10-Q 1 y60584e10-q.txt LORAL SPACE & COMMUNICATIONS LTD. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 COMMISSION FILE NUMBER 1-14180 LORAL SPACE & COMMUNICATIONS LTD. C/O LORAL SPACECOM CORPORATION 600 THIRD AVENUE NEW YORK, NEW YORK 10016 TELEPHONE: (212) 697-1105 JURISDICTION OF INCORPORATION: BERMUDA IRS IDENTIFICATION NUMBER: 13-3867424 The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. As of April 30, 2002, there were 352,952,916 shares of Loral Space & Communications Ltd. common stock outstanding. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PART 1. FINANCIAL INFORMATION LORAL SPACE & COMMUNICATIONS LTD. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 2002 2001 ----------- ------------ (UNAUDITED) (NOTE) ASSETS Current assets: Cash and cash equivalents................................. $ 108,137 $ 159,949 Accounts receivable, net.................................. 42,375 39,299 Contracts-in-process...................................... 167,853 178,599 Inventories............................................... 103,517 98,179 Other current assets...................................... 87,196 93,667 ----------- ----------- Total current assets.................................... 509,078 569,693 Property, plant and equipment, net.......................... 1,982,420 1,977,356 Cost in excess of net assets acquired, net.................. 891,719 Long-term receivables....................................... 194,722 190,306 Investments in and advances to affiliates................... 191,091 188,343 Deposits.................................................... 161,290 155,490 Deferred tax assets......................................... 305,483 297,528 Other assets................................................ 112,268 119,494 ----------- ----------- $ 3,456,352 $ 4,389,929 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................... $ 166,145 $ 136,616 Accounts payable.......................................... 157,199 144,841 Accrued employment costs.................................. 43,146 39,232 Customer advances......................................... 177,105 148,990 Accrued interest and preferred dividends.................. 27,295 31,170 Other current liabilities................................. 45,294 46,184 Income taxes payable...................................... 35,692 34,516 ----------- ----------- Total current liabilities............................... 651,876 581,549 Pension and other postretirement liabilities................ 57,803 55,590 Long-term liabilities....................................... 151,409 156,716 Long-term debt.............................................. 2,126,276 2,226,525 Minority interest........................................... 17,188 18,681 Commitments and contingencies (Notes 6, 8 and 13) Shareholders' equity: 6% Series C convertible redeemable preferred stock ($491,994 redemption value), $.01 par value............. 485,371 485,371 6% Series D convertible redeemable preferred stock ($305,539 redemption value), $.01 par value............. 296,529 296,529 Common stock, $.01 par value.............................. 3,376 3,368 Paid-in capital........................................... 2,774,812 2,771,964 Treasury stock............................................ (3,360) (3,360) Unearned compensation..................................... (4) (81) Retained deficit.......................................... (3,132,033) (2,223,710) Accumulated other comprehensive income.................... 27,109 20,787 ----------- ----------- Total shareholders' equity.................................. 451,800 1,350,868 ----------- ----------- $ 3,456,352 $ 4,389,929 =========== ===========
--------------- Note: The December 31, 2001 balance sheet has been derived from the audited consolidated financial statements at that date. See notes to condensed consolidated financial statements. 2 LORAL SPACE & COMMUNICATIONS LTD. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------- 2002 2001 --------- -------- Revenues from satellite sales............................... $ 198,471 $147,822 Revenues from satellite services............................ 109,705 113,313 --------- -------- Total revenues............................................ 308,176 261,135 Cost of satellite sales..................................... 186,428 127,055 Cost of satellite services.................................. 66,296 75,505 Selling, general and administrative expenses................ 40,747 54,651 --------- -------- Operating income............................................ 14,705 3,924 Interest and investment income.............................. 5,409 7,669 Interest expense............................................ (18,570) (49,693) --------- -------- Income (loss) before income taxes, equity in net loss of affiliates, minority interest and cumulative effect of change in accounting principle............................ 1,544 (38,100) Income tax (expense) benefit................................ (5,528) 1,925 --------- -------- Loss before equity in net loss of affiliates, minority interest and cumulative effect of change in accounting principle................................................. (3,984) (36,175) Equity in net loss of affiliates, net of taxes.............. (15,950) (22,354) Minority interest, net of taxes............................. 74 1,261 --------- -------- Loss before cumulative effect of change in accounting principle................................................. (19,860) (57,268) Cumulative effect of change in accounting principle, net of taxes (Notes 3 and 10).................................... (876,500) (1,741) --------- -------- Net loss.................................................... (896,360) (59,009) Preferred dividends......................................... (11,963) (16,123) --------- -------- Net loss applicable to common shareholders.................. $(908,323) $(75,132) ========= ======== Basic and diluted loss per share: Before cumulative effect of change in accounting principle................................................. $ (0.09) $ (0.25) Cumulative effect of change in accounting principle......... (2.60) -- --------- -------- Loss per share.............................................. $ (2.69) $ (0.25) ========= ======== Weighted average shares outstanding: Basic and diluted......................................... 337,052 298,656 ========= ========
See notes to condensed consolidated financial statements. 3 LORAL SPACE & COMMUNICATIONS LTD. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, --------------------- 2002 2001 --------- --------- Operating activities: Net loss.................................................. $(896,360) $ (59,009) Non-cash items: Equity in net loss of affiliates, net of taxes......... 15,950 22,354 Minority interest, net of taxes........................ (74) (1,261) Cumulative effect of change in accounting principle, net of taxes.......................................... 876,500 1,741 Deferred taxes......................................... 3,510 (2,239) Non-cash interest (income) expense..................... (141) 9,903 Depreciation and amortization.......................... 47,066 54,287 Change in operating assets and liabilities, net of acquisitions: Accounts receivable.................................... (3,076) 2,228 Contracts-in-process................................... 11,649 (16,218) Inventories............................................ (5,338) (15,213) Long-term receivables.................................. (4,416) (7,192) Deposits............................................... (5,800) 14,300 Other current assets and other assets.................. 11,526 (7,496) Accounts payable....................................... 12,358 (22,520) Accrued expenses and other current liabilities......... (851) (21,076) Customer advances...................................... 28,115 (12,628) Income taxes payable................................... 1,176 192 Pension and other postretirement liabilities........... 2,213 1,881 Long-term liabilities.................................. (5,307) 3,252 Other.................................................. (177) 677 --------- --------- Net cash provided by (used in) operating activities......... 88,523 (54,037) --------- --------- Investing activities: Investments in and advances to affiliates................. (9,614) (16,216) Capital expenditures...................................... (51,035) (67,144) --------- --------- Net cash used in investing activities....................... (60,649) (83,360) --------- --------- Financing activities: Borrowings under revolving credit facility................ 2,000 50,000 Repayments under term loans............................... (16,250) (28,000) Repayments under revolving credit facility................ (56,000) (50,000) Repayments of other long-term obligations................. (330) (549) Proceeds from stock issuances............................. 2,857 4,870 Preferred dividends....................................... (11,963) (16,123) --------- --------- Net cash used in financing activities....................... (79,686) (39,802) --------- --------- Decrease in cash and cash equivalents....................... (51,812) (177,199) Cash and cash equivalents -- beginning of period............ 159,949 394,045 --------- --------- Cash and cash equivalents -- end of period.................. $ 108,137 $ 216,846 ========= ========= Non-cash activities: Unrealized gain (loss) on available-for-sale securities... $ 6,494 $ (10,111) ========= ========= Unrealized net gain on derivatives, net of taxes.......... $ 72 $ 2,476 ========= =========
See notes to condensed consolidated financial statements. 4 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND PRINCIPAL BUSINESS Loral Space & Communications Ltd. together with its subsidiaries ("Loral" or the "Company") is one of the world's leading satellite communications companies with substantial activities in satellite-based communications services and satellite manufacturing. Loral is organized into three operating businesses (see Note 9): Fixed Satellite Services ("FSS"): The Company leases transponder capacity to customers for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television ("DTH") and provides telemetry, tracking and control services ("TT&C") and network services to customers. The Company operates its business through wholly-owned subsidiaries such as Loral Skynet, Loral Orion, Inc. ("Loral Orion") and Loral Skynet do Brasil Ltda. ("Skynet do Brasil") and affiliates such as Satelites Mexicanos, S.A. de C.V. ("Satmex"), Europe*Star Limited ("Europe*Star") and XTAR, L.L.C. ("XTAR"). Satellite Manufacturing and Technology: The Company designs and manufactures satellites and space systems and develops satellite technology for a broad variety of customers and applications through Space Systems/Loral, Inc. ("SS/L"). Data Services: The Company provides managed communications networks and Internet and intranet services through Loral CyberStar, Inc. ("Loral CyberStar") and delivers high-speed broadband data communications, business television and business media services through Loral Cyberstar and CyberStar, L.P. ("CyberStar LP"). 2. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission ("SEC") and, in the opinion of the Company, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of results of operations, financial position and cash flows as of and for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted pursuant to SEC rules. The Company believes that the disclosures made are adequate to keep the information presented from being misleading. The results of operations for the three months ended March 31, 2002 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. Reclassifications Certain reclassifications have been made to conform prior period amounts to the current period presentation. 5 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 3. COMPREHENSIVE LOSS The components of comprehensive loss for the three months ended March 31, 2002 and 2001 are as follows (in thousands):
2002 2001 --------- -------- Net loss.................................................... $(896,360) $(59,009) Cumulative translation adjustment........................... (244) (476) Unrealized gain (losses) on available-for-sale securities, net of taxes.............................................. 6,494 (10,111) Derivatives classified as cash flow hedges (net of taxes): Cumulative transition adjustment.......................... -- 1,220 Net increase in foreign currency exchange contracts....... 717 3,943 Reclassifications into revenue and cost of sales from other comprehensive income............................. (645) (2,687) --------- -------- Comprehensive loss.......................................... $(890,038) $(67,120) ========= ========
4. CONTRACTS-IN-PROCESS
MARCH 31, DECEMBER 31, 2002 2001 --------- ------------ (IN THOUSANDS) U.S. government contracts: Amounts billed............................................ $ 2,650 $ 1,613 Unbilled receivables...................................... 3,545 3,650 -------- -------- 6,195 5,263 -------- -------- Commercial contracts: Amounts billed............................................ 92,303 157,153 Unbilled receivables...................................... 69,355 16,183 -------- -------- 161,658 173,336 -------- -------- $167,853 $178,599 ======== ========
Unbilled amounts include recoverable costs and accrued profit on progress completed, which have not been billed. Such amounts are billed in accordance with the contract terms, typically upon shipment of the product, achievement of contractual milestones, or completion of the contract and, at such time, are reclassified to billed receivables. 6 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INVESTMENTS IN AND ADVANCES TO AFFILIATES Investments in and advances to affiliates consist of (in thousands):
MARCH 31, DECEMBER 31, 2002 2001 --------- ------------ Satmex equity investments................................... $ 63,028 $ 71,318 Europe*Star equity investments and advances................. 76,316 82,346 XTAR equity investments..................................... 10,171 2,781 Globalstar: Acquired notes and loans ($636 million and $624 million principal and accrued interest as of March 31, 2002 and December 31, 2001, respectively)....................... 42,726 32,674 Vendor financing ($245 million and $242 million principal and accrued interest as of March 31, 2002 and December 31, 2001, respectively)................................ -- -- Globalstar service provider partnerships equity investments and advances.............................................. (1,150) (776) -------- -------- $191,091 $188,343 ======== ========
The Company accounts for its investment in Globalstar's $500 million credit facility at fair value, with changes in the value (net of tax) recorded as a component of other comprehensive loss. The Company has contingent liabilities of approximately $14 million in connection with certain Globalstar service provider partnerships. Equity in net loss of affiliates consists of (in thousands):
THREE MONTHS ENDED MARCH 31, ------------------- 2002 2001 -------- -------- Satmex...................................................... $ (7,596) $ (3,216) Europe*Star................................................. (6,115) (6,098) XTAR, net of taxes.......................................... (353) -- Globalstar and Globalstar service provider partnerships, net of taxes.................................................. (1,886) (13,040) -------- -------- $(15,950) $(22,354) ======== ========
The condensed consolidated statements of operations reflect the effects of the following amounts related to transactions with or investments in affiliates (in thousands):
THREE MONTHS ENDED MARCH 31, ------------------- 2002 2001 -------- -------- Revenues.................................................... $22,642 $30,479 Investment income........................................... 294 294 Interest expense capitalized on development stage enterprises............................................... 127 -- Profits relating to affiliate transactions not eliminated... 2,742 1,163 Elimination of Loral's proportionate share of profits relating to affiliate transactions........................ 1,126 470 Amortization of deferred credit, capitalized interest and profits relating to investments in affiliates............. (135) 73
7 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table presents summary financial data of Loral's affiliates Satmex and Europe*Star as of March 31, 2002 and December 31, 2001 and for the three months ended March 31, 2002 and 2001, respectively (in thousands):
THREE MONTHS ENDED MARCH 31, --------------------------------------------- 2002 2001 --------------------- --------------------- SATMEX EUROPE*STAR SATMEX EUROPE*STAR ------- ----------- ------- ----------- STATEMENT OF OPERATIONS DATA: Revenues.................................. $22,609 $ 4,497 $33,857 $ 1,646 Operating income (loss)................... 1,175 (6,439) 10,533 (7,240) Net loss.................................. (7,653) (14,101) (1,038) (12,966) Net loss applicable to common shareholders............................ (8,030) (1,415) Net loss applicable to shareholders....... (14,101) (12,966)
MARCH 31, 2002 DECEMBER 31, 2001 ------------------------ ------------------------ SATMEX EUROPE*STAR SATMEX EUROPE*STAR ---------- ----------- ---------- ----------- BALANCE SHEET DATA: Current assets....................... $ 163,209 $ 17,118 $ 200,507 $ 5,186 Total assets......................... 1,069,298 379,963 1,089,278 383,884 Current liabilities.................. 45,917 88,298 44,791 82,942 Long-term debt....................... 542,124 555,000 Long-term liabilities................ 100,302 8,525 100,879 10,423 Loans from partners'................. 244,420 237,698 Shareholders' equity................. 380,955 388,608 Net partners' capital................ 38,720 52,821
8 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. LONG TERM DEBT
MARCH 31, DECEMBER 31, 2002 2001 ---------- ------------ (IN THOUSANDS) Loral Orion 10.00% Senior notes due 2006 (principal amount $613 million)............................................. $ 903,738 $ 903,738 Loral Satellite term loan, 5.63% and 5.64% at March 31, 2002 and December 31, 2001, respectively....................... 282,750 294,000 Loral Satellite revolving credit facility, 5.44% and 5.14% at March 31, 2002 and December 31, 2001, respectively..... 132,000 136,000 LSC term loan facility, 4.29% and 4.17% at March 31, 2002 and December 31, 2001 respectively........................ 395,000 400,000 LSC revolving credit facility, 4.53% and 4.17% at March 31, 2002 and December 31, 2001, respectively.................. 115,000 165,000 9.50% Senior notes due 2006................................. 350,000 350,000 Export-Import credit facility............................... 8,580 8,580 Other....................................................... 552 557 Non-recourse debt of Loral Orion: 11.25% Senior notes due 2007 (principal amount $37 million)............................................... 40,233 40,385 12.50% Senior discount notes due 2007 (principal amount at maturity $49 million and accreted principal amount $49 million)............................................... 54,707 54,696 Other..................................................... 9,861 10,185 ---------- ---------- Total debt.................................................. 2,292,421 2,363,141 Less, current maturities.................................... 166,145 136,616 ---------- ---------- $2,126,276 $2,226,525 ========== ==========
7. LOSS PER SHARE Basic loss per share is computed based upon the weighted average number of shares of common stock outstanding. For the three months ended March 31, 2002 and 2001, diluted loss per share excludes the assumed conversion of the Company's Series C convertible redeemable preferred stock due 2006 (the "Series C Preferred Stock") and the Series D convertible redeemable preferred stock due 2007 (the "Series D Preferred Stock") into shares of common stock, as their effect would have been antidilutive. Weighted options equating to approximately 3.7 million and 1.6 million shares of common stock for the three months ended March 31, 2002 and 2001, respectively, as calculated using the treasury stock method, were excluded from the calculation of diluted loss per share, as the effect would have been antidilutive. 9 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share data):
THREE MONTHS ENDED MARCH 31, ------------------- 2002 2001 -------- -------- Numerator: Loss before cumulative effect of change in accounting principle.............................................. $ 19,860 $ 57,268 Cumulative effect of change in accounting principle, net of taxes............................................... 876,500 1,741 -------- -------- Net loss.................................................. 896,360 59,009 Preferred dividends....................................... 11,963 16,123 -------- -------- Numerator for basic and diluted loss per share -- net loss applicable to common shareholders...................... $908,323 $ 75,132 ======== ======== Denominator: Weighted average shares: Common stock........................................... 337,052 298,656 -------- -------- Denominator for basic and diluted loss per share.......... 337,052 298,656 ======== ======== Basic and diluted loss per share: Before cumulative effect of change in accounting principle.............................................. $ 0.09 $ 0.25 Cumulative effect of change in accounting principle....... 2.60 -- -------- -------- Loss per share............................................ $ 2.69 $ 0.25 ======== ========
8. COMMITMENTS AND CONTINGENCIES Loral Skynet has entered into prepaid leases and sales contracts relating to transponders on its satellites. Under the terms of these agreements, Loral Skynet continues to operate the satellites which carry the transponders and originally provided for a warranty for a period of 10 to 14 years, in the case of sales contracts (twelve transponders), and the lease term, in the case of the prepaid leases (nine transponders). Depending on the contract, Loral Skynet may be required to replace transponders which do not meet operating specifications. All customers are entitled to a refund equal to the reimbursement value if there is no replacement, which is normally covered by insurance. In the case of the sales contracts, the reimbursement value is based on the original purchase price plus an interest factor from the time the payment was received to acceptance of the transponder by the customer, reduced on a straight-line basis over the warranty period. In the case of prepaid leases, the reimbursement value is equal to the unamortized portion of the lease prepayment made by the customer. Twelve of the satellites built by SS/L and launched since 1997, five of which are owned and operated by Loral's subsidiaries or affiliates, have experienced minor losses of power from their solar arrays. Although to date, neither the Company nor any of the customers using the affected satellites have experienced any degradation in performance, there can be no assurance that one or more of the affected satellites will not experience additional power loss that could result in performance degradation, including loss of transponder capacity. In the event of additional power loss, the extent of the performance degradation, if any, will depend on numerous factors, including the amount of the additional power loss, the level of redundancy built into the affected satellite's design, when in the life of the affected satellite the loss occurred and the number and type of use being made of transponders then in service. A complete or partial loss of satellites could result in a loss of orbital incentive payments and, in the case of satellites owned by Loral subsidiaries and affiliates, a loss of revenues and profits. With respect to satellites under construction and construction of new satellites, based on 10 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) its investigation of the matter, SS/L has identified and is implementing remedial measures that SS/L believes will prevent newly launched satellites from experiencing similar anomalies. SS/L does not expect that implementation of these measures will cause any significant delay in the launch of satellites under construction or construction of new satellites. Based upon information currently available, including design redundancies to accommodate small power losses and that no pattern has been identified as to the timing or specific location within the solar arrays of the failures, the Company believes that this matter will not have a material adverse effect on the consolidated financial position or results of operations of Loral. In September 2001, the PAS 7 satellite built by SS/L for PanAmSat experienced an electrical power failure on its solar arrays that resulted in the loss of use of certain transponders on the satellite. As a result, PanAmSat has claimed that under its contract with SS/L it is entitled to be paid $16 million. SS/L disputes this claim and is in discussions with PanAmSat to resolve this matter. SS/L believes that this failure is an isolated event and does not reflect a systemic problem in either the satellite design or manufacturing process. Accordingly, SS/L does not believe that this anomaly will affect other on-orbit satellites built by SS/L. However, in connection with the renewal of the insurance for the Telstar 10/Apstar IIR satellite in October 2001, the insurance underwriters have excluded losses due to solar array failures, since Telstar 10/Apstar IIR was manufactured by SS/L and has the same solar array configuration as PAS 7. Loral is currently in discussions with its insurers to remove this exclusion from the Telstar 10/Apstar IIR policy, in return for a deductible for losses arising from electrical problems on the satellite's solar arrays. There can be no assurance that these discussions will be successful. Three other satellites operated by Loral Skynet have the same solar array configuration as Telstar 10/Apstar IIR. There can be no assurance that the insurers will not require similar exclusions in connection with renewals of insurance for these satellites in 2003 and 2004. In addition, the PAS 8 satellite has experienced minor losses of power from its solar arrays, the cause of which is unrelated to the loss of power on the PAS 7 satellite. PanAmSat has claimed that under its contract with SS/L it is entitled to be paid $7.5 million as a result of these minor power losses. SS/L disputes this claim. SS/L and PanAmSat are in discussions to resolve this matter. SS/L has contracted to build a spot beam, Ka band satellite for a customer planning to offer broadband data services directly to the consumer. The customer has failed to make certain payments due to SS/L under the contract and has asserted that SS/L is not able to meet the contractual delivery date for the satellite. As of March 31, 2002, SS/L had billed and unbilled accounts receivable and vendor financing arrangements of $49 million with this customer. SS/L and the customer have entered into an agreement that provides that, until July 1, 2002, neither party will assert that the other party is in default under the contract, and the parties are currently engaged in discussions to resolve their outstanding issues. In addition, SS/L and the customer have agreed to suspend work on the satellite during these discussions, pending the outcome of the discussions. If the parties do not resolve their issues, it is likely that each party would assert that the other is in default. The contract provides that SS/L may terminate the contract for a customer default 90 days after serving a notice of default if the default is not cured by the customer; upon such a default, SS/L would be entitled to recover the contractually agreed price of items delivered and accepted prior to termination and 115% of its actual costs incurred for items not delivered prior to termination. The contract also provides that the customer may terminate the contract for an SS/L default 133 days after serving a notice of default if the default is not cured by SS/L; upon such a default, SS/L would be obligated to refund all amounts previously paid by the customer, $78 million as of March 31, 2002, plus interest. Based on the discussions currently in progress with the customer and other parties who may be interested in the satellite, management's assessment of the market opportunities for the satellite and consideration of the satellite's estimated value, management does not believe that this matter will have a material adverse effect on the consolidated financial position or results of operations of Loral. SS/L was a party to an Operational Agreement with Alcatel Space Industries, pursuant to which the parties had agreed to cooperate on certain satellite programs, and an Alliance Agreement with Alcatel Space (together with Alcatel Space Industries, Alcatel), pursuant to which Alcatel had certain rights with respect to 11 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SS/L, including the right to appoint two representatives to SS/L's seven-member board of directors, rights to approve certain extraordinary actions and certain rights to purchase SS/L shares at fair market value in the event of a change of control (as defined) of either Loral or SS/L. The agreements between Alcatel and SS/L were terminable on one year's notice, and, on February 22, 2001, Loral gave notice to Alcatel that they would expire on February 22, 2002. In April 2001, Alcatel commenced an arbitration proceeding challenging the effectiveness of Loral's notice of termination and asserting various alleged breaches of the agreements by SS/ L relating to the exchange of information and other procedural or administrative matters. In February 2002, the arbitral tribunal upheld the validity of Loral's termination effective February 22, 2002 and Alcatel's claims as to certain breaches. The arbitral tribunal has provided both parties with an opportunity to file any additional claims or counterclaims they may have. In March 2002, Alcatel submitted additional claims against Loral and SS/L and is seeking at least $330 million in damages in respect of all of its claims. The Company believes that Alcatel's claims for damages are without merit and have been asserted for competitive reasons to disadvantage SS/L and that this matter will not have a material adverse effect on its consolidated financial position or results of operations. In April 2002, Loral and SS/L filed their statement of counterclaims against Alcatel. The claims being asserted against Alcatel are for breach of contract, tortious interference with contracts and business relationships, defamation, misappropriation of SS/L's confidential property, conversion, and intentional breaches of confidentiality agreements. Loral and SS/L are seeking injunctive relief, compensatory damages in the amount of $405 million, and punitive damages. The arbitral tribunal will decide at a later date whether any of Alcatel's claims or Loral's or SS/L's counterclaims give rise to damages. On April 5, 2002, Alcatel filed in the District Court for the Southern District of New York a petition to confirm and enforce the partial decision issued in February 2002 in the arbitration between the parties. On April 29, 2000, Loral filed its response to the petition, in which Loral supports confirmation of the decision, but disputes Alcatel's claim that the decision requires the production of certain documents. The petition is pending before the court. The launch of ChinaSat-8 has been delayed pending SS/L's obtaining the approvals required for the launch. On December 23, 1998, the Office of Defense Trade Controls, or ODTC, of the U.S. Department of State temporarily suspended a previously approved technical assistance agreement under which SS/L had been preparing for the launch of the ChinaSat-8 satellite. In addition, SS/L was required to re-apply for new export licenses from the State Department to permit the launch of ChinaSat-8 on a Long March launch vehicle when the old export licenses issued by the Commerce Department, the agency that previously had jurisdiction over satellite licensing, expired in March 2000. On January 4, 2001, the ODTC, while not rejecting these license applications, notified SS/L that they were being returned without action. On January 9, 2002, Loral, SS/L and the United States Department of State entered into a consent agreement (the "Consent Agreement") settling and disposing of all civil charges, penalties and sanctions associated with alleged violations by SS/L of the Arms Export Control Act and its implementing regulations. The Company recorded a charge in the fourth quarter of 2001 for the penalties associated with the Consent Agreement. The Consent Agreement provides that the State Department agrees, assuming the Company's and SS/L's faithful adherence to the terms of the Consent Agreement, and the Arms Export Control Act and its implementing regulations, that decisions concerning export licenses for the ChinaSat-8 spacecraft will be made on the basis of the security and foreign policy interests of the United States, including matters relating to U.S. relations with the People's Republic of China, without reference to the State Department's previously expressed concerns regarding SS/L's reliability, which concerns are considered to be appropriately mitigated through the operation of various provisions of the Consent Agreement. Discussions between SS/L and the State Department regarding SS/L's obtaining the approvals required for the launch of ChinaSat-8 are continuing. In December 1999, SS/L reached an agreement with ChinaSat to extend the date for delivery of the ChinaSat-8 satellite to July 31, 2000. In return for this extension and other modifications to the contract, SS/ L provided to ChinaSat three transponders on Telstar 10/Apstar IIR for ChinaSat's use for the life of those transponders. As a result, the Company recorded a charge to earnings of $35 million in 1999. If ChinaSat were to terminate its contract with SS/L as a result of these delays, SS/L may have to refund $134 million in 12 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) advances received from ChinaSat and may incur penalties of up to $11 million and believes it would incur costs of approximately $38 million to refurbish and retrofit the satellite so that it could be sold to another customer, which resale cannot be guaranteed. To the extent that SS/L is able to recover some or all of its $52 million deposit payment on the Chinese launch vehicle, this recovery would offset a portion of such payments. There can be no assurance, however, that SS/L will be able either to obtain a refund from the launch provider or to find a replacement customer for the Chinese launch vehicle. SS/L is required to obtain licenses and enter into technical assistance agreements, presently under the jurisdiction of the State Department, in connection with the export of satellites and related equipment, as well as disclosure of technical data to foreign persons. Delays in obtaining the necessary licenses and technical assistance agreements may result in the cancellation of, or delay SS/L's performance on, existing contracts, and, as a result, SS/L may incur penalties or lose incentive payments under these contracts. Under an agreement reached with Eutelsat, Loral Orion agreed to operate Telstar 12, which was originally intended to operate at 12 degrees W.L., at 15 degrees W.L. while Eutelsat continued to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and will assert its priority rights over such location on Loral Orion's behalf. As part of this coordination effort, Loral Orion agreed to provide to Eutelsat four transponders on Telstar 12 for the life of the satellite and has retained risk of loss with respect to such transponders. Eutelsat also has the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. As part of the international coordination process, Loral continues to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees W.L. If these discussions are not successful, Telstar 12's useable capacity may be reduced. The Company is subject to various other legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Although the outcome of these claims cannot be predicted with certainty, the Company does not believe that any of these other existing legal matters will have a material adverse effect on its consolidated financial position or results of operations. Globalstar Related Matters On September 26, 2001, the nineteen separate purported class action lawsuits filed in the United States District Court for the Southern District of New York by various holders of securities of Globalstar Telecommunications Limited ("GTL") and Globalstar, L.P. ("Globalstar") against GTL, Loral, Bernard L. Schwartz and other defendants were consolidated into one action titled In re: Globalstar Securities Litigation. In November 2001, plaintiffs in the consolidated action filed a consolidated amended class action complaint against Globalstar, GTL, Globalstar Capital Corporation, Loral and Bernard L. Schwartz alleging (a) that all defendants (except Loral) violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, by making material misstatements or failing to state material facts about Globalstar's business and prospects, (b) that defendants Loral and Schwartz are secondarily liable for these alleged misstatements and omissions under Section 20(a) of the Exchange Act as alleged "controlling persons" of Globalstar, (c) that defendants GTL and Schwartz are liable under Section 11 of the Securities Act of 1933 (the "Securities Act") for untrue statements of material facts in or omissions of material facts from a registration statement relating to the sale of shares of GTL common stock in January 2000, (d) that defendant GTL is liable under Section 12(2)(a) of the Securities Act for untrue statements of material facts in or omissions of material facts from a prospectus and prospectus supplement relating to the sale of shares of GTL common stock in January 2000, and (e) that defendants Loral and Schwartz are secondarily liable under Section 15 of the Securities Act for GTL's primary violations of Sections 11 and 12(2)(a) of the Securities Act as alleged "controlling persons" of GTL. The class of plaintiffs on whose behalf the lawsuit has been asserted consists of all buyers of securities of Globalstar, Globalstar Capital and GTL during the period from December 6, 1999 through October 27, 2000, excluding the defendants and 13 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) certain persons related or affiliated therewith. Loral and Mr. Schwartz have filed a motion to dismiss the amended complaint in its entirety as to Loral and Mr. Schwartz, which motion is pending before the court. On March 2, 2001, the seven separate purported class action lawsuits filed in the United States District Court for the Southern District of New York by various holders of common stock of Loral Space & Communications Ltd. ("Loral") against Loral, Bernard L. Schwartz and Richard Townsend were consolidated into one action titled In re: Loral Space & Communications Ltd. Securities Litigation. On May 6, 2002, plaintiffs in the consolidated action filed a consolidated amended class action complaint alleging (a) that all defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by making material misstatements or failing to state material facts about Loral's financial condition and its investment in Globalstar and (b) that Mr. Schwartz is secondarily liable for these alleged misstatements and omissions under Section 20(a) of the Exchange Act as an alleged "controlling person" of Loral. The class of plaintiffs on whose behalf the lawsuit has been asserted consists of all buyers of Loral common stock during the period from November 4, 1999 through February 1, 2001, excluding the defendants and certain persons related or affiliated therewith. Loral believes that it has meritorious defenses to the above Globalstar related class action lawsuits and intends to pursue them vigorously. Loral holds debt obligations from Globalstar (see Note 5). On February 15, 2002, Globalstar and certain of its direct subsidiaries filed voluntary petitions under Chapter 11 of Title 11, United States Code in the United States Bankruptcy Court for the District of Delaware. Globalstar's proposed restructuring plan, which will be submitted to and subject to bankruptcy court approval, contemplates the creation of a new company, which will initially be owned by Globalstar's existing noteholders and other unsecured creditors, including Loral. In other situations in the past, challenges have been initiated seeking subordination or recharacterization of debt held by an affiliate of an issuer. While Loral knows of no reason why such a claim would prevail with respect to the debt Loral holds in Globalstar, there can be no assurance that such claims will not be made in Globalstar's bankruptcy proceeding. If such claims were to prove successful, it will jeopardize the amount of equity interest Loral will ultimately receive in the new Globalstar company. Moreover, actions may be initiated in Globalstar's bankruptcy proceeding seeking to characterize payments previously made by Globalstar to Loral prior to the filing date as preferential payments subject to repayment. Loral may also find itself subject to other claims brought by Globalstar creditors and securities holders, who may seek to impose liabilities on Loral as a result of its relationship with Globalstar. For instance, Globalstar's creditors may seek to pierce the corporate veil in an attempt to recover Globalstar obligations owed to them that are recourse to Loral's subsidiaries, which are general partners in Globalstar and have filed for bankruptcy protection. Globalstar's cumulative partners deficit at December 31, 2001, was $3.0 billion. Globalstar's proposed restructuring plan contemplates that mutual releases of claims related to Globalstar would be granted to and by various persons, including, among others, Loral and its affiliates, Globalstar, Globalstar's officers and directors, Globalstar partners, service providers acquired by Globalstar and the members of any official and informal committee of creditors. There can be no assurance that these releases will be approved by the bankruptcy court or, if approved, as to the scope of any releases finally obtained. In May 2000, Globalstar finalized $500 million of vendor financing arrangements with Qualcomm. The original terms of this vendor financing provided for interest at 6%, a maturity date of August 15, 2003 and required repayment pro rata with the term loans due to Loral under Globalstar's $500 million credit facility. As of March 31, 2002, $632 million was outstanding under this facility (including $132 million of capitalized interest). Loral has agreed that if the principal amount outstanding under the Qualcomm vendor financing facility exceeds the principal amount due Loral under Globalstar's $500 million credit facility, as determined on certain measurement dates, then Loral will guarantee 50% of such excess amount. As of March 31, 2002, Loral had no guarantee obligation. 14 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. SEGMENTS Loral is organized into three operating businesses: fixed satellite services, satellite manufacturing and technology and data services (see Note 1). In evaluating financial performance, management uses revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") as the measure of a segment's profit or loss. Segment results include the results of its subsidiaries and its affiliates, Satmex, Europe*Star and XTAR, which are accounted for using the equity method in these condensed consolidated financial statements. Intersegment revenues primarily consist of satellites under construction by satellite manufacturing and technology for fixed satellite services and the leasing of transponder capacity by satellite manufacturing and technology and data services from fixed satellite services. Summarized financial information concerning the reportable segments is as follows (in millions): THREE MONTHS ENDED MARCH 31, 2002
SATELLITE FIXED MANUFACTURING SATELLITE AND DATA SERVICES(1) TECHNOLOGY(2) SERVICES(3) CORPORATE(4) TOTAL ----------- ------------- ----------- ------------ --------- REVENUES AND EBITDA: Revenues from external customers....... $ 112.9 $180.8 $ 20.4 $ 314.1 Intersegment revenues.................. 7.9 61.8 69.7 -------- ------ ------ --------- Operating segment revenues............. $ 120.8 $242.6 $ 20.4 383.8 ======== ====== ====== Revenues of unconsolidated affiliates(5)........................ (27.1) Intercompany revenues(6)............... (48.5) --------- Operating revenues as reported......... $ 308.2 ========= Segment EBITDA before eliminations..... $ 77.4 $ 10.8 $ -- $ (8.7) $ 79.5 ======== ====== ====== ====== EBITDA of unconsolidated affiliates(5)........................ (11.6) Intercompany EBITDA(6)................. (6.1) --------- EBITDA(7).............................. 61.8 Depreciation and amortization(8)....... (47.1) --------- Operating income....................... $ 14.7 ========= OTHER DATA: Depreciation and amortization before affiliate eliminations(8)............ $ 53.1 $ 7.0 $ 4.4 $ 0.2 $ 64.7 ======== ====== ====== ====== Depreciation and amortization of unconsolidated affiliates(5)(8)...... (17.6) --------- Depreciation and amortization(8)....... $ 47.1 ========= Total assets before affiliate eliminations......................... $3,603.4 $836.2 $149.6 $349.8 $ 4,939.0 ======== ====== ====== ====== Total assets of unconsolidated affiliates(5)........................ (1,482.6) --------- Total assets........................... $ 3,456.4 =========
--------------- (1) Includes 100% of Europe*Star's and Satmex's revenues and EBITDA and 100% of XTAR's EBITDA since July 2001. Also includes Loral's subsidiary, Loral Skynet do Brasil. Loral Skynet's revenue was $94 million in 2002 and 2001 and EBITDA was $66 million and $65 million in 2002 and 2001, respectively. 15 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) Satellite manufacturing and technology consists of 100% of SS/L's results. (3) Data services consists of 100% of CyberStar LP (in which Loral owns an 82% equity interest) and 100% of Loral Orion's data services business, which business was transferred in December 2001 to a Loral subsidiary which assumed the name Loral CyberStar. Equipment sales for data services were $2.8 million and $2.1 million for the three months ended March 31, 2002 and 2001, respectively. (4) Represents corporate expenses incurred in support of the Company's operations. (5) Represents amounts related to unconsolidated affiliates (Satmex, Europe*Star and XTAR), which are eliminated in order to arrive at Loral's condensed consolidated results. Loral's proportionate share of these affiliates is included in equity in net loss of affiliates in Loral's condensed consolidated statements of operations. (6) Represents the elimination of intercompany sales and EBITDA, primarily for satellites under construction by SS/L for wholly-owned subsidiaries; as well as eliminating revenues for the lease of transponder capacity by satellite manufacturing and technology and data services from fixed satellite services. (7) EBITDA (which is equivalent to operating income/loss before depreciation and amortization, including amortization of unearned stock compensation) is provided because it is a measure commonly used in the communications industry to analyze companies on the basis of operating performance, leverage and liquidity and is presented to enhance the understanding of Loral's operating results. EBITDA is not an alternative to net income as an indicator of a company's operating performance, or cash flow from operations as a measure of a company's liquidity. EBITDA may be calculated differently and, therefore, may not be comparable to similarly titled measures reported by other companies. (8) Includes amortization of unearned stock compensation charges. 16 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) THREE MONTHS ENDED MARCH 31, 2001
SATELLITE FIXED MANUFACTURING SATELLITE AND DATA SERVICES(1) TECHNOLOGY(2) SERVICES(3) CORPORATE(4) TOTAL ----------- ------------- ----------- ------------ --------- REVENUES AND EBITDA: Revenues from external customers....... $ 116.0 $ 125.8 $ 28.7 $ 270.5 Intersegment revenues.................. 13.2 75.3 88.5 -------- -------- ------ --------- Operating segment revenues............. $ 129.2 $ 201.1 $ 28.7 359.0 ======== ======== ====== Revenues of unconsolidated affiliates(5)........................ (35.5) Intercompany revenues(6)............... (62.4) --------- Operating revenues as reported......... $ 261.1 ========= Segment EBITDA before eliminations..... $ 83.9 $ 19.2 $(10.0) $ (9.4) $ 83.7 ======== ======== ====== ====== EBITDA of unconsolidated affiliates(5)........................ (19.0) Intercompany EBITDA(6)................. (6.5) --------- EBITDA(7).............................. 58.2 Depreciation and amortization(8)....... (54.3) --------- Operating income....................... $ 3.9 ========= OTHER DATA: Depreciation and amortization before affiliate eliminations(8)............ $ 56.6 $ 7.5 $ 5.5 $ 0.5 $ 70.1 ======== ======== ====== ====== Depreciation and amortization of unconsolidated affiliates(5)(8)...... (15.8) --------- Depreciation and amortization(8)....... $ 54.3 ========= Total assets before affiliate eliminations......................... $4,190.1 $1,233.9 $209.5 $403.0 $ 6,036.5 ======== ======== ====== ====== Total assets of unconsolidated affiliates(5)........................ (1,507.4) --------- Total assets........................... $ 4,529.1 =========
10. ACCOUNTING FOR GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. SFAS 142 also changed the evaluation criteria for testing goodwill for impairment from an undiscounted cash flow approach, which was previously utilized under the guidance in Accounting Principles Board Opinion No. 17, Intangible Assets, to a test based on fair value. Fair value is determined by the amount at which an asset or liability could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Quoted market prices in active markets are the best evidence of fair value and must be used as the basis for the measurement, if available. If quoted market prices are not available, the estimate of fair value must be based on the best information available, including prices for 17 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) similar assets and liabilities and the results of using other valuation techniques, such as public company trading multiples, future discounted cash flows and merger and acquisition transaction multiples. The Company adopted SFAS 142 on January 1, 2002. Goodwill In accordance with SFAS 142, the Company's previously recognized cost in excess of net assets acquired ("goodwill") of $892 million for purchase businesses combinations completed prior to July 1, 2001, was reviewed under the new transitional guidance as of January 1, 2002. Goodwill had been previously assigned to the Company's business segments as follows (based on the net book value at December 31, 2001): FSS $597 million, satellite manufacturing and technology $286 million and data services $9 million. The Company hired professionals in the valuation consulting business to determine the fair value of each of the Company's reporting units. Since there were no quoted market prices in active markets for the Company's reporting units, the measurement of fair value for each reporting unit was based on the best information available for that reporting unit, including reasonable and supportable assumptions and projections, as follows: (1) FSS -- public company trading multiples, (2) satellite manufacturing and technology -- future discounted cash flows, and (3) data services -- merger and acquisition transaction multiples. Those professionals determined that the goodwill for each of the Company's reporting units under the new guidance in SFAS 142 was fully impaired. Accordingly, as of January 1, 2002, the Company recorded a non-cash charge for the cumulative effect of the change in accounting principle of $892 million before taxes ($877 million after taxes). The charge is the result of a change in the evaluation criteria for goodwill from an undiscounted cash flow approach which was previously utilized under the guidance in Accounting Principles Board Opinion No. 17, Intangible Assets, to the fair value approach which is stipulated in SFAS 142. The following table presents the actual financial results and as adjusted financial results without the amortization of goodwill for the Company for the three months ended March 31, 2001 (in thousands, except per share amounts):
ACTUAL AS ADJUSTED -------- ----------- Reported loss before cumulative effect of change in accounting principle...................................... $(57,268) $(57,268) Add back amortization of goodwill, net of taxes............. 6,652 -------- -------- Loss before cumulative effect of change in accounting principle................................................. (57,268) (50,616) Cumulative effect of change in accounting principle, net of taxes..................................................... (1,741) (1,741) -------- -------- Net loss.................................................... (59,009) (52,357) Preferred dividends......................................... (16,123) (16,123) -------- -------- Net loss applicable to common shareholders.................. $(75,132) $(68,480) ======== ======== Reported basic and diluted loss per share before cumulative effect of change in accounting principle.................. $ (0.25) Add back goodwill amortization per share.................... 0.02 -------- As adjusted loss per share before cumulative effect of change in accounting principle............................ (0.23) Cumulative effect of change in accounting principle......... -- -------- Adjusted loss per share..................................... $ (0.23) ========
Other Acquired Intangible Assets The Company evaluated the useful lives of its other acquired intangible assets in connection with the adoption of SFAS 142 and determined that no changes to the useful lives were necessary. 18 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Other acquired intangible assets are included in other assets in the Company's condensed consolidated balance sheets and were as follows at March 31, 2002 and December 31, 2001 (in millions):
MARCH 31, 2002 DECEMBER 31, 2001 ----------------------- ----------------------- GROSS GROSS CARRYING ACCUMULATED CARRYING ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION -------- ------------ -------- ------------ Regulatory fees............................ $22.7 $ (3.4) $22.7 $(3.0) Other intangibles.......................... 13.0 (7.1) 13.0 (6.6) ----- ------ ----- ----- Total................................. $35.7 $(10.5) $35.7 $(9.6) ===== ====== ===== =====
The weighted average remaining amortization period for regulatory fees was nine years and for other intangibles was three years, as of March 31, 2002. Total pre-tax amortization expense for other acquired intangible assets for the three months ending March 31, 2002 and 2001 was $0.8 million. Annual pre-tax amortization expense for other acquired intangible assets over the next five years is estimated to be as follows (in millions): 2002........................................................ $3.4 2003........................................................ 3.4 2004........................................................ 3.3 2005........................................................ 2.5 2006........................................................ 1.4
11. NEW ACCOUNTING PRONOUNCEMENTS SFAS 143 In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. The Company is required to adopt SFAS 143 on January 1, 2003. The Company has not yet determined the impact that the adoption of SFAS 143 will have on its results of operations or its financial position. SFAS 144 In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. The Company adopted SFAS 144 on January 1, 2002. The Company has determined that there was no effect on the Company's consolidated financial position or results of operations relating to the adoption of SFAS 144. SFAS 145 In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 generally requires that any 19 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) gains or losses on extinguishment of debt in current or prior periods be classified as other income (expense), beginning in fiscal 2003, with early adoption encouraged. The Company is currently evaluating the impact of adopting the provisions of SFAS No. 145 in its consolidated financial statements. 12. FINANCIAL INFORMATION FOR PARENT, SUBSIDIARY ISSUER AND GUARANTOR AND NON-GUARANTOR SUBSIDIARIES Loral is a holding company (the "Parent Company"), which is the ultimate parent of all Loral subsidiaries. In December 2001, the Company's wholly owned subsidiary, Loral Orion (the "Subsidiary Issuer"), issued New Senior Notes in an exchange offer which are fully and unconditionally guaranteed, on a joint and several basis, by the Parent Company and one of its wholly-owned subsidiaries (the "Guarantor Subsidiary"). Presented below is condensed consolidating financial information for the Parent Company, the Subsidiary Issuer, the Guarantor Subsidiary and the other wholly-owned subsidiaries (the "Non-Guarantor Subsidiaries") as of March 31, 2002 and December 31, 2001 and for the three months ended March 31, 2002, and 2001. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of the Parent Company, Subsidiary Issuer, Guarantor Subsidiary and Non-Guarantor Subsidiaries assuming the guarantee structure of the New Senior Notes was in effect at the beginning of the periods presented. The supplemental condensed consolidating financial information reflects the investments of the Parent Company in the Subsidiary Issuer, the Guarantor Subsidiary and the Non-Guarantor Subsidiaries using the equity method of accounting. The Parent Company's significant transactions with its subsidiaries other than the investment account and related equity in net loss of unconsolidated subsidiaries are the management fee charged by Loral SpaceCom Corporation to the Parent Company in 2001 and intercompany payables and receivables between its subsidiaries resulting primarily from the funding of the construction of satellites for the fixed satellite services segment. 20 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET MARCH 31, 2002 (IN THOUSANDS)
PARENT SUBSIDIARY GUARANTOR NON-GUARANTOR COMPANY ISSUER SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ---------- ------------- ------------ ------------ Current assets: Cash and cash equivalents................. $ 18,050 $ 36,277 $ -- $ 53,810 $ -- $ 108,137 Accounts receivable, net.................. -- 10,124 2,127 30,124 -- 42,375 Contracts-in-process...................... -- -- -- 167,853 -- 167,853 Inventories............................... -- -- -- 103,517 -- 103,517 Other current assets...................... 100 4,332 4,747 79,316 (1,299) 87,196 ----------- --------- --------- ----------- ---------- ----------- Total current assets.................... 18,150 50,733 6,874 434,620 (1,299) 509,078 Property, plant and equipment, net.......... -- 341,135 220,460 1,438,940 (18,115) 1,982,420 Costs in excess of net assets acquired, net....................................... -- -- -- -- -- -- Long-term receivables....................... -- -- -- 194,722 -- 194,722 Notes receivable from unconsolidated subsidiaries.............................. 200,000 (29,700) -- (170,300) -- -- Due to (from) unconsolidated subsidiaries... 17,215 (68,273) 82,817 (49,545) 17,786 -- Investments in unconsolidated subsidiaries.............................. 564,689 300,881 (271,698) (1,713,658) 1,119,786 -- Investments in and advances to affiliates... 62,283 -- -- 128,808 -- 191,091 Deposits.................................... -- -- -- 161,290 -- 161,290 Deferred tax assets......................... -- 32,130 -- 82,176 191,177 305,483 Other assets................................ 5,385 21,924 832 84,127 -- 112,268 ----------- --------- --------- ----------- ---------- ----------- $ 867,722 $ 648,830 $ 39,285 $ 591,180 $1,309,335 $ 3,456,352 =========== ========= ========= =========== ========== =========== Current liabilities: Current portion of long-term debt......... $ -- $ 80,315 $ -- $ 85,830 $ -- $ 166,145 Accounts payable.......................... 1,080 507 713 154,899 -- 157,199 Accrued employment costs.................. -- -- -- 43,146 -- 43,146 Customer advances......................... -- 573 128 176,404 -- 177,105 Accrued interest and preferred dividends............................... 14,231 2,136 -- 10,928 -- 27,295 Other current liabilities................. -- 2,453 1,365 41,476 -- 45,294 Income taxes payable...................... 7,952 -- -- (40,837) 68,577 35,692 Deferred tax liabilities.................. 22,274 -- -- -- (22,274) -- ----------- --------- --------- ----------- ---------- ----------- Total current liabilities............... 45,537 85,984 2,206 471,846 46,303 651,876 Deferred tax liabilities.................... 20,385 -- 6,362 -- (26,747) -- Pension and other postretirement liabilities............................... -- -- -- 57,803 -- 57,803 Long-term liabilities....................... -- 9,460 1,533 140,416 -- 151,409 Long-term debt.............................. 350,000 928,224 -- 848,052 -- 2,126,276 Minority interest........................... -- -- -- 17,188 -- 17,188 Shareholders' equity: 6% Series C convertible redeemable preferred stock......................... 485,371 -- -- -- -- 485,371 6% Series D convertible redeemable preferred stock......................... 296,529 -- -- -- -- 296,529 Common stock.............................. 3,376 -- -- -- -- 3,376 Paid-in capital........................... 2,774,812 604,166 -- -- (604,166) 2,774,812 Treasury stock, at cost................... (3,360) -- -- -- -- (3,360) Unearned compensation..................... (4) -- -- -- -- (4) Retained deficit.......................... (3,132,033) (979,004) 29,184 (944,125) 1,893,945 (3,132,033) Accumulated other comprehensive income.... 27,109 -- -- -- -- 27,109 ----------- --------- --------- ----------- ---------- ----------- Total shareholders' equity.............. 451,800 (374,838) 29,184 (944,125) 1,289,779 451,800 ----------- --------- --------- ----------- ---------- ----------- $ 867,722 $ 648,830 $ 39,285 $ 591,180 $1,309,335 $ 3,456,352 =========== ========= ========= =========== ========== ===========
21 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 (IN THOUSANDS)
PARENT SUBSIDIARY GUARANTOR NON-GUARANTOR COMPANY ISSUER SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ---------- ---------- ------------- ------------ ------------ Revenues from satellite sales......... $ -- $ -- $ -- $ 198,471 $ -- $ 198,471 Revenues from satellite services...... -- 26,836 12,892 84,738 (14,761) 109,705 Management fee from parent............ -- -- -- 291 (291) -- --------- --------- ------- --------- -------- --------- Total revenues.................... -- 26,836 12,892 283,500 (15,052) 308,176 Costs of satellite sales.............. -- -- -- 186,428 -- 186,428 Costs of satellite services........... -- 25,775 7,098 47,126 (13,703) 66,296 Selling, general and administrative expenses............................ 19 2,704 404 37,915 (295) 40,747 Management fee expense................ 291 -- -- -- (291) -- --------- --------- ------- --------- -------- --------- Operating income (loss)............... (310) (1,643) 5,390 12,031 (763) 14,705 Interest and investment income........ 5,230 220 -- 7,405 (7,446) 5,409 Interest expense...................... (9,847) (3,258) -- (13,598) 8,133 (18,570) --------- --------- ------- --------- -------- --------- (Loss) income before income taxes, equity in net loss of unconsolidated subsidiaries and affiliates, minority interest and cumulative effect of change in accounting principle........................... (4,927) (4,681) 5,390 5,838 (76) 1,544 Income tax benefit (provision)........ (1,549) 4,164 (1,857) (3,718) (2,568) (5,528) --------- --------- ------- --------- -------- --------- (Loss) income before equity in net loss of unconsolidated subsidiaries and affiliates, minority interest and cumulative effect of change in accounting principle................ (6,476) (517) 3,533 2,120 (2,644) (3,984) Equity in net loss of unconsolidated subsidiaries, net of tax benefit.... (874,287) 3,533 -- -- 870,754 -- Equity in net loss of affiliates, net of taxes............................ (15,597) -- -- (353) -- (15,950) Minority interest, net of taxes....... -- -- -- 74 -- 74 --------- --------- ------- --------- -------- --------- (Loss) income before cumulative effect of change in accounting principle... (896,360) 3,016 3,533 1,841 868,110 (19,860) Cumulative effect of change in accounting principle, net of taxes............................... -- (562,201) -- (314,299) -- (876,500) --------- --------- ------- --------- -------- --------- Net (loss) income..................... $(896,360) $(559,185) $ 3,533 $(312,458) $868,110 $(896,360) ========= ========= ======= ========= ======== =========
22 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2002 (IN THOUSANDS)
PARENT SUBSIDIARY GUARANTOR NON-GUARANTOR COMPANY ISSUER SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ---------- ---------- ------------- ------------ ------------ Operating activities: Net (loss) income........................... $(896,360) $(559,185) $ 3,533 $(312,458) $ 868,110 $(896,360) Non-cash items: Equity in net loss of affiliates, net of taxes................................... 15,597 -- -- 353 -- 15,950 Equity in net income (loss) of unconsolidated subsidiaries, net of taxes................................... 874,287 (3,533) -- (870,754) -- -- Minority interest, net of taxes........... -- -- -- (74) -- (74) Cumulative effect of change in accounting principle, net of taxes................. -- 562,201 -- 314,299 -- 876,500 Deferred taxes............................ 1,536 -- 752 2,842 (1,620) 3,510 Depreciation and amortization............. -- 13,570 5,253 28,243 -- 47,066 Non-cash interest expense................. -- (141) -- -- (141) Changes in operating assets and liabilities: Accounts receivable, net.................... -- 2,947 (1,630) (4,393) -- (3,076) Contracts-in-process........................ -- -- -- 11,649 -- 11,649 Inventories................................. -- -- -- (5,338) -- (5,338) Other current assets........................ 165 817 800 3,164 -- 4,946 Long-term receivables....................... -- -- -- (4,416) -- (4,416) Deposits.................................... -- -- -- (5,800) -- (5,800) Due to (from) unconsolidated subsidiaries... (4,300) 5,711 (9,838) 335 8,092 -- Other assets................................ 290 (1,089) -- 7,379 -- 6,580 Accounts payable............................ (277) (2,170) -- 14,805 -- 12,358 Accrued expenses and other current liabilities............................... (8,312) 247 7,214 -- (851) Customer advances........................... -- (487) -- 28,602 -- 28,115 Income taxes payable........................ 13 -- -- 1,163 -- 1,176 Pension and other postretirement liabilities............................... -- -- -- 2,213 -- 2,213 Long-term liabilities....................... (1,686) 1,130 (4,751) -- (5,307) Other....................................... (166) -- -- (11) -- (177) --------- --------- ------- --------- --------- --------- Net cash provided by (used in) operating activities.................................. (17,527) 17,202 -- (785,734) 874,582 88,523 --------- --------- ------- --------- --------- --------- Investing activities: Capital expenditures........................ -- -- -- (50,740) (295) (51,035) Investments in and advances to affiliates... (1,557) -- -- 866,230 (874,287) (9,614) Investments in and advances to unconsolidated subsidiaries............... 172 -- -- (172) -- -- --------- --------- ------- --------- --------- --------- Net cash (used in) provided by investing activities.................................. (1,385) -- -- 815,318 (874,582) (60,649) --------- --------- ------- --------- --------- --------- Financing activities: Borrowings under revolving credit facility.................................. -- -- -- 2,000 -- 2,000 Repayments under term loans................. -- -- -- (16,250) -- (16,250) Repayments under revolving credit facility.................................. -- -- -- (56,000) -- (56,000) Repayments of other long-term obligations... -- (324) -- (6) -- (330) Preferred dividends......................... (11,963) -- -- -- -- (11,963) Proceeds from stock issuances............... 2,857 -- -- -- -- 2,857 --------- --------- ------- --------- --------- --------- Net cash (used in) financing activities....... (9,106) (324) -- (70,256) -- (79,686) --------- --------- ------- --------- --------- --------- Increase (decrease) in cash and cash equivalents................................. (28,018) 16,878 -- (40,672) -- (51,812) Cash and cash equivalents -- beginning of period...................................... 46,068 19,399 -- 94,482 -- 159,949 --------- --------- ------- --------- --------- --------- Cash and cash equivalents -- end of period.... $ 18,050 $ 36,277 $ -- $ 53,810 $ -- $ 108,137 ========= ========= ======= ========= ========= =========
23 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2001 (IN THOUSANDS)
PARENT SUBSIDIARY GUARANTOR NON-GUARANTOR COMPANY ISSUER SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ---------- ---------- ------------- ------------ ------------ Current assets: Cash and cash equivalents............ $ 46,068 $ 19,399 $ -- $ 94,482 $ -- $ 159,949 Accounts receivable, net............. -- 13,071 497 25,731 -- 39,299 Contracts-in-process................. -- -- -- 178,599 -- 178,599 Inventories.......................... -- -- -- 98,179 -- 98,179 Other current assets................. 265 6,053 5,151 83,101 (903) 93,667 ----------- ---------- --------- ----------- ---------- ----------- Total current assets............... 46,333 38,523 5,648 480,092 (903) 569,693 Property, plant and equipment, net..... -- 354,196 225,714 1,415,856 (18,410) 1,977,356 Costs in excess of net assets acquired, net.................................. -- 562,201 -- 329,518 -- 891,719 Long-term receivables.................. -- -- -- 190,306 -- 190,306 Notes receivable from unconsolidated subsidiaries......................... 200,000 (29,700) -- (170,300) -- -- Due to (from) unconsolidated subsidiaries......................... 12,915 (62,961) 72,978 (48,810) 25,878 -- Investments in unconsolidated subsidiaries......................... 1,432,614 297,349 (271,698) (1,703,764) 245,499 -- Investments in and advances to affiliates........................... 77,061 -- -- 111,282 -- 188,343 Deposits............................... -- -- -- 155,490 -- 155,490 Deferred tax assets.................... -- 32,130 -- 74,290 191,108 297,528 Other assets........................... 6,632 20,836 832 91,194 -- 119,494 ----------- ---------- --------- ----------- ---------- ----------- $ 1,775,555 $1,212,574 $ 33,474 $ 925,154 $ 443,172 $ 4,389,929 =========== ========== ========= =========== ========== =========== Current liabilities: Current portion of long-term debt.... $ -- $ 49,449 $ -- $ 87,167 $ -- $ 136,616 Accounts payable..................... 1,357 2,677 713 140,094 -- 144,841 Accrued employment costs............. -- -- -- 39,232 -- 39,232 Customer advances.................... -- 952 128 147,910 -- 148,990 Accrued interest and preferred dividends.......................... 22,543 1,889 -- 6,738 -- 31,170 Other current liabilities............ -- 5,719 235 40,230 -- 46,184 Income taxes payable................. 7,939 -- -- (42,000) 68,577 34,516 Deferred tax liabilities............. 21,222 -- -- (485) (20,737) -- ----------- ---------- --------- ----------- ---------- ----------- Total current liabilities.......... 53,061 60,686 1,076 418,886 47,840 581,549 Deferred tax liabilities............... 21,626 -- 5,214 (503) (26,337) -- Pension and other postretirement liabilities.......................... -- -- -- 55,590 -- 55,590 Long-term liabilities.................. -- 7,986 1,533 147,197 -- 156,716 Long-term debt......................... 350,000 959,555 -- 916,970 -- 2,226,525 Minority interest...................... -- -- -- 18,681 -- 18,681 Shareholders' equity: 6% Series C convertible redeemable preferred stock.................... 485,371 -- -- -- -- 485,371 6% Series D convertible redeemable preferred stock.................... 296,529 -- -- -- -- 296,529 Common stock......................... 3,368 -- -- -- -- 3,368 Paid-in capital...................... 2,771,964 604,166 -- -- (604,166) 2,771,964 Treasury stock, at cost.............. (3,360) -- -- -- -- (3,360) Unearned compensation................ (81) -- -- -- -- (81) Retained deficit..................... (2,223,710) (419,819) 25,651 (631,667) 1,025,835 (2,223,710) Accumulated other comprehensive income............................. 20,787 -- -- -- -- 20,787 ----------- ---------- --------- ----------- ---------- ----------- Total shareholders' equity......... 1,350,868 184,347 25,651 (631,667) 421,669 1,350,868 ----------- ---------- --------- ----------- ---------- ----------- $ 1,775,555 $1,212,574 $ 33,474 $ 925,154 $ 443,172 $ 4,389,929 =========== ========== ========= =========== ========== ===========
24 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 (IN THOUSANDS)
PARENT SUBSIDIARY GUARANTOR NON-GUARANTOR COMPANY ISSUER SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ---------- ---------- ------------- ------------ ------------ Revenues from satellite sales...................... $ -- $ -- $ -- $147,822 $ -- $147,822 Revenues from satellite services................... -- 22,259 12,660 88,330 (9,936) 113,313 Management fee from parent... -- -- -- 10,435 (10,435) -- -------- -------- ------- -------- -------- -------- Total revenues.......... -- 22,259 12,660 246,587 (20,371) 261,135 Costs of satellite sales..... -- -- -- 127,055 -- 127,055 Costs of satellite services................... -- 27,820 6,345 56,783 (15,443) 75,505 Selling, general and administrative expenses.... 313 3,326 -- 51,275 (263) 54,651 Management fee expense....... 10,435 -- -- -- (10,435) -- -------- -------- ------- -------- -------- -------- Operating (loss) income...... (10,748) (8,887) 6,315 11,474 5,770 3,924 Interest and investment income..................... 6,270 114 4 9,390 (8,109) 7,669 Interest expense............. (8,593) (25,234) (4) (24,692) 8,830 (49,693) -------- -------- ------- -------- -------- -------- (Loss) income before income taxes, equity in net loss of unconsolidated subsidiaries and affiliates, cumulative effect of change in accounting principle and discontinued operations.... (13,071) (34,007) 6,315 (3,828) 6,491 (38,100) Income tax benefit (provision)................ (1,596) 2,516 (2,210) (1,885) 5,100 1,925 -------- -------- ------- -------- -------- -------- (Loss) income before equity in net loss of unconsolidated subsidiaries and affiliates, cumulative effect of change in accounting principle and discontinued operations.... (14,667) (31,491) 4,105 (5,713) 11,591 (36,175) Equity in net (loss) income of unconsolidated subsidiaries, net of tax benefit.................... (20,668) 2,362 -- -- 18,306 -- Equity in net loss of affiliates, net of taxes... (23,674) -- -- 1,320 -- (22,354) Minority interest, net of taxes...................... -- -- -- 1,261 -- 1,261 -------- -------- ------- -------- -------- -------- (Loss) income before cumulative effect of change in accounting principle and discontinued operations.... (59,009) (29,129) 4,105 (3,132) 29,897 (57,268) Cumulative effect of change in accounting principle.... -- -- -- (1,741) -- (1,741) -------- -------- ------- -------- -------- -------- (Loss) income from continuing operations................. (59,009) (29,129) 4,105 (4,873) 29,897 (59,009) Loss from operations of discontinued operations, net of taxes............... -- (3,132) -- -- 3,132 -- -------- -------- ------- -------- -------- -------- Net (loss) income............ $(59,009) $(32,261) $ 4,105 $ (4,873) $ 33,029 $(59,009) ======== ======== ======= ======== ======== ========
25 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 (IN THOUSANDS)
PARENT SUBSIDIARY GUARANTOR NON-GUARANTOR COMPANY ISSUER SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ---------- ---------- ------------- ------------ ------------ Operating activities: Net (loss).............................. $(59,009) $(29,129) $ 4,105 $ (4,873) $ 29,897 $ (59,009) Non-cash items: Equity in net loss of affiliates, net of taxes............................ 23,674 -- -- (1,320) -- 22,354 Equity in net loss of unconsolidated subsidiaries, net of taxes.......... 20,668 (2,362) -- (18,306) -- -- Minority interest, net of taxes....... -- -- -- (1,261) -- (1,261) Cumulative effect of change in accounting principle, net of taxes............................... -- -- -- 1,741 -- 1,741 Deferred taxes........................ 1,418 1,227 950 2,891 (8,725) (2,239) Depreciation and amortization......... -- 17,254 5,253 31,780 -- 54,287 Non-cash interest expense............. -- 9,903 -- -- 9,903 Changes in operating assets and liabilities: Accounts receivable, net................ -- (219) 246 2,201 -- 2,228 Contracts-in-process.................... -- -- -- (16,218) -- (16,218) Inventories............................. -- -- -- (15,213) -- (15,213) Other current assets.................... -- 969 392 (4,510) -- (3,149) Long-term receivables................... -- -- -- (7,192) -- (7,192) Deposits................................ -- -- -- 14,300 -- 14,300 Due to (from) unconsolidated subsidiaries.......................... 6,150 7,522 (9,303) 15,247 (19,616) -- Other assets............................ 2,594 (371) -- (6,570) -- (4,347) Accounts payable........................ (8,149) 394 -- (14,765) -- (22,520) Accrued expenses and other current liabilities........................... (10,795) (1,664) (8,617) -- (21,076) Customer advances....................... -- (595) 18 (12,051) -- (12,628) Income taxes payable.................... 178 -- -- 132 (118) 192 Long-term liabilities................... -- (626) -- 3,878 -- 3,252 Pension and other postretirement liabilities........................... -- -- -- 1,881 -- 1,881 Other................................... 47 (3) 3 630 -- 677 -------- -------- ------- --------- -------- --------- Net cash provided by (used in) operating activities.............................. (12,429) (6,831) -- (36,215) 1,438 (54,037) -------- -------- ------- --------- -------- --------- Net cash provided by net assets from discontinued operations................. -- 6,519 -- 1,589 (8,108) -- -------- -------- ------- --------- -------- --------- Investing activities: Capital expenditures.................... -- -- -- (66,970) (174) (67,144) Investments in and advances to affiliates............................ (14,933) -- -- (8,127) 6,844 (16,216) Investments in and advances to unconsolidated subsidiaries........... (14,956) -- -- 14,956 -- -- -------- -------- ------- --------- -------- --------- Net cash (used in) provided by investing activities.............................. (29,889) -- -- (60,141) 6,670 (83,360) -------- -------- ------- --------- -------- --------- Financing activities: Borrowings under revolving credit facilities............................ -- -- -- 50,000 -- 50,000 Repayments under term loans............. -- -- -- (28,000) -- (28,000) Repayments under revolving credit facilities............................ -- -- -- (50,000) -- (50,000) Repayments of other long-term obligations........................... -- (489) -- (60) -- (549) Preferred dividends..................... (16,123) -- -- -- -- (16,123) Proceeds from stock issuances........... 4,870 -- -- -- -- 4,870 Repayment of note due to Loral SpaceCom.............................. -- 1,164 -- (1,164) -- -- -------- -------- ------- --------- -------- --------- Net cash (used in) provided by financing activities.............................. (11,253) 675 -- (29,224) -- (39,802) -------- -------- ------- --------- -------- --------- Increase (decrease) in cash and cash equivalents............................. (53,571) 363 -- (123,991) -- (177,199) Cash and cash equivalents -- beginning of period.................................. 151,405 2 -- 242,638 -- 394,045 -------- -------- ------- --------- -------- --------- Cash and cash equivalents -- end of period.................................. $97,834 $ 365 $ -- $ 118,647 $ -- $ 216,846 ======== ======== ======= ========= ======== =========
26 LORAL SPACE & COMMUNICATIONS LTD. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. SHAREHOLDERS' EQUITY The Company has the ability to make the mandatory redemption payments due on its Series C and Series D Preferred Stock in cash, common stock, or a combination of the two. The number of shares of the Company's common stock to be issued on redemption is based on the aggregate redemption value divided by the average of the volume weighted average daily price of the Company's common stock for the 10 trading-day period ending on the second business day prior to the redemption date (approximately $2.28 per share at March 31, 2002). The mandatory redemption payments are due in 2006 for the Series C Preferred Stock and in 2007 for the Series D Preferred Stock. The exact number of shares of the Company's common stock that may be issued on a mandatory redemption date cannot be determined at this time, but may involve the issuance of a significant number of shares of our common stock. That number will depend on a number of factors not known today, such as the price of the Company's common stock and the number of shares of the Company's preferred stock outstanding at that time. The Company has in the past from time to time effected voluntary exchanges of its preferred stock for common stock. To the extent that the Company makes such additional exchanges in the future, the Company will reduce the number of shares of its preferred stock subject to redemption in 2006 and 2007. However, there is no guarantee that these exchanges will or can be made in the future. On April 3, 2002, in a privately negotiated transaction, Loral exchanged 1,016,050 shares of its Series C Preferred Stock and 1,167,500 shares of its Series D Preferred Stock for 15,066,495 shares of its common stock. As a result of this transaction, Loral retired preferred stock with an aggregate liquidation preference of $109,177,500 (representing almost 14% of the preferred stock then outstanding) and will save $6.6 million in annual dividends that it would otherwise have been obligated to pay over the life of the preferred stock retired. 27 LORAL SPACE & COMMUNICATIONS LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Except for the historical information contained herein, the matters discussed in the following Management's Discussion and Analysis of Results of Operations and Financial Condition of Loral Space & Communications Ltd. and its subsidiaries ("Loral" or the "Company") are not historical facts, but are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. In addition, the Company or its representatives have made and may continue to make forward-looking statements, orally or in writing, in other contexts, such as in reports filed with the SEC, press releases or statements made with the approval of an authorized executive officer of the Company. These forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "plans," "may," "will," "would," "could," "should," "anticipates," "estimates," "project," "intend," or "outlook" or the negative of these words or other variations of these words or other comparable words, or by discussion of strategy that involves risks and uncertainties. These forward-looking statements are only predictions, and actual events or results may differ materially as a result of a wide variety of factors and conditions, many of which are beyond the Company's control. Some of the factors and conditions that could affect the outcome of forward-looking statements relate to (i) the Company's financial structure, (ii) Globalstar matters, (iii) litigation and disputes, (iv) operational matters and (v) other matters. For a detailed discussion of these factors and conditions, please refer to the section of Loral's latest Annual Report on Form 10-K titled "Certain Factors that May Affect Future Results" beginning on page 14 and to the other periodic reports filed with the SEC by Loral, its wholly owned subsidiary Loral Orion, Inc. ("Loral Orion"), and the Company's affiliate Satelites de Mexico, S.A. de C.V. ("Satmex"). In addition, we caution you that the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the Company's control. The Company undertakes no obligation to update any forward-looking statements. Loral is one of the world's leading satellite communications companies, with substantial activities in satellite-based communications services and satellite manufacturing. Loral is organized into three operating businesses: Fixed Satellite Services ("FSS"). Through its wholly-owned subsidiaries, Loral Skynet, Loral Orion, Loral Skynet do Brasil Ltda. ("Skynet do Brasil"), its 49%-owned affiliate Satmex, its 47%-owned affiliate Europe*Star Limited ("Europe*Star") and its 56%-owned affiliate XTAR L.L.C. ("XTAR"), Loral has become one of the world's leading providers of satellite services using geostationary communications satellites. The Company leases transponder capacity on its satellites to its customers for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television ("DTH") and provides telemetry, tracking and control services ("TT&C") and network services to customers. The Loral Global Alliance currently has ten operating high-powered geosynchronous satellites in orbit: the seven satellite Telstar fleet, two Satmex satellites and one Europe*Star satellite, with footprints covering almost all of the world's population. Satellite Manufacturing and Technology. The Company designs and manufactures satellites and space systems and develops satellite technology for a broad variety of customers and applications through Space Systems/Loral, Inc. ("SS/L"). Data Services: The Company provides managed communications networks and Internet and intranet services through Loral CyberStar, Inc. ("Loral CyberStar") and delivers high-speed broadband data communications, business television and business media services through CyberStar, L.P. ("CyberStar LP"). 28 CONSOLIDATED OPERATING RESULTS In evaluating financial performance, management uses revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") as a measure of a segment's profit or loss. The following discussion of revenues and EBITDA reflects the results of Loral's operating businesses for the three months ended March 31, 2002 and 2001, respectively. See Note 9 to Loral's condensed consolidated financial statements for additional information on segment results. The remainder of the discussion relates to the consolidated results of Loral, unless otherwise noted. REVENUES:
THREE MONTHS ENDED MARCH 31, --------------- 2002 2001 ------ ------ Fixed satellite services: Skynet.................................................... $ 93.7 $ 93.7 Affiliates(1)............................................. 27.1 35.5 ------ ------ Total fixed satellite services............................ 120.8 129.2 Satellite manufacturing and technology(2)................... 242.6 201.1 Data services(3)............................................ 20.4 28.7 ------ ------ Segment revenues............................................ 383.8 359.0 Affiliate eliminations(4)................................... (27.1) (35.5) Intercompany eliminations(5)................................ (48.5) (62.4) ------ ------ Revenues as reported........................................ $308.2 $261.1 ====== ======
EBITDA(6):
THREE MONTHS ENDED MARCH 31, --------------- 2002 2001 ------ ------ Fixed satellite services: Skynet.................................................... $65.8 $64.9 Affiliates(1)............................................. 11.6 19.0 ----- ----- Total fixed satellite services............................ 77.4 83.9 Satellite manufacturing and technology(2)................... 10.8 19.2 Data services(3)............................................ -- (10.0) Corporate expenses(7)....................................... (8.7) (9.4) ----- ----- Segment EBITDA before eliminations.......................... 79.5 83.7 Affiliate eliminations(4)................................... (11.6) (19.0) Intercompany eliminations(5)................................ (6.1) (6.5) ----- ----- EBITDA as reported.......................................... $61.8 $58.2 ===== =====
--------------- (1) Includes 100% of Europe*Star's and Satmex's revenues and EBITDA and 100% of Loral's 56%-owned affiliate XTAR, EBITDA since July 2001. Also includes Loral's subsidiary, Loral Skynet do Brasil. (2) Satellite manufacturing and technology consists of 100% of SS/L's results. (3) Data services consists of 100% of CyberStar LP (in which Loral owns an 82% equity interest) and 100% of Loral Orion's data services business, which business was transferred in December 2001 to a Loral subsidiary which assumed the name Loral CyberStar. Equipment sales for data services were $2.8 million and $2.1 million for the three months ended March 31, 2002 and 2001, respectively. 29 (4) Represents amounts related to unconsolidated affiliates (Satmex, Europe*Star and XTAR), which are eliminated in order to arrive at Loral's condensed consolidated results. Loral's proportionate share of these affiliates is included in equity in net loss of affiliates in Loral's condensed consolidated statements of operations. (5) Represents the elimination of intercompany sales and EBITDA, primarily for satellites under construction by SS/L for wholly owned subsidiaries; as well as the elimination of revenues for the lease of transponder capacity by satellite manufacturing and technology and data services from fixed satellite services. (6) EBITDA (which is equivalent to operating income/loss before depreciation and amortization, including amortization of unearned stock compensation) is provided because it is a measure commonly used in the communications industry to analyze companies on the basis of operating performance, leverage and liquidity and is presented to enhance the understanding of Loral's operating results. EBITDA is not an alternative to net income as an indicator of a company's operating performance, or cash flow from operations as a measure of a company's liquidity. EBITDA may be calculated differently and, therefore, may not be comparable to similarly titled measures reported by other companies. (7) Represents corporate expenses incurred in support of the Company's operations. Critical accounting matters See the Company's latest Annual Report on Form 10-K filed with the SEC and Other Matters -- Accounting Pronouncements below. THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH MARCH 31, 2001 Revenues as reported for Loral's operating businesses were $308 million in 2002 as compared to $261 million in 2001, after intercompany and affiliate eliminations of $76 million in 2002 and $98 million in 2001. The increase in revenues was primarily due to higher revenues in satellite manufacturing and technology resulting from the timing of work performed on satellite programs, offset by lower volume in data services revenues in 2002 as compared to 2001. Intercompany eliminations primarily consists of revenues from satellites under construction by satellite manufacturing and technology for FSS. EBITDA as reported increased to $62 million in 2002 as compared to $58 million in 2001. This increase arose primarily from the achievement of break-even EBITDA for data services in 2002, as compared to an EBITDA loss of $10 million in 2001, which resulted from cost savings realized from streamlining operations, offset by lower satellite manufacturing and technology EBITDA, which was due to lower margins primarily due to start-up costs associated with the introduction of several new technologies and subcontractor delays. Depreciation and amortization was $47 million and $54 million for the three months ended March 31, 2002 and 2001, respectively. In 2002, amortization expense decreased by $7 million, primarily as a result of the Company adopting SFAS No. 142 (see Accounting Pronouncements). Interest and investment income was $5 million in 2002 as compared to $8 million in 2001. This decrease was principally due to lower average cash balances for investment and lower interest rates in 2002 as compared to 2001. Interest expense was $19 million in 2002, net of capitalized interest of $7 million, as compared to $50 million in 2001, net of capitalized interest of $5 million. The decrease was primarily due to reduced interest expense resulting from the accounting for the Loral Orion exchange offer completed in December 2001, as the Company does not recognize any interest expense on Loral Orion's new senior notes (see Liquidity and Capital Resources) and lower debt balances and interest rates in 2002 as compared to 2001. Loral, as a Bermuda company, is subject to U.S. federal, state and local income taxation at regular corporate rates plus an additional 30% "branch profits" tax on any income that is effectively connected with the conduct of a U.S. trade or business. Loral's U.S. subsidiaries are subject to regular corporate tax on their worldwide income. For 2002, the Company recorded income tax expense of $6 million on pre-tax income of $2 million, as compared to an income tax benefit of $2 million on a pre-tax loss of $38 million for 2001. The 30 increase in tax expense is primarily attributable to a higher amount of income subject to U.S. tax during the current period. The equity in net loss of affiliates was $16 million in 2002 compared to $22 million in 2001. Loral's share of equity in net losses attributable to Globalstar related activities, net of taxes, was $2 million in 2002 and $13 million in 2001. This reduction primarily resulted from the Company's decreased investment in Globalstar service provider partnerships. Loral's share of equity in net losses of Satmex was $8 million in 2001, as compared to $3 million in 2001. Loral's share of equity in net losses of Europe*Star, managed by Alcatel, was $6 million in 2002 and 2001 (see Note 5 to the condensed consolidated financial statements). The minority interest benefit primarily reflects the reduction of CyberStar LP's loss attributed to CyberStar LP's other investor, who owned 17.6% as of March 31, 2002. On January 1, 2002 the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which resulted in the Company recording a charge for the cumulative effect of change in accounting principle, net of taxes, of $877 million (see Accounting Pronouncements). The cumulative effect of change in accounting principle, net of taxes, in 2001 related to the Company's adoption of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Preferred dividends were $12 million in 2002 as compared to $16 million in 2001. This decrease was primarily due to lower dividends as a result of the conversion of 3.7 million shares of Loral's 6% Series C convertible redeemable preferred stock (the "Series C Preferred Stock") and 1.9 million shares of Loral's 6% Series D convertible redeemable preferred stock (the "Series D Preferred Stock") into the Company's common stock in April 2001, in connection with the Company's exchange offers (see Liquidity and Capital Resources). As a result of the above, net loss applicable to common shareholders before the cumulative effect of the change in accounting principle relating to cost in excess of net assets acquired ("goodwill") was $32 million or $0.09 per basic and diluted share in 2002, as compared to $75 million or $0.25 per basic and diluted share in 2001 ($69 million or $0.23 per basic and diluted share on a as adjusted basis to exclude the amortization of goodwill). Net loss applicable to common shareholders was $908 million or $2.69 per basic and diluted share in 2002. Basic and diluted weighted average shares were 337 million in 2002 and 299 million in 2001. The increase in shares was primarily due to the 30.9 million shares of common stock issued in connection with the Company's exchange offers in April 2001 (see Liquidity and Capital Resources). RESULTS BY OPERATING SEGMENT FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 Fixed Satellite Services FSS revenues (including 100% of Satmex and Europe*Star) decreased to $121 million in 2002, from $129 million in 2001, which was primarily due to decreased affiliate sales for Satmex, primarily resulting from contract cancellations and the anticipated non-renewal of a large customer in 2002. EBITDA (including 100% of Satmex, Europe*Star and XTAR) decreased to $77 million in 2002, from $84 million in 2001, which was primarily due to lower Satmex sales. As of March 31, 2002, FSS had 10 operational satellites (three of which are owned by Loral affiliates). Funded backlog for the segment totaled $1.8 billion at March 31, 2002, and December 31, 2001, including intercompany backlog of $56 million and $61 million at March 31, 2002 and December 31, 2001, respectively, and affiliate backlog of $404 million for Satmex and Europe*Star at March 31, 2002 and December 31, 2001. Gross bookings for FSS in 2002 declined by $31 million from 2001 to $168 million, as some customers remained cautious about initiating new projects, particularly in the broadband data market. De-bookings for FSS of $25 million in 2002 are down significantly from each quarter in 2001, indicating that the FSS de-bookings trend may be subsiding. Satellite Manufacturing and Technology Financial performance of the satellite manufacturing industry suffered in 2001 and early 2002 for numerous reasons. There is more capacity in the industry than needed at a time when, because of economic conditions, customers' capital investment programs have been stretched over longer time-frames and demand 31 for new and replacement satellites and satellite systems has slowed. In addition, the introduction of new technologies required by customer applications has increased development costs. To counter these factors, SS/L has increased productivity by reducing its workforce over the last four quarters. The Company also is streamlining certain internal processes and has instituted tighter controls to ensure that subcontracted components are received on time and meet all customer requirements, in turn bringing more stability and predictability to Loral's manufacturing performance. The benefits of these and other changes are expected to positively effect SS/L's financial performance over the course of 2002. Over the past three years, SS/L has developed a series of technical advances in response to customers' expressed desire for expanded capabilities. These advances include the development of spot beam technology, Ka-band frequency usage, increased power levels, lithium-ion batteries and advanced propulsion systems. In addition, SS/L has introduced a new family of satellite buses, designated the 1300E and comprising a number of models of varying size, power and capabilities based on the heritage 1300 bus. These improvements are part of the evolutionary technology developments typical to the satellite manufacturing industry and are essential to the maintenance of the company's strong market share position. To counter the challenges that typically accompany new product or technology introductions, SS/L has reinforced its design and testing disciplines to provide maximum reliability and to control added costs and potential delays. Revenues at SS/L, before intercompany eliminations, increased to $243 million in 2002, from $201 million in 2001, primarily resulting from the timing of work performed on backlog programs. EBITDA before intercompany eliminations was $11 million in 2002 as compared to $19 million in 2001, which was due to lower margins primarily due to start-up costs associated with the introduction of several new technologies and subcontractor delays. Funded backlog for SS/L as of March 31, 2002 and December 31, 2001 was $1.2 billion and $1.6 billion, respectively, including intercompany backlog of $221 million as of March 31, 2002 and $265 million as of December 31, 2001. SS/L gross bookings in the first quarter of 2002 declined from 2001 by $137 million, $103 million of which resulted from Satmex's direct procurement of launch services which led to the cancellation of a previously booked launch at SS/L. Data Services Revenues are derived primarily from Loral CyberStar's corporate data networking and Internet and intranet services businesses, which have been impacted by the slowdown of worldwide prices and demand for telecommunications and Internet services. Revenues for data services were $20 million in 2002, as compared to $29 million in 2001 due primarily to lower volume from the VSAT business, Internet services and occasional use revenue from business television services. Data services achieved break-even EBITDA in 2002 as compared to an EBITDA loss of $10 million in 2001. The substantial improvement in EBITDA in 2002 resulted primarily from cost savings realized from streamlining operations and reduced satellite capacity costs. As of March 31, 2002 and December 31, 2001, funded backlog for the segment was $88 million and $98 million, respectively, which was all from external sources. TRANSACTIONS WITH AFFILIATES Funded backlog at March 31, 2002 and December 31, 2001 includes $214 million and $341 million, respectively, as a result of transactions entered into with affiliates and related parties (primarily with Satmex, XTAR and Hisdesat) for the construction of satellites. 32 The Company's condensed consolidated statements of operations reflect the effects of the following amounts related to transactions with or investments in affiliates (in thousands).
THREE MONTHS ENDED MARCH 31, ------------------- 2002 2001 -------- -------- Revenues.................................................... $22,642 $30,479 Investment income........................................... 294 294 Interest expense capitalized on development stage enterprises............................................... 127 Profits relating to affiliate transactions not eliminated... 2,742 1,163 Amortization of deferred credit, capitalized interest and profits related to investment in affiliate................ (135) 73
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. Loral regularly engages in discussions with telecommunications service providers, equipment manufacturers and others regarding possible strategic transactions and alliances such as joint ventures; strategic relationships involving our fixed satellite services operations and satellite manufacturing operations, which could involve business combinations; participation in the Loral Global Alliance; and dispositions of non-core assets. In order to pursue such opportunities, Loral may seek funds from strategic partners and other investors, and through incurrence of debt or the issuance of additional equity. Management believes that cash, available credit and cash flow from operations will be adequate to meet its expected cash requirements. At March 31, 2002, the Company has met all of the covenants and conditions under its various lending and funding arrangements and believes that it will continue to meet these covenants and conditions. The Satellite Credit Agreement, LSC Amended Credit Agreement, the indenture relating to Loral Orion's new senior notes and the indenture relating to Loral's 9.5% senior notes provide for cross default or cross acceleration provisions (see below). Debt Satellite Credit Agreement On December 21, 2001, Loral Satellite, Inc. ("Loral Satellite"), a subsidiary of Loral Space & Communications Corporation, which in turn is a subsidiary of Loral, entered into the first amendment to the $500 million secured credit agreement dated as of November 17, 2000 by and among Loral Satellite, Bank of America as Administrative Agent, and the other lending parties thereto (the "Satellite Credit Agreement"). The first amendment provided for a $200 million revolving credit facility expiring January 7, 2005 and a term loan of which $283 million was outstanding as of March 31, 2002 and which is subject to the following amortization: $11.25 million per quarter on June 30, 2002 through September 30, 2004 and $170 million on January 7, 2005. The Satellite Credit Agreement is secured by certain assets of Loral Satellite, including the Telstar 6 and Telstar 7 satellites and the loans due to Loral under Globalstar's $500 million credit facility (see below). Based on third party valuations, management believes that the fair value of Telstar 6 and Telstar 7 is in excess of $500 million. As of March 31, 2002, the net book value of Telstar 6 and Telstar 7 was approximately $325 million. In addition, as part of the first amendment, lenders under the Satellite Credit Agreement received a junior lien on the assets of Loral SpaceCom Corporation ("LSC") and its subsidiaries pledged in favor of the banks under the LSC Amended Credit Agreement. Loral has also agreed to guarantee Loral Satellite's obligations under the Satellite Credit Agreement. 33 LSC Amended Credit Agreement On December 21, 2001, LSC entered into an Amended and Restated Credit Agreement with Bank of America, N.A., as Administrative Agent, and the other lenders parties thereto (the "LSC Amended Credit Agreement"). The LSC Amended Credit Agreement provides for a $200 million revolving credit facility expiring January 7, 2005 and a $400 million term loan subject to the following remaining amortization payment schedule: $5 million on each of June 30, and September 30, 2002; $25 million on December 31, 2002; $5 million on each of March 31, June 30, September 30 and December 31, 2003; $20 million on each of March 31, June 30 and September 30, 2004; and $280 million on January 7, 2005. Borrowings under the LSC Amended Credit Agreement bear interest, at LSC's option, at various rates based on margins over the lead bank's base rate or the London Interbank Offered Rate for periods of one, two, three or six months. The margin levels have increased under the new amended agreement and are fixed through September 30, 2002. As a result of this increase in margin levels, interest costs will increase by approximately $11 million annually. LSC pays a commitment fee on the unused portion of the revolver. The LSC Amended Credit Agreement is secured by substantially all of the assets of and the stock of LSC and its subsidiaries, including SS/L. LSC's obligations under the LSC Amended Credit Agreement have been guaranteed by certain of LSC's subsidiaries, including SS/L. As of March 31, 2002, the net book value of the assets that secure the LSC Amended Credit Agreement was approximately $860 million. Loral Orion Debt Agreements On December 21, 2001, Loral Orion completed exchange offers and consent solicitations by issuing $613 million principal amount of new senior notes due 2006 guaranteed by Loral, in exchange for the extinguishment of $841 million principal amount of Loral Orion senior notes due in 2007 and senior discount notes due 2007 as discussed below. As part of the exchange, Loral issued to the new note holders 6.04 million five-year warrants to purchase Loral common stock (approximately 1.8% of the Company's outstanding common stock) at a price of $2.37 per share. The warrants were valued at $7 million using the Black Scholes option pricing model with the following assumptions: stock volatility, 75%, risk free interest rate, 4.36%, and no dividends during the expected term. Principal amount of $37 million of the existing senior notes and principal amount of $49 million of the existing senior discount notes remain outstanding at their original maturities and interest rates. The interest rate on the new senior notes is 10%, a reduction from the 11.25% interest rate on the existing senior notes and the 12.5% rate on the existing senior discount notes. Interest is payable semi-annually on July 15 and January 15, beginning July 15, 2002. As a result of the lower interest rate and the $229 million reduction in principal amount of debt, Loral Orion's annual cash interest payments will be reduced by approximately $39 million. Under U.S. generally accepted accounting principles dealing with debt restructurings, in December 2001 the Company recorded an after-tax extraordinary gain of $22 million on the exchange, after expenses of $8 million. The carrying value of the new senior notes on the balance sheet is $904 million, although the actual principal amount of the new senior notes is $613 million. The difference between this carrying value and the actual principal amount of the new senior notes is being amortized over the life of the new senior notes, fully offsetting interest expense through maturity of the new senior notes. The indenture relating to the new senior notes contains limitations on Loral Orion and its subsidiaries, including, without limitation, restrictions on Loral Orion's ability to pay dividends or make loans to Loral. Loral 9.5% Senior Notes In January 1999, Loral sold $350 million of 9.5% senior notes due 2006. The related indenture contains customary covenants, including, without limitation, restrictions on incurring indebtedness and paying dividends. Equity On April 3, 2002, in a privately negotiated transaction, Loral exchanged 1,016,050 shares of its Series C Preferred Stock and 1,167,500 shares of its Series D Preferred Stock for 15,066,495 shares of its common 34 stock. As a result of this transaction, Loral retired preferred stock with an aggregate liquidation preference of $109,177,500 (representing almost 14% of the preferred stock then outstanding) and will save $6.6 million in annual dividends that it would otherwise have been obligated to pay over the life of the preferred stock retired. On April 16, 2001, the Company completed exchange offers for its Series C Preferred Stock and its Series D Preferred Stock. As a result, 3.7 million shares of its Series C Preferred Stock and 1.9 million shares of its Series D Preferred Stock were tendered and exchanged (representing approximately 27% and 24%, respectively, of the outstanding shares of the two issues) into 30.9 million shares of the Company's common stock. Loral incurred non-cash dividend charges in the second quarter of 2001 of approximately $29 million, which primarily relates to the difference between the value of the common stock issued in the exchange offers and the value of the shares that were issuable under the stated conversion terms of the preferred stock. The non-cash dividend charges had no impact on Loral's total shareholders' equity as the offset was an increase in common stock and paid-in capital. In addition, Loral will save approximately $17 million annually in preferred dividend payments and will avoid approximately $277 million in mandatory redemptions in 2006 and 2007. The Company has the ability to make the mandatory redemption payments due on its Series C and Series D Preferred Stock in cash, common stock, or a combination of the two. The number of shares of the Company's common stock to be issued on redemption is based on the aggregate redemption value divided by the average of the volume weighted average daily price of the Company's common stock for the 10 trading-day period ending on the second business day prior to the redemption date (approximately $2.28 per share at March 31, 2002). The mandatory redemption payments are due in 2006 for the Series C Preferred Stock and in 2007 for the Series D Preferred Stock. The exact number of shares of the Company's common stock that may be issued on a mandatory redemption date cannot be determined at this time, but may involve the issuance of a significant number of shares of the Company's common stock. That number will depend on a number of factors not known today, such as the price of the Company's common stock and the number of shares of the Company's preferred stock outstanding at that time. The Company has in the past from time to time effected voluntary exchanges of its preferred stock for common stock. To the extent that the Company makes such additional exchanges in the future, the Company will reduce the number of shares of its preferred stock subject to redemption in 2006 and 2007. However, there is no guarantee that theses exchanges will or can be made in the future. Cash and Available Credit As of March 31, 2002, Loral had $237 million of cash and available credit (including $129 million of available credit from the credit facilities described above under the captions "Satellite Credit Agreement" and "LSC Amended Credit Agreement"). Net Cash Provided by (Used in) Operating Activities Net cash provided by operating activities for 2002 was $89 million, as compared to net cash used in operating activities of $(54) million in 2001. Net cash provided by operating activities for 2002 was $89 million, primarily due to the net loss as adjusted for non-cash items of $46 million and a increase in customer advances of $28 million, primarily resulting from the timing of satellite program milestone payments. Net cash used in operating activities for 2001 was $54 million, primarily due to increases in inventories of $15 million due to the timing of satellite contract awards, contracts-in-process of $16 million due to the progress on satellite programs and decreases in accounts payable of $23 million due to the timing of satellite subcontractor payments and accrued expenses and other current liabilities of $21 million due to the timing of interest and dividend payments, offset by the net loss as adjusted for non-cash operating items of $26 million. 35 Net Cash Used in Investing Activities Net cash used in investing activities in 2002 and 2001 was $61 million and $83 million, respectively, primarily as a result of capital expenditures mainly for the construction of satellites and reduced investments in Globalstar service provider partnerships. Net Cash Used in Financing Activities Net cash used in financing activities for 2002 and 2001 was $80 million and $40 million, respectively, primarily due to net payments for debt obligations and preferred dividends. OTHER LIQUIDITY MATTERS Fixed Satellite Services Satellites are carefully built and tested and have some redundant components to save the satellite in case of a component failure. Due to the failure of primary components, certain of our satellites are currently operating using back-up components. If these back-up components fail and the primary components cannot be restored, these satellites could lose a significant amount of capacity or be total losses which, until replacement satellites are placed in-orbit, would result in lost revenues and lost profits to the Company. Loral Orion Loral Orion anticipates it will have additional requirements over the next three years to fund the replacement of Telstar 11 which is expected to reach the end of its useful life in 2005. To the extent that excess cash flow from Loral Orion's satellites is not sufficient to meet these requirements, Loral Orion will need to secure funding from Loral, or raise additional financing to fund this requirement and there can be no assurance that Loral Orion will be successful in doing so. Sources of additional capital may include public or private debt, vendor financing, equity financings or strategic investments. To the extent that Loral Orion seeks to raise additional debt financing, its indenture relating to its 10% senior notes limits the amount of such additional debt to $100 million for such replacement satellite and prohibits Loral Orion from using Telstar 11, Telstar 10/Apstar IIR and Telstar 12 as collateral for indebtedness. See Commitments and Contingencies. Telstar 12, originally intended to operate at 12 degrees W.L., was launched aboard an Ariane launch vehicle in October 1999 into the orbital slot located at 15 degrees W.L., and commenced operations in January 2000. Under an agreement reached with Eutelsat, Loral Orion agreed to operate Telstar 12 at 15 degrees W.L. while Eutelsat continues to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority rights at such location on Loral Orion's behalf. As part of this coordination effort, Loral Orion agreed to provide to Eutelsat four 54 MHz transponders on Telstar 12 for the life of the satellite and has retained risk of loss with respect to those transponders. Eutelsat also has the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. As part of the international coordination process, Loral continues to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees W.L. If these discussions are not successful, Telstar 12's useable capacity may be reduced. On September 28, 1999, Loral Orion purchased from APT Satellite Company Limited ("APT") for approximately $273 million, the rights to all transponder capacity and existing customer leases on the Apstar IIR satellite (except for one C-band transponder retained by APT), and renamed the satellite the Telstar 10/ Apstar IIR satellite. Loral Orion has full use of the transponders for the remaining life of Telstar 10/Apstar IIR. Loral Orion also has the right to provide replacement satellites upon the end of life of Telstar 10/Apstar IIR, for which it will be required to pay a fee to APT for the right to use the orbital slot. Satmex Satmex currently has two satellites in orbit (Solidaridad 2 and Satmex 5) and one satellite in inclined orbit (Morelos 2). In August 2000, Satmex announced that its Solidaridad 1 satellite ceased operation and was irretrievably lost. The loss was caused by the failure of the back-up control processor on board the satellite. Solidaridad 1, which was built by Hughes Space and Communications ("Hughes") and launched in 36 1994, experienced a failure of its primary control processor in April 1999, and had been operating on its back-up processor since that time. The majority of Solidaridad 1 customers were provided replacement capacity on other Satmex satellites or on satellites operated by Loral Skynet. The loss of Solidaridad 1 was fully covered by insurance proceeds. Satmex has contracted with SS/L to build a replacement satellite. This satellite, known as Satmex 6, is scheduled to be launched in the first quarter of 2003, and is designed to provide broader coverage and higher power levels than any other satellite currently in the Satmex fleet. At March 31, 2002, Solidaridad 2 had a remaining estimated useful life of seven years. Solidaridad 2 was also manufactured by Hughes and is similar in design to Solidaridad 1 and to other Hughes satellites which have experienced in-orbit component failures. While Satmex has obtained in-orbit insurance for Solidaridad 2, a satellite failure may result in a drop in Satmex's profits, which loss of profits would not be insured. The in-orbit insurance for Solidaridad 2 expires in November 2002. Satmex cannot guarantee that it will be able to renew the insurance at the end of this period, or that if renewal is available, that it would be on acceptable terms. For example, a renewal policy for Solidaridad 2 may not insure against an in-orbit failure due to the loss of the satellite's control processor, the same component that caused the loss of Solidaridad 1 and other Hughes satellites. An uninsured loss would have a material adverse effect on Satmex's results of operations and financial condition. In August 2001, the Mexican government granted market access rights for satellites owned by non-Mexican satellite operators, including SES Global and PanAmSat, resulting in increased competition for Satmex. In connection with the privatization of Satmex by the Mexican Government of its fixed satellite services business, Loral and Principia formed a joint venture, Firmamento Mexicano, S.A. de R.L. de C.V. ("Holdings"). In 1997, Holdings acquired 75% of the outstanding capital stock of Satmex. As part of the acquisition, Servicios Corporativos Satelitales, S.A. de C.V. ("Servicios"), a wholly owned subsidiary of Holdings, issued a seven-year Government Obligation ("Government Obligation") to the Mexican Government in consideration for the assumption by Satmex of the debt incurred by Servicios in connection with the acquisition. The Government Obligation had an initial face amount of $125 million, which accretes at 6.03% and expires in December 2004. The debt of Satmex and Holdings is non-recourse to Loral and Principia. However, Loral and Principia have agreed to maintain assets in a collateral trust in an amount equal to the value of the Government Obligation through December 30, 2000 and, thereafter, in an amount equal to 1.2 times the value of the Government Obligation until maturity. As of March 31, 2002, Loral and Principia have pledged their respective shares in Holdings in such trust. Loral has a 65% economic interest in Holdings and a 49% indirect economic interest in Satmex. Loral accounts for Satmex using the equity method. The covenants of Satmex's debt instruments restrict the ability of Satmex to pay dividends to Loral. Europe*Star In December 1998, Loral finalized its strategic partnership with a subsidiary of Alcatel to jointly build and operate Europe*Star, a geostationary satellite system that commenced service in 2001. Europe*Star is a member of the Loral Global Alliance, which is led by Loral Skynet. Through March 31, 2002, Loral has invested $76 million in Europe*Star. As of March 31, 2002, Loral owned 47% of Europe*Star. Pursuant to the terms of the shareholders agreement, Loral has permitted Alcatel to fund additional expenditures to develop Europe*Star's business and infrastructure through $181 million in loans to the venture, which Alcatel claims are payable on demand. XTAR, L.L.C. XTAR, L.L.C. ("XTAR"), a newly formed joint venture between Loral and Hisdesat Servicios Estrategicos, S.A. ("Hisdesat"), a consortium comprised of leading Spanish telecommunications companies, including Hispasat, S.A., and agencies of the Spanish government, plans to construct and launch an X-band satellite by the end of 2003 to provide X-band services to government users in the United States and Spain, as well as other friendly and allied nations. XTAR is owned 56% by Loral (accounted for under the equity method since the Company does not control certain significant operating decisions) and 44% by Hisdesat. In 37 addition, XTAR has agreed to lease certain transponders on the Spainsat satellite, which is being constructed for Hisdesat. As of March 31, 2002, the partners in proportion to their respective ownership interests, have contributed $20 million to XTAR and expect to fund an additional $35 million in 2002. XTAR expects to raise the remaining amount of the funds it needs to construct and launch its satellite through vendor and other third-party financings. Globalstar and GTL The Company accounts for its investment in Globalstar's $500 million credit facility at fair value, with changes in the value (net of tax) recorded as a component of other comprehensive loss (see Notes 3 and 5 to the condensed consolidated financial statements). The Company recognized unrealized net gains (losses) after taxes as a component of other comprehensive income (loss) of $7 million and $(10) million in 2002 and 2001, respectively, in connection with this security. In January 2001, Globalstar suspended indefinitely principal and interest payments on its debt and dividend payments on its redeemable preferred partnership interests in order to conserve cash for operations. On February 15, 2002, Globalstar and certain of its direct subsidiaries filed voluntary petitions under Chapter 11 of Title 11, United States Code in the United States Bankruptcy Court for the District of Delaware (the "Court"). In connection therewith, Loral/Qualcomm Satellite Services, L.P., the managing general partner of Globalstar, its general partner, Loral/Qualcomm Partnership, L.P. ("LQP"), and certain of Loral's subsidiaries that serve as general partners of LQP also filed voluntary petitions with the Court. As a result of Globalstar's bankruptcy petition, several of Globalstar's debt facilities and other debt obligations have been accelerated and are immediately due and payable. Subcontractors have assumed $87 million of financing related to deferred billings SS/L has provided to Globalstar at March 31, 2002, which includes $46 million which is non-recourse to SS/L in the event of non-payment by Globalstar due to bankruptcy and is included in long-term liabilities in the consolidated balance sheets. Globalstar has reached an agreement with Loral and an informal committee of noteholders, representing approximately 17% principal amount of Globalstar's outstanding notes, regarding the substantive terms of a financial and legal restructuring of Globalstar's business. The proposed restructuring plan, which will have to be submitted for and will be subject to Court approval, calls for the establishment of a new Globalstar company which will, in addition to taking ownership of all of Globalstar's existing assets, acquire certain service provider operations, including Loral's investment in the Canadian service provider company. Under the proposed restructuring plan, if approved, the new company will initially be owned by Globalstar's existing noteholders and other unsecured creditors, including Loral, which would result in Loral initially holding about a 24% equity interest in the new company, prior to any dilution that may result from any new investments. The proposed plan also calls for the cancellation of all existing partnership interests in Globalstar, but contemplates, subject to the satisfaction of certain conditions, a rights offering to common and preferred shareholders in Globalstar Telecommunications Limited and Globalstar's creditors which could give them the option to purchase up to 15% of the common equity in the new company. The proposed plan, if approved, will also provide for mutual releases of claims related to Globalstar to be granted to and by various persons, including, among others, Globalstar, Globalstar's officers and directors, Loral and its affiliates, Globalstar partners, service providers acquired by Globalstar and the members of any official and informal committees of creditors. On March 5, 2002, the Court appointed an official committee of creditors. Although the majority of the members of the official committee are the members of the informal committee, there can be no assurance that the proposed restructuring plan, including Loral's proposed equity ownership in the new company, will be approved by Globalstar's remaining creditors or the Court. As of March 31, 2002, the Company's investment in Globalstar related activities was approximately $42 million, consisting primarily of the fair value of its investment in Globalstar's $500 million credit facility, which was based on the trading values of Globalstar's public debt at March 31, 2002. If Globalstar were unable to effectuate a successful restructuring, the Company's remaining investment in Globalstar's $500 million credit facility would be impaired, which, as discussed above, would have no effect on the Company's results of operations. Loral's investment in the 2002 operations of those Globalstar service provider ventures in 38 which it participates as an equity owner is expected to be less than $5 million in 2002. These Globalstar service providers own and operate gateways, are licensed to provide services and, through their sales and marketing organizations, are actively selling Globalstar service, in their respective territories. Contractual Obligations Contractual obligations as previously disclosed in the Company's Latest Annual Report on Form 10-K have not materially changed, except for the reduction in the aggregate liquidation preference of $109 million resulting from the exchange of the Company's preferred stock for common stock in April 2002 (See Liquidity and Capital Resources). COMMITMENTS AND CONTINGENCIES Loral Skynet has entered into prepaid leases and sales contracts relating to transponders on its satellites. Under the terms of these agreements, Loral Skynet continues to operate the satellites which carry the transponders and originally provided for a warranty for a period of 10 to 14 years, in the case of sales contracts (twelve transponders), and the lease term, in the case of the prepaid leases (nine transponders). Depending on the contract, Loral Skynet may be required to replace transponders which do not meet operating specifications. All customers are entitled to a refund equal to the reimbursement value if there is no replacement, which is normally covered by insurance. In the case of the sales contracts, the reimbursement value is based on the original purchase price plus an interest factor from the time the payment was received to acceptance of the transponder by the customer, reduced on a straight-line basis over the warranty period. In the case of prepaid leases, the reimbursement value is equal to the unamortized portion of the lease prepayment made by the customer. Twelve of the satellites built by SS/L and launched since 1997, five of which are owned and operated by Loral's subsidiaries or affiliates, have experienced minor losses of power from their solar arrays. Although to date, neither the Company nor any of the customers using the affected satellites have experienced any degradation in performance, there can be no assurance that one or more of the affected satellites will not experience additional power loss that could result in performance degradation, including loss of transponder capacity. In the event of additional power loss, the extent of the performance degradation, if any, will depend on numerous factors, including the amount of the additional power loss, the level of redundancy built into the affected satellite's design, when in the life of the affected satellite the loss occurred and the number and type of use being made of transponders then in service. A complete or partial loss of satellites could result in a loss of orbital incentive payments and, in the case of satellites owned by Loral subsidiaries and affiliates, a loss of revenues and profits. With respect to satellites under construction and construction of new satellites, based on its investigation of the matter, SS/L has identified and has implemented remedial measures that SS/L believes will prevent newly launched satellites from experiencing similar anomalies. SS/L does not expect that implementation of these measures will cause any significant delay in the launch of satellites under construction or construction of new satellites. Based upon information currently available, including design redundancies to accommodate small power losses and that no pattern has been identified as to the timing or specific location within the solar arrays of the failures, the Company believes that this matter will not have a material adverse effect on the consolidated financial position or results of operations of Loral. In September 2001, the PAS 7 satellite built by SS/L for PanAmSat experienced an electrical power failure on its solar arrays that resulted in the loss of use of certain transponders on the satellite. As a result, PanAmSat has claimed that under its contract with SS/L it is entitled to be paid $16 million. SS/L disputes this claim and is in discussions with PanAmSat to resolve this matter. SS/L believes that this failure is an isolated event and does not reflect a systemic problem in either the satellite design or manufacturing process. Accordingly, SS/L does not believe that this anomaly will affect other on-orbit satellites built by SS/L. However, in connection with the renewal of the insurance for the Telstar 10/Apstar IIR satellite in October 2001, the insurance underwriters have excluded losses due to solar array failures, since Telstar 10/Apstar IIR was manufactured by SS/L and has the same solar array configuration as PAS 7. Loral is currently in discussions with its insurers to remove this exclusion from the Telstar 10/Apstar IIR policy, in return for a deductible for losses arising from electrical problems on the satellite's solar arrays. There can be no assurance 39 that these discussions will be successful. Three other satellites operated by Loral Skynet have the same solar array configuration as Telstar 10/Apstar IIR. There can be no assurance that the insurers will not require similar exclusions in connection with renewals of insurance for these satellites in 2003 and 2004. In addition, the PAS 8 satellite has experienced minor losses of power from its solar arrays, the cause of which is unrelated to the loss of power on the PAS 7 satellite. PanAmSat has claimed that under its contract with SS/L it is entitled to be paid $7.5 million as a result of these minor power losses. SS/L disputes this claim. SS/L and PanAmSat are in discussions to resolve this matter. SS/L has contracted to build a spot beam, Ka-band satellite for a customer planning to offer broadband data services directly to the consumer. The customer has failed to make certain payments due to SS/L under the contract and has asserted that SS/L is not able to meet the contractual delivery date for the satellite. As of March 31, 2002, SS/L had billed and unbilled accounts receivable and vendor financing arrangements of $49 million with this customer. SS/L and the customer have entered into an agreement that provides that, until July 1, 2002, neither party will assert that the other party is in default under the contract, and the parties are currently engaged in discussions to resolve their outstanding issues. In addition, SS/L and the customer have agreed to suspend work on the satellite during these discussions, pending the outcome of the discussions. If the parties do not resolve their issues, it is likely that each party would assert that the other is in default. The contract provides that SS/L may terminate the contract for a customer default 90 days after serving a notice of default if the default is not cured by the customer; upon such a default, SS/L would be entitled to recover the contractually agreed price of items delivered and accepted prior to termination and 115% of its actual costs incurred for items not delivered prior to termination. The contract also provides that the customer may terminate the contract for an SS/L default 133 days after serving a notice of default if the default is not cured by SS/L; upon such a default, SS/L would be obligated to refund all amounts previously paid by the customer, $78 million as of December 31, 2001, plus interest. Based on the discussions currently in progress with the customer and other parties who may be interested in the satellite, management's assessment of the market opportunities for the satellite and consideration of the satellite's estimated value, management does not believe that this matter will have a material adverse effect on the consolidated financial position or results of operations of Loral. SS/L was a party to an Operational Agreement with Alcatel Space Industries, pursuant to which the parties had agreed to cooperate on certain satellite programs, and an Alliance Agreement with Alcatel Space (together with Alcatel Space Industries, Alcatel), pursuant to which Alcatel had certain rights with respect to SS/L, including the right to appoint two representatives to SS/L's seven-member board of directors, rights to approve certain extraordinary actions and certain rights to purchase SS/L shares at fair market value in the event of a change of control (as defined) of either Loral or SS/L. The agreements between Alcatel and SS/L were terminable on one year's notice, and, on February 22, 2001, Loral gave notice to Alcatel that they would expire on February 22, 2002. In April 2001, Alcatel commenced an arbitration proceeding challenging the effectiveness of Loral's notice of termination and asserting various alleged breaches of the agreements by SS/L relating to the exchange of information and other procedural or administrative matters. In February 2002, the arbitral tribunal upheld the validity of Loral's termination effective February 22, 2002 and Alcatel's claims as to certain breaches. The arbitral tribunal has provided both parties with an opportunity to file any additional claims or counterclaims they may have. In March 2002, Alcatel submitted additional claims against Loral and SS/L and is seeking at least $330 million in damages in respect of all of its claims. The Company believes that Alcatel's claims for damages are without merit and have been asserted for competitive reasons to disadvantage SS/L and that this matter will not have a material adverse effect on its consolidated financial position or results of operations. In April 2002, Loral and SS/L filed their statement of counterclaims against Alcatel. The claims being asserted against Alcatel are for breach of contract, tortious interference with contracts and business relationships, defamation, misappropriation of SS/L's confidential property, conversion, and intentional breaches of confidentiality agreements. Loral and SS/L are seeking injunctive relief, compensatory damages in the amount of $405 million, and punitive damages. The arbitral tribunal will decide at a later date whether any of Alcatel's claims or Loral's or SS/L's counterclaims give rise to damages. On April 5, 2002, Alcatel filed in the District Court for the Southern District of New York a petition to confirm and enforce the partial decision issued in February 2002 in the arbitration between the parties. On April 29, 2000, Loral filed its response to the petition, in which Loral supports confirmation of the decision, but disputes 40 Alcatel's claim that the decision requires the production of certain documents. The petition is pending before the court. The launch of ChinaSat-8 has been delayed pending SS/L's obtaining the approvals required for the launch. On December 23, 1998, the Office of Defense Trade Controls, or ODTC, of the U.S. Department of State temporarily suspended a previously approved technical assistance agreement under which SS/L had been preparing for the launch of the ChinaSat-8 satellite. In addition, SS/L was required to re-apply for new export licenses from the State Department to permit the launch of ChinaSat-8 on a Long March launch vehicle when the old export licenses issued by the Commerce Department, the agency that previously had jurisdiction over satellite licensing, expired in March 2000. On January 4, 2001, the ODTC, while not rejecting these license applications, notified SS/L that they were being returned without action. On January 9, 2002, Loral, SS/L and the United States Department of State entered into a consent agreement (the "Consent Agreement") settling and disposing of all civil charges, penalties and sanctions associated with alleged violations by SS/L of the Arms Export Control Act and its implementing regulations. The Company recorded a charge in the fourth quarter of 2001 for the penalties associated with the Consent Agreement. The Consent Agreement provides that the State Department agrees, assuming the Company's and SS/L's faithful adherence to the terms of the Consent Agreement, and the Arms Export Control Act and its implementing regulations, that decisions concerning export licenses for the ChinaSat-8 spacecraft will be made on the basis of the security and foreign policy interests of the United States, including matters relating to U.S. relations with the People's Republic of China, without reference to the State Department's previously expressed concerns regarding SS/L's reliability, which concerns are considered to be appropriately mitigated through the operation of various provisions of the Consent Agreement. Discussions between SS/L and the State Department regarding SS/L's obtaining the approvals required for the launch of ChinaSat-8 are continuing. In December 1999, SS/L reached an agreement with ChinaSat to extend the date for delivery of the ChinaSat-8 satellite to July 31, 2000. In return for this extension and other modifications to the contract, SS/L provided to ChinaSat three transponders on Telstar 10/Apstar IIR for ChinaSat's use for the life of those transponders. As a result, the Company recorded a charge to earnings of $35 million in 1999. If ChinaSat were to terminate its contract with SS/L as a result of these delays, SS/L may have to refund $134 million in advances received from ChinaSat and may incur penalties of up to $11 million and believes it would incur costs of approximately $38 million to refurbish and retrofit the satellite so that it could be sold to another customer, which resale cannot be guaranteed. To the extent that SS/L is able to recover some or all of its $52 million deposit payment on the Chinese launch vehicle, this recovery would offset a portion of such payments. There can be no assurance, however, that SS/L will be able either to obtain a refund from the launch provider or to find a replacement customer for the Chinese launch vehicle. SS/L is required to obtain licenses and enter into technical assistance agreements, presently under the jurisdiction of the State Department, in connection with the export of satellites and related equipment, as well as disclosure of technical data to foreign persons. Delays in obtaining the necessary licenses and technical assistance agreements may result in the cancellation of, or delay SS/L's performance on, existing contracts, and, as a result, SS/L may incur penalties or lose incentive payments under these contracts. The Company is subject to various other legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Although the outcome of these claims cannot be predicted with certainty, the Company does not believe that any of these other existing legal matters will have a material adverse effect on its consolidated financial position or results of operations. Globalstar Related Matters On September 26, 2001, the nineteen separate purported class action lawsuits filed in the United States District Court for the Southern District of New York by various holders of securities of Globalstar Telecommunications Limited ("GTL") and Globalstar, L.P. ("Globalstar") against GTL, Loral, Bernard L. Schwartz and other defendants were consolidated into one action titled In re: Globalstar Securities Litigation. In November 2001, plaintiffs in the consolidated action filed a consolidated amended class action complaint against Globalstar, GTL, Globalstar Capital Corporation, Loral and Bernard L. Schwartz alleging (a) that all 41 defendants (except Loral) violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, by making material misstatements or failing to state material facts about Globalstar's business and prospects, (b) that defendants Loral and Schwartz are secondarily liable for these alleged misstatements and omissions under Section 20(a) of the Exchange Act as alleged "controlling persons" of Globalstar, (c) that defendants GTL and Schwartz are liable under Section 11 of the Securities Act of 1933 (the "Securities Act") for untrue statements of material facts in or omissions of material facts from a registration statement relating to the sale of shares of GTL common stock in January 2000, (d) that defendant GTL is liable under Section 12(2)(a) of the Securities Act for untrue statements of material facts in or omissions of material facts from a prospectus and prospectus supplement relating to the sale of shares of GTL common stock in January 2000, and (e) that defendants Loral and Schwartz are secondarily liable under Section 15 of the Securities Act for GTL's primary violations of Sections 11 and 12(2)(a) of the Securities Act as alleged "controlling persons" of GTL. The class of plaintiffs on whose behalf the lawsuit has been asserted consists of all buyers of securities of Globalstar, Globalstar Capital and GTL during the period from December 6, 1999 through October 27, 2000, excluding the defendants and certain persons related or affiliated therewith. Loral and Mr. Schwartz have filed a motion to dismiss the amended complaint in its entirety as to Loral and Mr. Schwartz, which motion is pending before the court. On March 2, 2001, the seven separate purported class action lawsuits filed in the United States District Court for the Southern District of New York by various holders of common stock of Loral Space & Communications Ltd. ("Loral") against Loral, Bernard L. Schwartz and Richard Townsend were consolidated into one action titled In re: Loral Space & Communications Ltd. Securities Litigation. On May 6, 2002, plaintiffs in the consolidated action filed a consolidated amended class action complaint alleging (a) that all defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by making material misstatements or failing to state material facts about Loral's financial condition and its investment in Globalstar and (b) that Mr. Schwartz is secondarily liable for these alleged misstatements and omissions under Section 20(a) of the Exchange Act as an alleged "controlling person" of Loral. The class of plaintiffs on whose behalf the lawsuit has been asserted consists of all buyers of Loral common stock during the period from November 4, 1999 through February 1, 2001, excluding the defendants and certain persons related or affiliated therewith. Loral believes that it has meritorious defenses to the above Globalstar related class action lawsuits and intends to pursue them vigorously. Loral holds debt obligations from Globalstar (see Note 5 to the condensed consolidated financial statements). Globalstar's proposed restructuring plan, which will be submitted to and subject to bankruptcy court approval, contemplates the creation of a new company, which will initially be owned by Globalstar's existing noteholders and other unsecured creditors, including Loral. In other situations in the past, challenges have been initiated seeking subordination or recharacterization of debt held by an affiliate of an issuer. While Loral knows of no reason why such a claim would prevail with respect to the debt Loral holds in Globalstar, there can be no assurance that such claims will not be made in Globalstar's bankruptcy proceeding. If such claims were to prove successful, it will jeopardize the amount of equity interest Loral will ultimately receive in the new Globalstar company. Moreover, actions may be initiated in Globalstar's bankruptcy proceeding seeking to characterize payments previously made by Globalstar to Loral prior to the filing date as preferential payments subject to repayment. Loral may also find itself subject to other claims brought by Globalstar creditors and securities holders, who may seek to impose liabilities on Loral as a result of its relationship with Globalstar. For instance, Globalstar's creditors may seek to pierce the corporate veil in an attempt to recover Globalstar obligations owed to them that are recourse to Loral's subsidiaries, which are general partners in Globalstar and have filed for bankruptcy protection. Globalstar's cumulative partners deficit at December 31, 2001, was $3.0 billion. Globalstar's proposed restructuring plan contemplates that mutual releases of claims related to Globalstar would be granted to and by various persons, including, among others, Loral and its affiliates, Globalstar, Globalstar's officers and directors, Globalstar partners, service providers acquired by Globalstar and the members of any official and informal committee of creditors. There can be no assurance that these releases will be approved by the bankruptcy court or, if approved, as to the scope of any releases finally obtained. 42 In May 2000, Globalstar finalized $500 million of vendor financing arrangements with Qualcomm. The original terms of this vendor financing provided for interest at 6%, a maturity date of August 15, 2003 and required repayment pro rata with the term loans due to Loral under Globalstar's $500 million credit facility. As of December 31, 2001, $632 million was outstanding under this facility (including $132 million of capitalized interest). Loral has agreed that if the principal amount outstanding under the Qualcomm vendor financing facility exceeds the principal amount due Loral under Globalstar's $500 million credit facility, as determined on certain measurement dates, then Loral will guarantee 50% of such excess amount. As of March 31, 2002, Loral had no guarantee obligation. OTHER MATTERS Insurance Costs The Company, like others in the satellite industry, is faced with significantly higher premiums on launch and in-orbit insurance and significantly shorter coverage periods than those that have been available in the past, which is due in part to the events of September 11, 2001. This development in the insurance industry will increase the cost of doing business for both the Company's satellite manufacturing and fixed satellite services segments. The Company intends to pass on such increased cost to its customers. There can be no assurance, however, that it will be able to do so. Insurance market conditions have historically been cyclical in nature. While the Company anticipates that these conditions will improve in the future, there can be no assurance that they will. Accounting Pronouncements SFAS 142 On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142") which addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. SFAS 142 also changed the evaluation criteria for testing goodwill for impairment from an undiscounted cash flow approach, which was previously utilized under the guidance in Accounting Principles Board Opinion No. 17, Intangible Assets, to a test based on fair value. Fair value is determined by the amount at which an asset or liability could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Quoted market prices in active markets are the best evidence of fair value and must be used as the basis for the measurement, if available. If quoted market prices are not available, the estimate of fair value must be based on the best information available, including prices for similar assets and liabilities and the results of using other valuation techniques, such as public company trading multiples, future discounted cash flows and merger and acquisition transaction multiples. The Company adopted SFAS 142 on January 1, 2002. In accordance with SFAS 142, the Company's previously recognized cost in excess of net assets acquired ("goodwill") of $892 million for purchase businesses combinations completed prior to July 1, 2001, was reviewed under the new transitional guidance as of January 1, 2002. Goodwill had been previously assigned to the Company's business segments as follows (based on the net book value at December 31, 2001): FSS $597 million, satellite manufacturing and technology $286 million and data services $9 million. The Company hired professionals in the valuation consulting business to determine the fair value of each of the Company's reporting units. Since there were no quoted market prices in active markets for the Company's reporting units, the measurement of fair value for each reporting unit was based on the best information available for that reporting unit, including reasonable and supportable assumptions and projections, as follows: (1) FSS -- public company trading multiples, (2) satellite manufacturing and technology -- future discounted cash flows, and (3) data services -- merger and acquisition transaction multiples. Those professionals determined that the goodwill for each of the Company's reporting units under the new guidance in SFAS 142 was fully impaired. 43 Accordingly, as of January 1, 2002, the Company recorded a non-cash charge for the cumulative effect of the change in accounting principle of $892 million before taxes ($877 million after taxes). The charge is the result of a change in the evaluation criteria for goodwill from an undiscounted cash flow approach which was previously utilized under the guidance in Accounting Principles Board Opinion No. 17, Intangible Assets, to the fair value approach which is stipulated in SFAS 142. The following table presents the actual financial results and as adjusted financial results without the amortization of goodwill for the Company for the three months ended March 31, 2001 (in thousands, except per share amounts):
ACTUAL AS ADJUSTED -------- ----------- Reported loss before cumulative effect of change in accounting principle...................................... $(57,268) $(57,268) Add back amortization of goodwill, net of taxes............. -- 6,652 -------- -------- Loss before cumulative effect of change in accounting principle................................................. (57,268) (50,616) Cumulative effect of change in accounting principle, net of taxes..................................................... (1,741) (1,741) -------- -------- Net loss.................................................... (59,009) (52,357) Preferred dividends......................................... (16,123) (16,123) -------- -------- Net loss applicable to common shareholders.................. $(75,132) $(68,480) ======== ======== Reported basic and diluted loss per share before cumulative effect of change in accounting principle.................. $ (0.25) Add back goodwill amortization per share.................... 0.02 -------- As adjusted loss per share before cumulative effect of change in accounting principle............................ (0.23) Cumulative effect of change in accounting principle......... -- -------- Adjusted net loss per share................................. $ (0.23) ========
SFAS 143 In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. The Company is required to adopt SFAS 143 on January 1, 2003. The Company has not yet determined the impact that the adoption of SFAS 143 will have on its results of operations or its financial position. SFAS 144 In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. The Company adopted SFAS 144 on January 1, 2002. The Company has determined that there was no effect on the Company's consolidated financial position or results of operations relating to the adoption of SFAS 144. 44 SFAS 145 In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 generally requires that any gains or losses on extinguishment of debt in current or prior periods be classified as other income (expense), beginning in fiscal 2003, with early adoption encouraged. The Company is currently evaluating the impact of adopting the provisions of SFAS No. 145 in its consolidated financial statements. 45 PART II. OTHER INFORMATION ITEM 2. LEGAL PROCEEDINGS See legal proceedings set forth in Note 8 to the condensed consolidated financial statements. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as part of this report: Exhibit 12 -- Computation of Deficiency of Earnings to Cover Fixed Charges (b) Reports on Form 8-K
DATE OF REPORT DESCRIPTION -------------- ----------- January 9, 2002 Item 5 -- Other SS/L Settlement with Justice Department Events February 15, 2002 Item 5 -- Other Globalstar Petition for Bankruptcy Events
46 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LORAL SPACE & COMMUNICATIONS LTD. Registrant /s/ RICHARD J. TOWNSEND -------------------------------------- Richard J. Townsend Senior Vice President and Chief Financial Officer (Principal Financial Officer) and Registrant's Authorized Officer Date: May 14, 2002 47 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- Exhibit 12 -- Computation of Deficiency of Earnings to Cover Fixed Charges