "Government Obligation") in consideration for the assumption by SatMex of the debt incurred in connection with the acquisition. The debt of SatMex and Servicios is non-recourse to Loral and Telefonica Autrey. However, Loral and Telefonica Autrey have agreed to maintain assets in a collateral trust in an amount equal to the value of the Government Obligation through December 30, 2000 and, thereafter, in an amount equal to 1.2 times the Government Obligation until maturity. Loral has a 65% economic interest in Holdings and a 49% indirect economic interest in SatMex. Loral, together with Telefonica Autrey, are responsible for managing SatMex and will receive an aggregate management fee, based on a sliding scale, applied to SatMex's quarterly gross revenues up to a maximum of 3.75% of cumulative gross revenues. In addition, Loral Skynet had licensed certain intellectual property to SatMex for a fee of 1.5% of SatMex's gross revenues. Such fees earned by Loral for the six months ended June 30, 1998, were approximately $872,000. In February 1998, Loral and Alcatel Alsthom ("Alcatel") announced that they will jointly build and operate Europe*Star, a geostationary satellite system that will provide broadcast and telecommunications services to Europe, the Middle East, Southeast Asia, India and South Africa. Alcatel will serve as the primary contractor of the Europe*Star turnkey system. SS/L will provide the satellite bus and test and integrate the satellites. Loral's initial investment in this joint venture was $5 million. In June, 1997 Loral and Alcatel formed a strategic partnership to jointly develop, deploy and operate high-speed global multimedia satellite networks that will bring high-bandwidth services to businesses and to consumers. The agreement includes cross investments in Loral's geostationary (GEO) satellite-based CyberStar project and Alcatel's low-earth-orbit (LEO) satellite-based SkyBridge project. Each company will participate in the development of the two projects, and have initially committed to invest up to $30 million in the other's respective project. Each project will be managed separately, but the two companies have agreed to facilitate a coordinated approach to the two networks, including integrated marketing. 6 8 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Investments in affiliates is summarized as follows:
JUNE 30, DECEMBER 31, 1998 1997 -------- ------------ (IN THOUSANDS) Globalstar.................................................. $368,133 $383,714 SatMex...................................................... 78,106 88,925 Europe*Star................................................. 5,037 Skybridge................................................... 14,258 17,268 Other affiliates............................................ 6,906 9,328 -------- -------- $472,440 $499,235 ======== ========
Equity in net loss of affiliates consists of:
SIX MONTHS ENDED JUNE 30, -------------------------- 1998 1997 ----------- ----------- (IN THOUSANDS) Globalstar.................................................. $(28,020) $(15,267) SatMex...................................................... (11,848) Skybridge................................................... (15,891) Other affiliates............................................ (5,568) -------- -------- $(61,327) $(15,267) ======== ========
The following table represents the summary of results of operations of certain of Loral's affiliates for the six months ended June 30, 1998 and 1997:
1998 1997 ---------------------- ---------- GLOBALSTAR SATMEX GLOBALSTAR ---------- -------- ---------- (IN THOUSANDS) Sales................................................. $ -- $ 51,160 $ -- Operating income (loss)............................... (53,040) 15,046 (39,363) Net loss.............................................. (43,220) (17,375) (32,254) Net loss applicable to ordinary partnership interests........................................... (65,417) (42,855)
7 9 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5) CONTRACTS IN PROCESS
JUNE 30, DECEMBER 31, 1998 1997 --------- ------------ (IN THOUSANDS) U.S. Government contracts: Amounts billed............................................ $5,587 $5,243 Unbilled contract receivables............................. 15,172 10,274 --------- ------------ 20,759 15,517 --------- ------------ Commercial contracts: Amounts billed............................................ 291,614 194,997 Unbilled contract receivables............................. 139,749 167,620 --------- ------------ 431,363 362,617 --------- ------------ $452,122 $378,134 ========= ============
Unbilled amounts include recoverable costs and accrued profit on progress completed which have not been billed. Such amounts are billed upon shipment of the product, achievement of contractual milestones, or completion of the contract and are reclassified to billed receivables. 6) LONG TERM DEBT
JUNE 30, DECEMBER 31, 1998 1997 ---------- ------------ (IN THOUSANDS) Term loan, 6.785% and 7.2% at June 30 and December 31, respectively............................................. $ 275,000 $275,000 Revolving credit facility, 6.785% and 7.2% at June 30 and December 31, respectively................................ 220,000 55,000 Note purchase facility..................................... 108,430 88,234 Export-Import credit facility.............................. 16,091 17,164 Other...................................................... 10,576 Non-recourse debt of Orion: Senior notes due 2007 (principal amount $445 million)............................................ 505,267 Senior discount notes due 2007 (principal amount $484 million)............................................ 388,402 ---------- -------- Total debt................................................. 1,523,766 435,398 Less, current maturities................................... 5,500 2,146 ---------- -------- $1,518,266 $433,252 ========== ========
In connection with the Orion acquisition, Loral did not assume Orion's senior notes and senior discount notes. Such debt remains outstanding and is non-recourse to Loral. The carrying value of the Orion senior notes and senior discount notes has been increased to reflect a fair value adjustment, of $148.6 million based on quoted market prices at March 31, 1998. The Orion senior notes are due in 2007, bear interest of 11.25% and pay interest semi-annually on January 15 and July 15 of each year. The Orion senior discount notes are due in 2007, bear interest of 12.5% and pay interest semi-annually on January 15 and July 15 commencing on July 15, 2002. On April 17, 1998, Orion made an offer to purchase its senior notes and senior discount notes. Substantially all of Orion's senior notes and senior discount notes remained outstanding following the expiration of the offer. The offer by Orion to repurchase such notes was made pursuant to the applicable indentures as a result of the change in control of Orion in connection with its acquisition by Loral. 8 10 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7) STOCKHOLDER'S EQUITY On June 29, 1998, Loral sold 23 million shares of its common stock for $27.00 per share. The net proceeds were $602.6 million, of which Loral used $175 million, net, to fund the Globalstar Purchase (see Note 10) and Loral intends to use the remainder for general corporate purposes, including investment in its existing core businesses, to pursue emerging satellite service opportunities worldwide and for possible acquisitions. 8) EARNINGS PER SHARE Basic earnings per share is computed based on the weighted average number of shares of common stock and the Series A Preferred Stock outstanding. Diluted earnings per share excludes the assumed conversion of the Series C Preferred Stock and stock options as the effect would have been antidilutive. The following table sets forth the computation of basic and diluted earnings per share:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (In thousands, except per share data) Numerator: Net loss.................................. $(58,973) $(10,296) $(74,416) $(10,702) Preferred stock dividends and accretion... (11,607) (2,947) (23,213) (2,947) -------- -------- -------- -------- Numerator for basic and diluted earnings per share -- net loss applicable to common stockholders.................... $(70,580) $(13,243) $(97,629) $(13,649) ======== ======== ======== ======== Denominator: Weighted average shares: Common stock........................... 219,872 192,289 211,656 191,691 Series A Preferred Stock............... 45,897 45,897 45,897 45,897 -------- -------- -------- -------- Denominator for basic earnings per share.................................. 265,769 238,186 257,553 237,588 Effect of dilutive securities: Series C Preferred Stock............... * * * * Employee stock options................. * * * * -------- -------- -------- -------- Denominator for diluted earnings per share.................................. 265,769 238,186 257,553 237,588 ======== ======== ======== ======== Basic earnings per share.................... $ (0.27) $ (0.06) $ (0.38) $ (0.06) ======== ======== ======== ======== Diluted earnings per share.................. $ (0.27) $ (0.06) $ (0.38) $ (0.06) ======== ======== ======== ========
- --------------- * Effect is antidilutive. 9) CONTINGENCIES In 1997, two in-orbit satellites built by SS/L experienced some solar array circuit failures. One of the customers has asserted that, in light of the failures and uncertainty as to future failure, it has not accepted the satellite. The Company believes that the customer was contractually required to accept the satellite at completion of in-orbit testing and that risk of loss has passed to the customer. In addition, due to a delay caused by the replacement on a satellite under construction of solar arrays similar to those that 9 11 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) have experienced failures, another customer has requested that SS/L structure an arrangement whereby the satellite would be sold to another customer. Management believes that these matters will not have a material adverse effect on the financial position or results of operations of the Company. The Company is aware 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. While the grand jury investigation appears to be in its preliminary stages, and SS/L is not in a position to predict its direction or outcome, if SS/L were to be indicted and convicted of a criminal violation of the Arms Export Control Act, it would be subject to a fine of $1 million per violation and could be debarred from certain export privileges and, possibly, from participation in government contracts. Since many of SS/L's satellites are built for foreign customers and/or launched on foreign rockets, such a debarment would have a material adverse effect on SS/L's business, which is important to the Company. Indictment for such violations would subject SS/L to discretionary debarment from further export licenses. Whether or not SS/L is indicted or convicted, SS/L will remain 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 the party'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, especially in view of the early stage of the proceedings, there can be no assurance as to those conclusions. On May 21, 1998, the House of Representatives passed a bill which, if passed by the Senate and enacted into law, would prohibit exports of satellites of U.S. origin to the People's Republic of China, whether or not an export license had theretofore been obtained. The United States Senate has not acted on this bill. If enacted into law, these provisions would prohibit further launches of U.S.-made satellites, including those manufactured by SS/L, on the Long March rocket. SS/L is under contract to build one satellite which is to be launched on a Long March rocket, for which SS/L currently holds an export license. As of June 30, 1998, SS/L has expended $65.0 million on the satellite, of which $49.0 million has been used to acquire common parts that could be applied to other satellite programs if this program is canceled. In addition, SS/L has expended $52.5 million in connection with the launcher. If the House bill or similar legislation is enacted, or if SS/L's export license is revoked administratively, the satellite's buyers may be entitled to terminate this contract for cause and require SS/L to refund approximately $119 million as of June 30, 1998. In such an event, SS/L would attempt to resell the satellite and launcher to other parties and/or use some or all of the parts on other programs. Such resales or reuse would likely result in a loss to SS/L, which could be substantial, and the amount of which would be affected by a number of factors beyond the control of the Company, including the date on which the program is terminated and how long any embargo on Chinese launchers would last, as well as market conditions for satellites and launchers. Loss of Long March availability would disable all U.S. satellite manufacturers, including SS/L, from competing for satellite contract awards from customers who, for political or economic reasons, desire Long March launches and would benefit foreign satellite manufacturers at the expense of the Company and other domestic manufacturers. 10 12 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Several Congressional committees have held hearings or announced plans to hold hearings on U.S. satellite export policy toward China, alleged influence of campaign contributions (including contributions made by Loral's Chairman and CEO) on the Clinton Administration's export policy toward China and related matters. The Company cannot predict what, if any, legislative initiatives will result from these hearings, although they could result in passage of the House bill described above or other legislation that could adversely affect the Company's business. 10) SUBSEQUENT EVENT PURCHASE OF GLOBALSTAR PARTNERSHIP INTERESTS On July 6, 1998, Loral, the managing general partner of Globalstar, purchased 4.2 million Globalstar ordinary partnership interests (corresponding to 16.8 million shares of GTL common stock) from certain founding service provider partners of Globalstar for $420 million in cash (the "Globalstar Purchase"). The founding service provider partners participating in the transaction have deposited one half of their proceeds ($210 million) into an escrow account to be used for the purchase of Globalstar gateways and user terminals. Loral used $175 million of the proceeds from its equity offering, see Note 7, to finance the Globalstar Purchase and the remaining balance was provided through the concurrent sale by Loral of 8.4 million shares of GTL common stock owned by Loral to persons or entities advised by or associated with Soros Fund Management L.L.C. ("Soros") for $245 million in cash. After giving effect to these transactions, Loral's fully diluted ownership in Globalstar increased from approximately 38% to 42% and Soros owns GTL shares equating to approximately 4% of Globalstar. Soros acquired from Loral, in lieu of Globalstar limited partnership interests, shares of GTL common stock, which are restricted for U.S. securities law purposes, and for which GTL has agreed to file a shelf registration statement and have such registration statement declared effective within one year. Soros paid Loral a premium of $4.1667 per share of GTL common stock over the price paid by Loral in the Globalstar Purchase, which represents a pre-tax gain of approximately $35 million. 11 13 LORAL SPACE & COMMUNICATIONS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, from time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, but are not limited to, various filings made by the Company with the Securities and Exchange Commission, press releases or oral statements made by or with the approval of an authorized executive officer of the Company. Actual results could differ materially from those projected or suggested in any forward-looking statements as a result of a wide variety of factors and conditions. See the section of Loral's registration statement on Form S-3 (File No. 333-51133), entitled "Risk Factors." In addition, with respect to Loral's interest in Globalstar and Globalstar Telecommunications Limited ("GTL"), see the section of GTL's and Globalstar's registration statement on Form S-4 (File No. 333-57749) entitled "Risk Factors". With regard to forward-looking statements concerning Orion see the section of Orion's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, entitled "Forward Looking Statements". Except for the historical information contained herein, the matters discussed in the following Management's Discussion and Analysis of Results of Operations and Financial Condition of the Company, Globalstar, SatMex and Orion, are forward-looking statements that involve risks and uncertainties, many of which may be beyond the companies' control. The actual results that the companies achieve may differ materially from any forward-looking projections due to such risks and uncertainties. Loral Space & Communications Ltd. and subsidiaries (the "Company" or "Loral") is one of the world's leading satellite companies, with substantial activities in satellite manufacturing and satellite-based communications services. Space Systems/Loral, Inc. ("SS/L") is a leading designer and manufacturer of space systems. Loral Skynet ("Skynet"), acquired March 14, 1997, is a leading provider of satellite communications services in the United States. Skynet owns and operates the Telstar satellite network and is expanding its business internationally. Loral Orion, Inc. ("Orion"), acquired on March 20, 1998, provides satellite-based communications services, focused primarily on private communications network services, Internet services and video distribution and other satellite transmission services. On November 17, 1997, a joint venture including Loral and another partner acquired 75% of Satellites Mexicanos, S.A. de C.V. ("SatMex"), a satellite services provider to Mexico and South America. Loral also manages and is the largest equity owner of Globalstar, L.P. ("Globalstar"), a global, mobile satellite telephony system scheduled to begin commercial service in the second quarter of 1999. Loral is pursuing additional satellite-based communications service opportunities including CyberStar, a proposed worldwide high-speed broadband data services system which will initiate service using leased Ku-band transponder capacity on Skynet's Telstar 5 satellite. RESULTS OF OPERATIONS In 1997 and 1998, Loral accelerated its transformation from a company with extensive equity investments to a major satellite manufacturer and provider of satellite services by making a number of acquisitions that significantly affected its results of operations. In February 1997, Loral agreed to acquire the remaining 49% of the common stock of SS/L held by four international aerospace and communications companies (the "Alliance Partners") for $374 million paid in cash and Loral securities. On March 14, 1997, Loral acquired Skynet for $462.1 million in cash. The acquisition of Skynet and the remaining equity interest in SS/L have been accounted for as purchases. Loral's consolidated financial statements for the three and six months ended June 30, 1997, reflect the results of operations of SS/L from January 1, 1997, the elimination of the minority interest of the SS/L equity not owned by Loral during the period and the results of operations of Skynet from March 14, 1997. Prior to January 1, 1997, SS/L was accounted for using the equity method of accounting. In connection with the privatization by the Mexican Government of its fixed satellite services business, Loral and Telefonica Autrey, S.A. de C.V. ("Telefonica Autrey") formed a joint venture, Firmamento 12 14 Mexicano, S. de R.L. de C.V. ("Holdings"). On November 17, 1997, Holdings acquired 75% of the outstanding capital stock of SatMex for $646.8 million. The purchase price was financed by a Loral equity contribution of $94.6 million, a Telefonica Autrey equity contribution of $50.9 million and debt issued by a subsidiary of Holdings. As part of the acquisition, Servicios Corporativos Sateliates, S.A. de C.V., a wholly owned subsidiary of Holdings issued a $125.1 million seven year government obligation ("Government Obligation") bearing interest at 6.03% to the Mexican Government in consideration for the assumption by SatMex of the debt incurred by Holdings in connection with the acquisition. The debt of SatMex and Holdings is non-recourse to Loral and Telefonica Autrey. However, Loral and Telefonica Autrey have agreed to maintain assets in a collateral trust in an amount equal to the value of the Government Obligation through December 31, 2000 and, thereafter, in an amount equal to 1.2 times the value of the Government Obligation until maturity. Loral has a 65% economic interest in Holdings and a 49% indirect economic interest in SatMex. Loral accounts for SatMex using the equity method from November 17, 1997. On March 20, 1998, Loral acquired all of the outstanding stock of Orion in exchange for Loral common stock. Loral issued 17.9 million shares of its common stock and assumed existing Orion options and warrants to purchase 1.9 million shares of Loral common stock representing an aggregate purchase price of $469 million. Loral's consolidated statement of operations reflects the results of Orion commencing April 1, 1998. COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND THE THREE MONTHS ENDED JUNE 30, 1997. Revenues for the quarter ended June 30, 1998 totaled $379.8 million, before elimination of intercompany sales of $131.6 million, compared to revenues of $380.3 million and elimination of intercompany sales of $89.1 million for the quarter ended June 30, 1997. SS/L's 1998 revenues were $330.1 million before intercompany eliminations of $130.5 million compared to revenues of $358.5 million and intercompany eliminations of $89.1 million in 1997. The decrease in SS/L sales is primarily due to the stoppage of work on three Asian satellites in the fourth quarter of 1997. The increase in the intercompany eliminations reflects the classification of the construction of the Orion 2 satellite by SS/L as intercompany sales subsequent to the acquisition of Orion offset by reduced intercompany sales to Skynet. Skynet's revenues for the quarter ended June 30, 1998 were $29.5 million compared to $21.8 million for the quarter ended June 30, 1997, reflecting the effect of Skynet's Telstar 5 satellite which was placed in service in July 1997. Orion's revenues for the quarter ended June 30, 1998 were $20.2 million. Earnings before interest, taxes, depreciation and amortization ("EBITDA")(1) for the three months ended June 30, 1998 and 1997 were as follows (in millions):
1998 1997 ------ ------ SS/L........................................................ $ 18.1 $ 17.4 Skynet -- from March 14, 1997............................... 17.5 15.9 Orion -- from April 1, 1998................................. 0.8 Corporate expenses and intercompany eliminations............ (16.2) (12.5) ------ ------ EBITDA before CyberStar and Globalstar development costs.... 20.2 20.8 SatMex(2)................................................... 10.1 ------ ------ Adjusted EBITDA before CyberStar and Globalstar development costs(3).................................................. $ 30.3 $ 20.8 ====== ======
- --------------- (1) EBITDA 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 as presented may be calculated differently and, therefore, may not be comparable to similarly titled measures reported by other companies. (2) Represents Loral's proportionate share of SatMex's EBITDA. (3) Development costs for the three months ended June 30, 1998 and 1997, for CyberStar were $8.1 million and $8.9 million, respectively and Loral's proportionate share of Globalstar's development costs were $11.4 million and $8.2 million, respectively. EBITDA before development costs was $20.2 million for 1998 compared to $20.8 million for 1997. CyberStar development costs were $8.1 million in 1998 compared to $8.9 million in 1997. Depreciation and amortization was $38.4 million and $14.5 million for 1998 and 1997, respectively. The increase in depreciation 13 15 and amortization in 1998 primarily results from the inclusion of Orion's depreciation of fixed assets and amortization of cost in excess of net assets acquired, of $16.1 million, for a full quarter and the inclusion of depreciation of Skynet's Telstar 5 satellite which was placed in service on July 1, 1997. As a result of the above, the operating loss was $26.3 million for 1998 compared to $2.5 million for 1997. Interest income for the quarter ended June 30, 1998, of $16.5 million represents $14.8 million of interest earned on available cash during the period and interest on GTL's Convertible Preferred Equivalent Obligations ("GTL Convertible Preferreds") held by Loral, and $1.7 million of interest earned on orbital incentive payments. Interest income for the quarter ended June 30, 1997, of $11.1 million represents $9.8 million of interest earned on the investment of available cash during the period and interest on the GTL Convertible Preferreds held by Loral and $1.3 million of interest earned on orbital incentive payments. Interest expense of $21.6 million, net of capitalized interest of $10.7 million, for the quarter ended June 30, 1998 reflects interest on borrowings under Loral's credit agreement and interest on Orion's outstanding debt. Interest expense of $5.4 million, net of capitalized interest of $6.6 million, for the quarter ended June 30, 1997, reflects the assumption of SS/L's debt and interest on Loral's outstanding Convertible Preferred Equivalent Obligations ("CPEOs"). On June 5, 1997, the CPEOs were exchanged for Loral 6% Series C Convertible Redeemable Preferred Stock ("Series C Preferred Stock"). The Company's effective income tax rate was a 31.0% benefit for 1998 and a 116.5% provision for 1997. The change is caused by the impact of the Company's foreign source net income which is not subject to Federal taxation on the Company's pretax income (loss), state and local income taxes and the non-deductible amortization of cost in excess of net assets acquired. The minority interest benefit in 1998 reflects the reduction of CyberStar's loss attributed to CyberStar's other investor. The minority interest expense in 1997 reflects the reduction of SS/L's income attributed to the Alliance Partners. The equity in net loss of affiliates was $41.0 million in 1998 compared to $8.1 million for 1997. Loral's share of Globalstar's losses was $16.9 million in 1998 compared to $8.1 million in 1997 reflecting Globalstar's increased development costs as well as an increased ownership percentage by Loral. Also included in the equity in net loss of affiliates for 1998 is Loral's share of SatMex's loss of $4.9 million, Loral's share of Skybridge's loss of $15.9 million and Loral's portion of losses from other affiliates of $3.3 million. Preferred dividends of $11.6 million in the three months ended June 30, 1998 relate to the Series C Preferred Stock. Preferred dividends of $2.9 million in the three months ended June 30, 1997, relate to the Series C Preferred Stock which was issued in June 1997. As a result of the above, net loss applicable to common stockholders for 1998 was $70.6 million or $0.27 per diluted share, compared to $13.2 million or $0.06 per diluted share, for 1997. Diluted weighted average shares were 265.8 million for 1998 and 238.2 million for 1997. COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997. Revenues for the six months ended June 30, 1998 totaled $716.8 million, before elimination of intercompany sales of $173.3 million, compared to revenues of $722.2 million and elimination of intercompany sales of $90.7 million for the six months ended June 30, 1997. SS/L's 1998 revenues were $638.5 million before intercompany eliminations of $171.3 million compared to revenues of $696.8 million and intercompany eliminations of $90.7 million in 1997. The decrease in SS/L sales is primarily due to the stoppage of work on three Asian satellites in the fourth quarter of 1997. The increase in the intercompany eliminations reflects the classification of the construction of the Orion 2 satellite by SS/L as intercompany sales subsequent to the acquisition of Orion, offset by a reduction in intercompany sales to Skynet. Skynet's revenues for the six months ended June 30, 1998 were $58.0 million compared to $25.4 million for the period March 14, 1997 through June 30, 1997, reflecting the inclusion of a full six months of Skynet's revenues in 1998 and the effect of the Telstar 5 satellite which was placed in service in July 1997. Orion's revenues from the date of acquisition, April 1, 1998, were $20.2 million. 14 16 Earnings before interest, taxes, depreciation and amortization ("EBITDA")(1) for the six months ended June 30, 1998 and 1997 were as follows (in millions):
1998 1997 ------ ------ SS/L........................................................ $ 37.3 $ 39.9 Skynet -- from March 14, 1997............................... 33.0 17.6 Orion -- from April 1, 1998................................. 0.8 Corporate expenses and intercompany eliminations............ (25.1) (15.1) ------ ------ EBITDA before CyberStar and Globalstar development costs.... 46.0 42.4 SatMex(2)................................................... 19.6 ------ ------ Adjusted EBITDA before CyberStar and Globalstar development costs(3).................................................. $ 65.6 $ 42.4 ====== ======
- --------------- (1) EBITDA 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 as presented may be calculated differently and, therefore, may not be comparable to similarly titled measures reported by other companies. (2) Represents Loral's proportionate share of SatMex's EBITDA. (3) Development costs for the six months ended June 30, 1998 and 1997, for CyberStar were $15.4 million and $11.5 million, respectively and Loral's proportionate share of Globalstar's development costs were $21.4 million and $14.5 million, respectively. EBITDA before development costs was $46.0 million for 1998 compared to $42.4 million for 1997. CyberStar development costs were $15.4 million in 1998 compared to $11.5 million in 1997 reflecting increased spending levels in 1998 for product development, marketing expenditures and increased headcount. Depreciation and amortization was $55.9 million and $24.1 million for 1998 and 1997, respectively. The increase in depreciation and amortization in 1998 primarily results from the inclusion of Orion's depreciation of fixed assets and amortization of cost in excess of net assets acquired of $16.1 million for the six month period and from the inclusion of depreciation and amortization related to Skynet for a full six months including the depreciation of Skynet's Telstar 5 satellite which was placed in service on July 1, 1997. As a result of the above, operating loss was $25.3 million for 1998 compared to operating income of $6.8 million for 1997. Interest income for the six months ended June 30, 1998, of $25.2 million represents $21.4 million of interest earned on available cash during the period and interest on the GTL Convertible Preferreds held by Loral, and $3.7 million of interest earned on orbital incentive payments. Interest income for the six months ended June 30, 1997, of $31.2 million represents $28.3 million of interest earned on the investment of available cash during the period and interest on the GTL Convertible Preferreds held by Loral and $2.9 million of interest earned on orbital incentive payments. Interest expense of $23.3 million, net of capitalized interest of $20.2 million, for the six months ended June 30, 1998 reflects interest on borrowings under Loral's credit agreement and interest on Orion's outstanding debt. Interest expense of $15.4 million, net of capitalized interest of $9.1 million, for the six months ended June 30, 1997, reflects the assumption of SS/L's debt and interest on Loral's outstanding CPEOs. On June 5, 1997, the CPEOs were exchanged for Series C Preferred Stock. The Company's effective income tax rate was a 28.5% benefit for 1998 and a 57.4% provision for 1997. The change is caused by the impact of the Company's foreign source net income which is not subject to Federal taxation on the Company's pretax income (loss), state and local income taxes and the non-deductible amortization of cost in excess of net assets acquired. The minority interest benefit in 1998 reflects the reduction of CyberStar's loss attributed to CyberStar's other investor. The minority interest expense in 1997 reflects the reduction of SS/L's income attributed to the Alliance Partners. The equity in net loss of affiliates was $61.3 million in 1998 compared to $15.3 million for 1997. Loral's share of Globalstar's losses was $28.0 million in 1998 compared to $15.3 million in 1997 reflecting Globalstar's increased development costs as well as an increased ownership percentage by Loral. Also included in the 15 17 equity in net loss of affiliates for 1998 is Loral's share of SatMex's loss of $11.8 million, Loral's share of Skybridge's loss of $15.9 million and Loral's portion of losses from other affiliates of $5.6 million. Preferred distributions of $23.2 million in the six months ended June 30, 1998 relate to the Series C Preferred Stock. Preferred distributions of $2.9 million for the six months ended June 30, 1997, relate to the Series C Preferred Stock which was issued in June 1997. As a result of the above, net loss applicable to common stockholders for 1998 was $97.6 million or $0.38 per diluted share, compared to $13.6 million or $0.06 per diluted share, for 1997. Diluted weighted average shares were 257.6 million for 1998 and 237.6 million for 1997. SUMMARY RESULTS OF OPERATIONS OF AFFILIATES GLOBALSTAR Globalstar is a development stage partnership and has not commenced commercial service operations. The net loss applicable to ordinary partnership interests for the six months ended June 30, 1998 was $65.4 million as compared to $42.9 million for the six months ended June 30, 1997. The net loss applicable to ordinary partnership interests increased primarily as a result of increased activity in the development of Globalstar user terminals, increased in-house engineering and marketing efforts and the net effect of the RPPI conversion during the quarter ended June 30, 1998. Globalstar is expending significant funds for the construction, testing and deployment of the Globalstar System and expects such losses to continue through commencement of revenue generating service operations. SATMEX For the six month ended June 30, 1998, SatMex had revenues, EBITDA, operating income and a net loss of $51.2 million, $39.9 million, $15.1 million and $17.4 million, respectively. The net loss is primarily attributed to interest expense of $34.6 million on debt issued to finance the acquisition, which includes a charge for $10.5 million of fees associated with debt refinancing. SatMex expects such losses to continue through 1999 until funds from operations are available to reduce outstanding debt. 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, through incurrence of debt or the issuance of additional equity. On June 29, 1998, Loral sold 23 million shares of its common stock for $27.00 per share. The net proceeds were $602.6 million, of which Loral used $175 million, net, to fund the Globalstar Purchase (see below) and the remainder of which Loral intends to use for general corporate purposes, including investing in existing core businesses, to pursue emerging satellite service opportunities worldwide and for possible acquisitions. On July 6, 1998, Loral, the managing general partner of Globalstar, purchased 4.2 million Globalstar ordinary partnership interests (corresponding to 16.8 million shares of GTL common stock) from certain founding service provider partners of Globalstar for $420 million in cash (the "Globalstar Purchase"). The founding service provider partners participating in the transaction have deposited one half of their proceeds ($210 million) into an escrow account to be used for the purchase of Globalstar gateways and user terminals. Loral used $175 million of the net proceeds from its equity offering to finance a portion of the Globalstar Purchase and the remaining balance was provided through the concurrent sale by Loral of 8.4 million shares of GTL common stock owned by Loral to persons or entities advised by or associated with Soros Fund Management L.L.C. ("Soros") for $245 million in cash. After giving effect to these transactions, Loral's fully diluted ownership in Globalstar increased from approximately 38% to 42% and Soros owns GTL shares equating to approximately 4% of Globalstar. Soros acquired from Loral, in lieu of Globalstar limited partnership interests, shares of GTL common stock, which are restricted for U.S. securities law purposes, and 16 18 for which GTL has agreed to file a shelf registration statement and have such registration statement declared effective within one year. Soros paid Loral a premium of $4.1667 per share of GTL common stock over the price paid by Loral in the Globalstar Purchase, which represents a pre-tax gain of approximately $35 million. At June 30, 1998, Loral had $876.5 million of cash and cash equivalents. Loral intends to utilize its existing capital base and access to the capital markets to construct and operate additional satellites, make additional investments in Globalstar and Globalstar service provider opportunities and invest in current and additional satellite communications service opportunities. At June 30, 1998, Orion had $178.6 million of cash and restricted cash, to be used for the satellites under construction and interest payments, and debt of $904.2 million. Orion's outstanding debt is non-recourse to Loral. On November 14, 1997, the Company's wholly owned subsidiary Loral SpaceCom Corporation, entered into a $850 million credit facility with a group of banks. The facility consists of a $500 million revolving credit facility, a $275 million term loan and a $75 million letter of credit facility. The facility replaced SS/L's existing credit facility. The facility is secured by the stock of Loral SpaceCom Corporation and SS/L and contains various covenants including an interest coverage ratio, debt to capitalization ratios and restrictions on cash transfers to its parent. At June 30, 1998, there was $619.5 million of borrowings outstanding under this agreement and other credit facilities. On April 17, 1998, Orion made an offer to purchase its senior notes and senior discount notes. Substantially all of Orion's senior notes and senior discount notes remained outstanding following the expiration of the offer. The offer by Orion to repurchase such notes was made pursuant to the applicable indentures as a result of the change in control of Orion in connection with its acquisition by Loral. Skynet: Skynet currently has two high-powered satellites operating in orbit. Loral intends to expand Skynet's business to become a worldwide satellite service provider through the construction of additional satellites and has four satellites under construction by SS/L. Orion: Orion currently has one satellite in orbit and two satellites under construction (Orion 2 and Orion 3). The cost of Orion 3 is fully funded. Loral intends to fund approximately $60 million of the construction cost of Orion 2. All other costs related to Orion 2 are fully funded. Globalstar: On February 14, 1998, Globalstar launched its first four satellites and on April 24, 1998 four additional satellites were launched. Globalstar expects to begin commercial service in the second quarter of 1999 following the launch of 36 additional satellites during 1998. The remaining 12 satellites, including eight in-orbit spares, will be launched in the first half of 1999. As of July 31, 1998, Globalstar's budgeted expenditures for the design, construction and deployment of the Globalstar System to commence commercial service, including working capital, cash interest on borrowings and operating expenses is approximately $2.8 billion. In addition to expenditures for operating costs, working capital and debt service, Globalstar anticipates additional expenditures on system software for the improvement of system functionality and the addition of new features beyond those planned for the commencement of commercial service. As of July 31, 1998, Globalstar had raised or receive commitments for approximately $2.9 billion. In addition, Globalstar has agreed to purchase from SS/L eight additional spare satellites at a cost estimated at $175 million. Further, in order to accelerate the deployment of gateways around the world Globalstar has agreed to finance approximately $80 million of the cost of up to 32 of the initial 38 gateways. In December 1997, Globalstar ordered 40,000 fixed access terminals for $84 million. Globalstar has also agreed to finance approximately $67 million of the cost of portable handsets. Globalstar expects to recoup the amounts financed following the acceptance by the service providers of the gateways, fixed access terminals and portable handsets. SS/L is the prime contractor for the design and construction of Globalstar's satellites. In connection therewith, SS/L and its subcontractors have committed $353 million of vendor financing to Globalstar, of which $121 million of such vendor financing is effectively borne by the subcontractors. 17 19 Commitments and Contingencies: In connection with the Merger between Loral Corporation and Lockheed Martin Corporation ("Lockheed Martin"), Lockheed Martin assumed approximately $206 million of the guarantee under the Globalstar credit agreement. The balance of $44 million of the guarantee was assumed by various Globalstar partners, including $11.7 million by SS/L. Loral has agreed to indemnify Lockheed Martin for its liability, if any, in excess of $150 million under its guarantee of the Globalstar credit agreement. Globalstar is currently financed without recourse to Loral other than the indemnification described above. In 1997, two in-orbit satellites built by SS/L experienced solar array circuit failures. One of the customers has asserted that, in light of the failures and uncertainty as to further failures, it has not accepted the satellite. Loral believes that the customer was contractually required to accept the satellite at completion of in-orbit testing and that risk of loss has passed to the customer. In addition, another customer has requested that SS/L structure an arrangement whereby a satellite under construction would be sold to another customer. Management believes that these matters will not have a material adverse effect on the financial condition or results of operations of Loral. The Company is aware 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. While the grand jury investigation appears to be in its preliminary stages, and SS/L is not in a position to predict its direction or outcome, if SS/L were to be indicted and convicted of a criminal violation of the Arms Export Control Act, it would be subject to a fine of $1 million per violation and could be debarred from certain export privileges and, possibly, from participation in government contracts. Since many of SS/L's satellites are built for foreign customers and/or launched on foreign rockets, such a debarment would have a material adverse effect on SS/L's business, which is important to the Company. Indictment for such violations would subject SS/L to discretionary debarment from further export licenses. Whether or not SS/L is indicted or convicted, SS/L will remain 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 the party'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, especially in view of the early stage of the proceedings, there can be no assurance as to those conclusions. On May 21, 1998, the House of Representatives passed a bill which, if passed by the Senate and enacted into law, would prohibit exports of satellites of U.S. origin to the People's Republic of China, whether or not an export license had theretofore been obtained. The United States Senate has not acted on this bill. If enacted into law, these provisions would prohibit further launches of U.S.-made satellites, including those manufactured by SS/L, on the Long March rocket. SS/L is under contract to build one satellite which is to be launched on a Long March rocket, for which SS/L currently holds an export license. As of June 30, 1998, SS/L has expended $65.0 million on the satellite, of which $49.0 million has been used to acquire common parts that could be applied to other satellite programs if this program is canceled. In addition, SS/L has expended $52.5 million in connection with the launcher. If the House bill or similar legislation is enacted, or if SS/L's export license is revoked administratively, the satellite's buyers may be entitled to terminate this contract for cause and require SS/L to refund approximately $119 million as of June 30, 1998. In such an event, SS/L would attempt to resell the satellite and launcher to other parties and/or use some or all of the parts on other programs. Such resales or reuse would likely result in a loss to SS/L, which could be substantial, and the amount of which would be affected by a number of factors beyond the control of the 18 20 Company, including the date on which the program is terminated and how long any embargo on Chinese launchers would last, as well as market conditions for satellites and launchers. Loss of Long March availability would disable all U.S. satellite manufacturers, including SS/L, from competing for satellite contract awards from customers who, for political or economic reasons, desire Long March launches and would benefit foreign satellite manufacturers at the expense of the Company and other domestic manufacturers. Several Congressional committees have held hearings or announced plans to hold hearings on U.S. satellite export policy toward China, alleged influence of campaign contributions (including contributions made by Loral's Chairman and CEO) on the Clinton Administration's export policy toward China and related matters. The Company cannot predict what, if any, legislative initiatives will result from these hearings, although they could result in passage of the House bill described above or other legislation that could adversely affect the Company's business. Cash Used and Provided. Cash used in operating activities for the six months ended June 30, 1998 was $67.4 million, primarily due to changes in satellite related assets and liabilities of $87.5 million due to the progress on commercial satellite contracts and increases in component inventory, including an increase in contracts in process and inventories of $91.9 million, a decrease in customer advances of $36.6 million offset by a decrease in launch vehicle deposits of $40.5 million. This was offset by funds generated by earnings before depreciation and amortization, taxes, minority interest and equity in net loss of affiliates of $32.5 million. Cash used in operating activities for 1997, was $115.7 million, primarily due to an increase in satellite contracts in process and component inventories of $61.8 million and a decrease in customer advances of $74.1 million, offset by funds generated from earnings before depreciation and amortization, taxes and equity in net loss of affiliates of $46.7 million. Cash used in investing activities for 1998 was $73.4 million primarily as a result of $304.3 million of capital expenditures, $22.2 million of investments in affiliates offset by a reduction in restricted cash of $199.3 million and $53.8 million of cash acquired in connection with the Orion acquisition. Cash used in investing activities for 1997 was $823.5 million primarily due to the purchase of Skynet and the SS/L equity interests, the purchase of equity interests in Globalstar and capital expenditures of $129.5 million primarily for the construction of Skynet's satellites by SS/L and for facility expansion and renovation at SS/L. Net cash provided by financing activities for 1998 was $790.7 million, primarily from the net proceeds of the equity offering of $602.6 million and borrowing under existing credit facilities. Cash provided by financing activities for 1997 was $77.3 million, primarily as a result of borrowings under credit facilities. OTHER MATTERS Year 2000 Issue The Company is evaluating the potential effect on its information processing systems to determine what actions will be necessary or appropriate in connection with the "Year 2000 Issue." The Year 2000 Issue is the result of computer programs which were written using two digits rather than four to signify a year (i.e., the year 1997 is denoted "97" and not "1997"). Computer programs written using only two digits may recognize the year 2000 as the year 1900. This could result in a system failure or miscalculations causing disruption of operations. It is not known at this time what modifications, if any, will be required. All costs associated with any modification will be expensed as incurred. In addition, the Company has requested, and will continue to seek information from third-party entities on which it relies, certifying that their computer systems will not negatively affect Loral's operations. No assurance can be given that there will not be some unforeseen issue, in particular, in connection with third parties' systems, that may materially affect Loral's operations. Accounting Pronouncements Effective January 1, 1998, Loral adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 established new rules for the reporting and display of comprehensive income and its components. SFAS 130 requires unrealized gains or losses on the Company's foreign currency translation adjustments to be included in other comprehensive income. During the six months ended June 30, 1998 and 1997, comprehensive loss was $97.3 million and $13.6 million, respectively. 19 21 In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS 131"), and in February 1998, issued Statement No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 131 establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. SFAS 132 expands and standardizes the disclosure requirements for pensions and other postretirement benefits. The Company is required to adopt SFAS 131 and SFAS 132 in 1998, and the Company's consolidated financial statements will reflect the appropriate disclosures. 20 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as part of this report: Exhibit 12 -- Computation of Ratio of Earnings to Fixed Charges. Exhibit 27 -- Financial Data Schedule.
(b) Reports on Form 8-K
DATE OF REPORT DESCRIPTION -------------- ----------- June 9, 1998 Item 5 -- Other Events June 18, 1998 Amendment No. 2 to Form 8-K dated March 20, 1998 to amend Item 7, Pro Forma Financial Information June 29, 1998 Item 5 -- Other Events, Loral issued 23 million shares of its Common Stock on June 29, 1998.
21 EX-12 2 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 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 Date: August 13, 1998 MICHAEL P. DEBLASIO -------------------------------------- Michael P. DeBlasio First Senior Vice President and Chief Financial Officer (Principal Financial Officer) and Registrant's Authorized Officer 22 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF LORAL SPACE & COMMUNICATIONS LTD. FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JUN-30-1998 876,530 0 452,122 0 129,230 1,557,642 1,669,955 137,032 5,065,979 341,105 0 0 734,598 2,430 2,225,563 5,065,979 543,473 568,663 568,757 568,757 0 0 23,277 (23,371) 6,651 (74,416) 0 0 0 (97,629) (0.38) (0.38) Note: The adoption of SFAS 128 had no effect on reported earnings per share for the quarter ended June 30, 1998. NOTE: THE CAPTION "DEPRECIATION" LISTED ABOVE REPRESENTS ACCUMULATED DEPRECIATION.
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