1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
COMMISSION FILE NUMBER 1-14180
LORAL SPACE & COMMUNICATIONS LTD.
C/O LORAL SPACECOM CORPORATION
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
TELEPHONE: (212) 697-1105
JURISDICTION OF INCORPORATION: BERMUDA
IRS IDENTIFICATION NUMBER: 13-3867424
The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
has been subject to such filing requirements for the past 90 days.
As of July 31, 2001, there were 333,299,503 shares of Loral Space &
Communications Ltd. common stock outstanding.
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2
PART 1.
FINANCIAL INFORMATION
LORAL SPACE & COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2001 2000 2001 2000
-------- --------- --------- ---------
Revenues from satellite sales.................. $160,164 $ 226,384 $ 307,986 $ 448,906
Revenues from satellite services............... 114,698 97,874 228,011 193,438
-------- --------- --------- ---------
Total revenues............................ 274,862 324,258 535,997 642,344
Cost of satellite sales........................ 139,125 200,803 265,729 391,777
Cost of satellite services..................... 73,189 73,494 149,144 152,323
Selling, general and administrative expenses... 55,740 59,838 110,390 114,100
-------- --------- --------- ---------
Operating income (loss)........................ 6,808 (9,877) 10,734 (15,856)
Interest and investment income................. 6,660 31,302 14,328 60,541
Interest expense............................... (46,751) (42,436) (96,444) (85,752)
Gain on investments............................ 37,566 52,723
-------- --------- --------- ---------
Income (loss) before income taxes, equity in
net loss of affiliates, minority interest and
cumulative effect of change in accounting
principle.................................... (33,283) 16,555 (71,382) 11,656
Income tax benefit (expense)................... 25 (4,860) 1,950 (15,122)
-------- --------- --------- ---------
Income (loss) before equity in net loss of
affiliates, minority interest and cumulative
effect of change in accounting principle..... (33,258) 11,695 (69,432) (3,466)
Equity in net loss of affiliates, net of
taxes........................................ (20,707) (106,654) (43,061) (215,043)
Minority interest, net of taxes................ (732) 1,044 529 1,564
-------- --------- --------- ---------
Loss before cumulative effect of change in
accounting principle......................... (54,697) (93,915) (111,964) (216,945)
Cumulative effect of change in accounting
principle, net of taxes (Note 10)............ (1,741)
-------- --------- --------- ---------
Net loss....................................... (54,697) (93,915) (113,705) (216,945)
Preferred dividends............................ (40,694) (16,124) (56,817) (35,481)
-------- --------- --------- ---------
Net loss applicable to common stockholders..... $(95,391) $(110,039) $(170,522) $(252,426)
======== ========= ========= =========
Basic and diluted loss per share............... $ (0.29) $ (0.37) $ (0.55) $ (0.86)
======== ========= ========= =========
Weighted average shares outstanding:
Basic and diluted............................ 326,859 295,909 312,758 294,595
======== ========= ========= =========
</Table>
See notes to condensed consolidated financial statements.
1
3
LORAL SPACE & COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<Table>
<Caption>
JUNE, 30 DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED) (NOTE)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 225,403 $ 394,045
Accounts receivable, net.................................. 64,734 56,347
Contracts-in-process...................................... 171,214 180,868
Inventories............................................... 146,275 120,608
Other current assets...................................... 82,429 79,713
----------- -----------
Total current assets.................................... 690,055 831,581
Property, plant and equipment, net.......................... 1,978,379 1,944,815
Cost in excess of net assets acquired, net.................. 905,273 918,826
Long-term receivables....................................... 163,271 145,504
Investments in and advances to affiliates................... 197,674 251,658
Deposits.................................................... 147,490 161,790
Deferred tax assets......................................... 303,634 293,142
Other assets................................................ 125,640 131,002
----------- -----------
$ 4,511,416 $ 4,678,318
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ 150,059 $ 110,715
Accounts payable.......................................... 142,781 139,104
Accrued employment costs.................................. 52,695 45,271
Customer advances......................................... 93,275 70,866
Accrued interest and preferred dividends.................. 48,983 51,645
Other current liabilities................................. 43,852 45,049
Income taxes payable...................................... 32,606 31,904
----------- -----------
Total current liabilities............................... 564,251 494,554
Pension and other postretirement liabilities................ 55,388 51,619
Long-term liabilities....................................... 168,387 180,275
Long-term debt.............................................. 2,268,421 2,346,129
Minority interest........................................... 18,646 19,353
Commitments and contingencies (Note 8)
Shareholders' equity:
6% Series C convertible redeemable preferred stock
($491,994 and $674,893 redemption value), $.01 par
value................................................... 485,371 665,809
6% Series D convertible redeemable preferred stock
($305,539 and $400,000 redemption value), $.01 par
value................................................... 296,529 388,204
Common stock, $.01 par value.............................. 3,330 2,983
Paid-in capital........................................... 2,758,718 2,448,519
Treasury stock............................................ (3,360) (3,360)
Unearned compensation..................................... (78) (148)
Retained deficit.......................................... (2,117,029) (1,946,507)
Accumulated other comprehensive income.................... 12,842 30,888
----------- -----------
Total shareholders' equity.............................. 1,436,323 1,586,388
----------- -----------
$ 4,511,416 $ 4,678,318
=========== ===========
</Table>
- ---------------
NOTE: The December 31, 2000 balance sheet has been derived from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
2
4
LORAL SPACE & COMMUNICATIONS LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
----------------------
2001 2000
--------- ---------
Operating activities:
Net loss.................................................. $(113,705) $(216,945)
Non-cash items:
Equity in net loss of affiliates, net of taxes.......... 43,061 215,043
Minority interest, net of taxes......................... (529) (1,564)
Cumulative effect of change in accounting principle, net
of taxes............................................... 1,741
Deferred taxes.......................................... (2,865) 5,314
Non-cash interest expense............................... 19,882 18,103
Depreciation and amortization........................... 109,676 107,255
Non-cash interest and investment income................. (20,341)
Gain on investment...................................... (52,723)
Change in operating assets and liabilities:
Accounts receivable, net................................ (8,387) (41,845)
Contracts-in-process.................................... 904 85,607
Inventories............................................. (25,667) (10,628)
Long-term receivables................................... (17,767) (10,942)
Deposits................................................ 14,300 46,980
Other current assets and other assets................... 11,432 1,517
Accounts payable........................................ 3,677 (98,005)
Accrued expenses and other current liabilities.......... 3,565 14,572
Customer advances....................................... 22,409 (24,549)
Income taxes payable.................................... 586 8,215
Pension and other postretirement liabilities............ 3,769 3,001
Long-term liabilities................................... (11,888) 30,726
Other................................................... (65) (1,198)
--------- ---------
Net cash provided by operating activities................... 54,129 57,593
--------- ---------
Investing activities:
Capital expenditures...................................... (126,017) (288,091)
Investments in and advances to affiliates................. (20,124) (139,580)
Advances repaid by affiliates............................. 4,473
Proceeds from sale of investments......................... 70,940
Use and transfer of restricted and segregated cash........ 162,252
--------- ---------
Net cash used in investing activities....................... (146,141) (190,006)
--------- ---------
Financing activities:
Proceeds from issuance of 6% Series D preferred stock,
net..................................................... 388,000
Borrowings under revolving credit facility................ 85,000
Repayments under term loans............................... (56,000) (37,500)
Repayments under revolving credit facilities.............. (85,000) (50,000)
Repayments of export-import facility...................... (1,073) (1,073)
Repayments of other long-term obligations................. (1,173) (1,204)
Proceeds from other stock issuances....................... 9,908 16,278
Preferred dividends....................................... (28,292) (29,599)
--------- ---------
Net cash (used in) provided by financing activities......... (76,630) 284,902
--------- ---------
Increase (decrease) in cash and cash equivalents............ (168,642) 152,489
Cash and cash equivalents -- beginning of period............ 394,045 239,865
--------- ---------
Cash and cash equivalents -- end of period.................. $ 225,403 $ 392,354
========= =========
Non-cash activities:
Unrealized losses on available-for-sale securities, net of
taxes................................................... $ (20,207) $ (2,764)
========= =========
Unrealized net gains on derivatives, net of taxes......... $ 3,067
=========
Conversion of Series A preferred stock to common stock.... $ 459
=========
Conversion of Series C preferred stock and Series D
preferred stock to common stock and related issuance of
additional common shares on conversion.................. $ 300,328 $ 75,449
========= =========
</Table>
See notes to condensed consolidated financial statements.
3
5
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION AND PRINCIPAL BUSINESS
Loral Space & Communications Ltd. together with its subsidiaries ("Loral"
or the "Company") is one of the world's leading satellite communications
companies with substantial activities in satellite manufacturing and
satellite-based communications services. Loral has assembled the building blocks
necessary to provide a seamless, global networking capability for the
information age. Loral is organized into three distinct operating businesses
(see Note 9):
Fixed Satellite Services ("FSS"): Leasing transponder capacity to
customers for various applications, including broadcasting, news gathering,
Internet access and transmission, private voice and data networks, business
television, distance learning and direct-to-home television ("DTH"),
through the activities of Loral Skynet, Loral CyberStar, Inc. ("Loral
CyberStar"), Loral Skynet do Brasil Ltda. ("Skynet do Brasil"), Satelites
Mexicanos, S.A. de C.V. ("Satmex") and Europe*Star Limited ("Europe*Star");
Satellite Manufacturing and Technology: Designing and manufacturing
satellites and space systems and developing satellite technology for a
broad variety of customers and applications through Space Systems/Loral,
Inc. ("SS/L"); and
Data Services: Providing managed communications networks and Internet
and intranet services through Loral CyberStar and delivering high-speed
broadband data communications and business television services through
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 such SEC rules.
The Company believes that the disclosures made are adequate to keep the
information presented from being misleading. The results of operations for the
three and six months ended June 30, 2001, 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.
4
6
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3) COMPREHENSIVE LOSS
The components of comprehensive loss for the six months ended June 30, 2001
and 2000 are as follows (in thousands):
<Table>
<Caption>
2001 2000
--------- ---------
Net loss.................................................... $(113,705) $(216,945)
Cumulative translation adjustment........................... (906) (803)
Unrealized net gains on derivatives, net of taxes (see Note
10)....................................................... 3,067
Unrealized losses on available-for-sale securities, net of
taxes..................................................... (20,207) (2,764)
Less: realized gains on available-for-sale securities
included in net loss...................................... (52,723)
--------- ---------
Comprehensive loss.......................................... $(131,751) $(273,235)
========= =========
</Table>
4) CONTRACTS-IN-PROCESS
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
(IN THOUSANDS)
U.S. government contracts:
Amounts billed............................................ $ 9,002 $ 8,285
Unbilled receivables...................................... 1,186 4,098
-------- --------
10,188 12,383
-------- --------
Commercial contracts:
Amounts billed............................................ 119,683 50,587
Unbilled receivables...................................... 41,343 117,898
-------- --------
161,026 168,485
-------- --------
$171,214 $180,868
======== ========
</Table>
Unbilled amounts include recoverable costs and accrued profit on progress
completed, which have not been billed. Such amounts are billed upon shipment of
the product, achievement of contractual milestones, or completion of the
contract and, at such time, are reclassified to billed receivables.
5
7
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5) INVESTMENTS IN AND ADVANCES TO AFFILIATES
Investments in and Advances to Affiliates consist of (in thousands):
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
Globalstar:
Acquired notes and loans ($603 million and $572 million
principal and accrued interest as of June 30, 2001 and
December 31, 2000, respectively)....................... $ 20,107 $ 50,267
Vendor financing ($235 million and $229 million principal
and accrued interest as of June 30, 2001 and December
31, 2000, respectively)................................
Globalstar service provider partnerships equity investments
and advances.............................................. 2,433 11,400
Satmex equity investments................................... 75,276 84,290
Europe*Star equity investments and advances................. 98,750 104,593
Other affiliate equity investments.......................... 1,108 1,108
-------- --------
$197,674 $251,658
======== ========
</Table>
The Company accounts for its investment in Globalstar on the equity method
due to its inability to control significant operating decisions at Globalstar.
In 2000, Loral's allocated share of Globalstar's losses and Globalstar's
impairment charges reduced Loral's investment in and advances to Globalstar to
zero. Accordingly, Loral has discontinued providing for its allocated share of
Globalstar's net losses beginning in 2001. 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 $22 million in
connection with Globalstar service provider partnerships.
Equity in net loss of affiliates consists of (in thousands):
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
---------------------
2001 2000
-------- ---------
Globalstar and Globalstar service provider partnerships, net
of taxes.................................................. $(22,589) $(200,335)
Satmex...................................................... (9,057) (11,433)
Europe*Star................................................. (11,415) (2,434)
Other affiliates, net of taxes.............................. (841)
-------- ---------
$(43,061) $(215,043)
======== =========
</Table>
6
8
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5) INVESTMENTS IN AND ADVANCES TO AFFILIATES -- (CONTINUED)
The condensed consolidated statements of operations reflect the effects of
the following amounts related to transactions with or investments in affiliates
(in thousands):
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
------------------
2001 2000
------- -------
Revenues.................................................... $58,831 $86,135
Interest and investment income.............................. 589 30,446
Interest expense capitalized on development stage
enterprises............................................... 2,294
Elimination of Loral's proportionate share of intercompany
profits................................................... 808 3,780
Amortization of excess carrying value, capitalized interest
and intercompany profits related to investments........... (254) 15,450
</Table>
The following table represents the summary of results of operations of
Loral's affiliate Satmex (in thousands):
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
------------------
2001 2000
------- -------
Sales....................................................... $66,704 $66,253
Operating income............................................ 20,537 13,693
Net loss.................................................... (7,615) (14,739)
Net loss applicable to common shareholders.................. (8,369) (15,493)
</Table>
7
9
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6) LONG TERM DEBT
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
---------- ------------
(IN THOUSANDS)
Term loan, 7.72% and 10.45% at June 30, 2001 and December
31, 2000, respectively................................... $ 294,000 $ 300,000
Revolver, 7.22% and 9.95% at June 30, 2001 and December 31,
2000, respectively....................................... 165,000 200,000
Term loan facility, 4.15% and 7.04% at June 30, 2001 and
December 31, 2000 respectively........................... 125,000 175,000
Revolving credit facility, 4.15% and 7.04% at June 30, 2001
and December 31, 2000, respectively...................... 455,000 420,000
9.50% Senior notes due 2006................................ 350,000 350,000
Export-Import credit facility.............................. 9,653 10,726
Other...................................................... 566 576
Non-recourse debt of Loral CyberStar:
11.25% Senior notes due 2007 (principal amount $443
million).............................................. 491,989 495,377
12.50% Senior discount notes due 2007 (principal amount
at maturity $484 million and accreted principal amount
$453 million and $427 million at June 30, 2001 and
December 31, 2000, respectively)...................... 515,110 491,841
Other.................................................... 12,162 13,324
---------- ----------
Total debt................................................. 2,418,480 2,456,844
Less, current maturities................................... 150,059 110,715
---------- ----------
$2,268,421 $2,346,129
========== ==========
</Table>
7) LOSS PER SHARE
Basic loss per share is computed based upon the weighted average number of
shares of common stock and the Series A Preferred Stock outstanding in 2000. For
the three and six months ended June 30, 2001 and 2000, diluted loss per share
excludes the assumed conversion of the Company's Series C convertible redeemable
preferred stock (the "Series C Preferred Stock") and its Series D convertible
redeemable preferred stock (the "Series D Preferred Stock") into shares of
common stock, as their effect would have been antidilutive. Weighted options
equating to approximately 1.0 million shares of common stock for the three
months ended June 30, 2000 and approximately 0.8 million and 0.5 million shares
of common stock for the six months ended June 30, 2001 and 2000, respectively,
as calculated using the treasury stock method, were excluded from the
calculation of diluted loss per share, as the effect would have been
antidilutive.
8
10
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7) LOSS PER SHARE -- (CONTINUED)
The following table sets forth the computation of basic and diluted loss
per share (in thousands, except per share data):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2001 2000 2001 2000
-------- -------- -------- --------
Numerator:
Loss before cumulative effect of change
in accounting principle.............. $ 54,697 $ 93,915 $111,964 $216,945
Cumulative effect of change in
accounting principle, net of taxes... 1,741
-------- -------- -------- --------
Net loss................................ 54,697 93,915 113,705 216,945
Preferred dividends..................... 40,694 16,124 56,817 35,481
-------- -------- -------- --------
Numerator for basic and diluted loss per
share -- net loss applicable to
common stockholders.................. $ 95,391 $110,039 $170,522 $252,426
======== ======== ======== ========
Denominator:
Weighted average shares:
Common stock......................... 326,859 295,909 312,758 272,148
Series A preferred stock............. 22,447
-------- -------- -------- --------
Denominator for basic and diluted loss
per share............................ 326,859 295,909 312,758 294,595
======== ======== ======== ========
Basic and diluted loss per share........ $ 0.29 $ 0.37 $ 0.55 $ 0.86
======== ======== ======== ========
</Table>
The cumulative effect of the change in accounting principle increased the
Company's loss per share calculation by $0.01 to $0.55 for the six months ended
June 30, 2001 (see Note 10).
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
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.
During the first quarter of 2000, all of the Company's Series A preferred
stock and 1.4 million shares of its Series C Preferred Stock were converted into
the Company's common stock.
8) COMMITMENTS AND CONTINGENCIES
In May 2000, Globalstar finalized $531.1 million of vendor financing
arrangements (including $31.1 million of capitalized interest as of May 2000)
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 June 30, 2001, $583.2 million was outstanding under this facility (including
$83.2 million of capitalized interest).
9
11
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Loral has agreed that if the principal amount (excluding capitalized
interest of $83.2 million at June 30, 2001) 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 June 30, 2001,
Loral had no guarantee obligation.
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 (six 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. 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.
Eleven of the satellites built by SS/L and launched since 1997, four 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. Losses of satellites owned by
Loral and its affiliates are fully insured. With respect to satellites under
construction and construction of new satellites, based on 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
delays 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 late 1998, following the launch of an SS/L-built satellite sold to
PanAmSat, a manufacturing error was discovered that affected the geographical
coverage of the Ku-band transponders on the satellite. On January 6, 2000,
PanAmSat filed an arbitration proceeding in connection with this error claiming
damages of $225 million for lost profits and increased sales and marketing
costs. On May 25, 2001, the Company settled this matter with PanAmSat. The
charge for the settlement was fully provided for in 2000.
SS/L has an agreement with Alcatel Space Industries pursuant to which the
parties have agreed generally to operate as a team on satellite programs
worldwide. In addition, Alcatel Space has certain rights as a strategic partner
of SS/L for so long as it continues to hold at least 81.6% of the Loral
securities that it acquired in 1997 in exchange for SS/L stock that it
previously owned. Alcatel is permitted two representatives on SS/L's
seven-member board of directors, and certain actions require the approval of its
board representatives. Alcatel also has 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, including the right to use its Loral holdings as part of the SS/L
10
12
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
purchase price. These agreements are terminable upon one-year's notice by either
party, and SS/L gave the one-year notice to Alcatel on February 22, 2001.
Alcatel filed suit on March 16, 2001 in the United States District Court for the
Southern District of New York against Loral and SS/L alleging various breaches
of the agreements, seeking declaratory and injunctive relief to enforce its
rights thereunder and challenging the effectiveness of the termination. On April
26, 2001, the District Court issued its decision granting in part Alcatel's
motion for a preliminary injunction and granting the Company's motion to compel
arbitration. The District Court held that the issue of the termination of the
agreements is a matter that is to be decided in arbitration, as required by the
agreements. The arbitration has commenced. The District Court granted Alcatel's
request for a preliminary injunction requiring that the Company continue to
comply with the agreements pending resolution of the arbitration, or the
expiration of the agreements, whichever occurs earlier. The Company believes
that this matter will not have a material adverse effect on the consolidated
financial position or results of operations of Loral.
SS/L was informed in 1998 that it was a target of a grand jury
investigation being conducted by the office of the U.S. Attorney for the
District of Columbia with respect to possible violations of export control laws
that may have occurred in connection with the participation of SS/L employees on
a committee formed in the wake of the 1996 crash of a Long March rocket in China
and whose purpose was to consider whether studies of the crash made by the
Chinese had correctly identified the cause of the failure. The Company is not in
a position to predict the direction or outcome of the investigation. If SS/L
were to be indicted and convicted of a criminal violation of the Arms Export
Control Act, it would be subject to a fine of $1 million per violation and could
be debarred from certain export privileges and, possibly, from participation in
government contracts. Since many of SS/L's satellites are built for foreign
customers and/or launched on foreign rockets, such a debarment would have a
material adverse effect on SS/L's business and, therefore, the Company.
Indictment for such violations would subject SS/L to discretionary debarment
from further export licenses. Under the applicable regulations, SS/L could be
debarred from export privileges without being convicted of any crime if it is
indicted for these alleged violations, and loss of export privileges would harm
SS/L's business. Whether or not SS/L is indicted or convicted, SS/L remains
subject to the State Department's general statutory authority to prohibit
exports of satellites and related services if it finds a violation of the Arms
Export Control Act that puts SS/L's reliability in question, and it can suspend
export privileges whenever it determines that grounds for debarment exist and
that such suspension "is reasonably necessary to protect world peace or the
security or foreign policy of the United States."
As far as SS/L can determine, no sensitive information or technology was
conveyed to the Chinese, and no secret or classified information was discussed
with or reported to them. SS/L believes that its employees acted openly and in
good faith and that none engaged in intentional misconduct. Accordingly, the
Company does not believe that SS/L has committed a criminal violation of the
export control laws. The Company does not expect the grand jury investigation or
its outcome to result in a material adverse effect upon its business. However,
there can be no assurance as to these conclusions.
On December 23, 1998, the Office of Defense Trade Controls, 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. According to ODTC, the purpose of the temporary suspension
was to permit that agency to review the agreement for conformity with then
newly-enacted legislation (Section 74 of the Arms Export Control Act) with
respect to the export of missile equipment and technology. 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
11
13
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
they were being returned without action. SS/L and the State Department are now
in discussions regarding SS/L's obtaining the approvals required for the launch
of ChinaSat-8.
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 two 36 MHz and one 54 MHz transponders on Telstar 10/Apstar IIR for
ChinaSat's use for the life of those transponders. As a result, SS/L 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.
In March 1999, jurisdiction for satellite licensing was transferred from
the Commerce Department to the State Department and the State Department has
issued regulations relating to the export of and disclosure of technical
information related to, satellites and related equipment. It has been SS/L's
experience that obtaining licenses and technical assistance agreements under
these new regulations takes more time and is considerably more burdensome than
in the past. Delays in obtaining the necessary licenses and technical assistance
agreements may delay SS/L's performance on existing contracts, and, as a result,
SS/L may incur penalties or lose incentive payments under these contracts. In
addition, such delays may have an adverse effect on SS/L's ability to compete
against unregulated foreign satellite manufacturers for new satellite contracts.
Under an agreement reached with Eutelsat, Loral CyberStar agreed to operate
Telstar 12, which was originally intended to operate at 12 degrees W.L., at 15
degrees W.L. while Eutelsat 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 CyberStar's
behalf. As part of this coordination effort, Loral CyberStar agreed to provide
to Eutelsat four transponders on Telstar 12 for the life of the satellite and
has retained risk of loss with respect to such transponders. Eutelsat also has
the right to acquire, at cost, four transponders on the next replacement
satellite for Telstar 12. As part of the international coordination process,
Loral continues to conduct discussions with various administrations regarding
Telstar 12's operations at 15 degrees W.L. If these discussions are not
successful, Telstar 12's useable capacity may be reduced.
The Company estimated the recovery of certain insurance proceeds in its
2000 consolidated financial statements in connection with an insurance claim
with its insurance carrier and received the proceeds in May 2001.
Loral holds debt obligations from Globalstar (see Note 5). In a bankruptcy
or restructuring proceeding involving Globalstar, challenges could be initiated
seeking subordination or recharacterization of the debt Loral holds from
Globalstar. While we know 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 any restructuring or bankruptcy proceeding
involving Globalstar. Moreover, there can be no assurance that actions will not
be initiated in a Globalstar bankruptcy proceeding to characterize payments
previously made by Globalstar to Loral as preferential payments subject to
repayment. Loral also may be subject to other claims brought by Globalstar
creditors and securities holders, who may seek to impose liabilities on the
Company as a result of the Company's relationships with Globalstar. For example,
see Globalstar Related Matters below.
Globalstar Related Matters. On February 28, 2001, plaintiff Eric Eismann
filed a purported class action complaint against Globalstar Telecommunications
Limited ("GTL") in the United States District Court for
12
14
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
the Southern District of New York. The other defendants named in the complaint
are Loral Space & Communications Ltd. and Bernard Schwartz. The complaint
alleges that (a) GTL and Mr. Schwartz 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 GTL's
business and prospects; and (b) that Loral and Mr. Schwartz are secondarily
liable for these alleged misstatements and omissions under Section 20(a) of the
Exchange Act as alleged "controlling persons" of GTL. The class of plaintiffs on
whose behalf this lawsuit has been asserted consists of all buyers of GTL common
stock from December 6, 1999 through October 27, 2000, excluding the defendants
and certain persons related or affiliated therewith (the "Excluded Persons").
Eighteen additional purported class action complaints have been filed in
the United States District Court for the Southern District of New York by
plaintiffs Chaim Kraus, L.A. Murphy, Eddie Maiorino, Damon Davis, Iskander
Batyrev, Shelly Garfinkel, Sequoia Land Development and Phil Sigel, Michael
Ceasar as Trustee for Howard Gunty Profit Sharing Plan, Colin Barry, James D.
Atlas, Lawrence Phillips, Kent A. Hillemeir, Sarah Harman, Pablo Lozza, Joseph
and Eudice Meyers, The 60223 Trust, Antonio and Lucia Maddalena and Chaim Troman
on each of March 2, March 2, March 6, March 7, March 7, March 9, March 16, March
21, March 21, March 22, March 23, March 28, March 28, April 2, April 3, April
11, April 27, and May 1, 2001, respectively. These complaints allege claims
against GTL, Loral, and Mr. Schwartz (and, in the case of the Sequoia, Atlas and
Meyers complaints, two additional individual defendants, Messrs. Navarra and
DeBlasio) that are substantially identical to those set forth in the Eismann
action. The class of plaintiffs on whose behalf these lawsuits have been
allegedly asserted are: with respect to the Kraus, Davis, Maiorino, Batyrev,
Ceasar, Phillips, Hillemeir, Harman and The 60223 Trust actions, buyers of GTL
common stock in the period from December 6, 1999, through October 27, 2000; with
respect to the Murphy, Barry and Troman actions, buyers of GTL securities in the
period from December 6, 1999, through October 27, 2000; with respect to the
Sequoia/Sigel, Atlas and Meyers actions, buyers of GTL common stock in the
period from December 6, 1999, through July 19, 2000; with respect to the
Garfinkel and Lozza actions, buyers of GTL debt securities in the period from
December 6, 1999, through October 27, 2000; and with respect to the Maddalena
action, buyers of GTL securities in the period from October 11, 1999 through
October 27, 2000. In each case, the Excluded Persons are excepted from the
class.
On May 22, 2001, plaintiffs Philip J. Hage, Jr. and Ron Maggiaro filed a
purported class action complaint against Loral in the United States District
Court for the Southern District of New York. The other defendants named in the
complaint are Bernard Schwartz and Richard Townsend. The complaint alleges that
(a) the 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 Globalstar's and Loral's business and prospects; and (b)
that Messrs. Schwartz and Townsend are secondarily liable for these alleged
misstatements and omissions under Section 20(a) of the Exchange Act as alleged
"controlling persons" of Loral. The class of plaintiffs on whose behalf this
lawsuit has been asserted consists of all buyers of Loral common stock from
November 4, 1999 through February 1, 2001, excluding the defendants and certain
persons related or affiliated therewith.
Six additional purported class action complaints have been filed in the
United States District Court for the Southern District of New York by plaintiffs
Merchants TNS Pension Trust, Laura S. Dalton, Michael T. Benson, Marilyn Funt
and Trident, Ltd., Profit Sharing Plan, Alexander Igdalski and James Dwyer on
May 25, May 29, June 1, June 6, June 28, and July 23, 2001 respectively. These
complaints allege claims against Loral and Messrs. Schwartz and Townsend that
are substantially identical to those set forth in the Hage action, and the class
of plaintiffs on whose behalf these lawsuits have been asserted is the same as
the purported class in the Hage action.
13
15
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
Loral believes that it has meritorious defenses to the above Globalstar
Related Matters and intends to pursue them vigorously.
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.
9) SEGMENTS
Loral is organized into three distinct 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 and Europe*Star, which are accounted for
using the equity method in these condensed consolidated financial statements.
Intersegment revenues primarily consists 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. In 2001, the Company no longer
considered global mobile telephone service to be a reportable segment and has
excluded it from its segment presentation and restated the information for 2000
accordingly.
14
16
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9) SEGMENTS -- (CONTINUED)
Summarized financial information concerning Loral's reportable segments is
as follows (in millions):
THREE MONTHS ENDED JUNE 30, 2001
<Table>
<Caption>
SATELLITE
FIXED MANUFACTURING
SATELLITE AND DATA
SERVICES(1) TECHNOLOGY(2) SERVICES(3) CORPORATE(4) TOTAL
----------- ------------- ----------- ------------ ---------
REVENUES AND EBITDA:
Revenues from external customers....... $ 119.8 $ 145.0 $ 26.1 $ 290.9
Intersegment revenues.................. 13.7 67.0 80.7
-------- -------- ------ ---------
Operating segment revenues............. $ 133.5 $ 212.0 $ 26.1 371.6
======== ======== ======
Revenues of unconsolidated
affiliates(5)........................ (36.0)
Intercompany revenues(6)............... (60.7)
---------
Operating revenues as reported......... $ 274.9
=========
Segment EBITDA before eliminations..... $ 89.5 $ 15.8 $ (3.6) $(12.5) $ 89.2
======== ======== ====== ======
EBITDA of unconsolidated
affiliates(5)........................ (19.5)
Intercompany EBITDA(6)................. (7.5)
---------
EBITDA(7).............................. 62.2
Depreciation and amortization(8)....... (55.4)
---------
Operating income....................... $ 6.8
=========
OTHER DATA:
Depreciation and amortization before
affiliate eliminations(8)............ $ 58.6 $ 8.1 $ 6.2 $ 0.5 $ 73.4
======== ======== ====== ======
Depreciation and amortization of
unconsolidated affiliates(5)(8)...... (18.0)
---------
Depreciation and amortization(8)....... $ 55.4
=========
Total assets before affiliate
eliminations......................... $4,142.8 $1,176.9 $223.7 $455.5 $ 5,998.9
======== ======== ====== ======
Total assets of unconsolidated
affiliates(5)........................ (1,487.5)
---------
Total assets........................... $ 4,511.4
=========
</Table>
15
17
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9) SEGMENTS -- (CONTINUED)
- ---------------
(1) Includes 100% of Europe*Star's and Satmex's revenues and EBITDA (Europe*Star
commenced revenue service in 2001). Also includes Loral's subsidiary, Loral
Skynet do Brasil since November 2000.
(2) Satellite manufacturing and technology consists of 100% of SS/L's results.
(3) Data services consists of 100% of CyberStar LP and Loral CyberStar's data
services business. Equipment sales for data services were $1.7 million and
$2.2 million for the three months ended June 30, 2001 and 2000 respectively,
and $3.8 million and $6.4 million for the six months ended June 30, 2001 and
2000, respectively.
(4) Represents corporate expenses incurred in support of the Company's
operations.
(5) Represents amounts related to unconsolidated affiliates (Satmex and
Europe*Star), which are eliminated in order to arrive at Loral's
consolidated results. Loral's proportionate share of these affiliates is
included in net loss of affiliates in Loral's 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
18
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9) SEGMENTS -- (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001
<Table>
<Caption>
SATELLITE
FIXED MANUFACTURING
SATELLITE AND DATA
SERVICES(1) TECHNOLOGY(2) SERVICES(3) CORPORATE(4) TOTAL
----------- ------------- ----------- ------------ -------
REVENUES AND EBITDA:
Revenues from external customers........ $235.8 $270.8 $ 54.8 $ 561.4
Intersegment revenues................... 26.9 142.3 169.2
------ ------ ------ -------
Operating segment revenues.............. $262.7 $413.1 $ 54.8 730.6
====== ====== ======
Revenues of unconsolidated
affiliates(5)......................... (71.6)
Intercompany revenues(6)................ (123.0)
-------
Operating revenues as reported.......... $ 536.0
=======
Segment EBITDA before eliminations...... $173.4 $ 35.0 $(13.6) $(21.9) $ 172.9
====== ====== ====== ======
EBITDA of unconsolidated
affiliates(5)......................... (38.6)
Intercompany EBITDA(6).................. (13.9)
-------
EBITDA(7)............................... 120.4
Depreciation and amortization(8)........ (109.7)
-------
Operating income........................ $ 10.7
=======
OTHER DATA:
Depreciation and amortization before
affiliate eliminations(8)............. $115.2 $ 15.6 $ 11.6 $ 1.1 $ 143.5
====== ====== ====== ======
Depreciation and amortization of
unconsolidated affiliates(5)(8)....... (33.8)
-------
Depreciation and amortization(8)........ $ 109.7
=======
</Table>
17
19
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9) SEGMENTS -- (CONTINUED)
THREE MONTHS ENDED JUNE 30, 2000
<Table>
<Caption>
SATELLITE
FIXED MANUFACTURING
SATELLITE AND DATA
SERVICES(1) TECHNOLOGY(2) SERVICES(3) CORPORATE(4) TOTAL
----------- ------------- ----------- ------------ ---------
REVENUES AND EBITDA:
Revenues from external customers..... $ 102.4 $ 181.4 $ 29.2 $ 313.0
Intersegment revenues................ 9.9 116.4 126.3
-------- -------- ------ ---------
Operating segment revenues........... $ 112.3 $ 297.8 $ 29.2 439.3
======== ======== ======
Revenues of unconsolidated
affiliates(5)...................... (33.8)
Intercompany revenues(6)............. (81.2)
---------
Operating revenues as reported....... $ 324.3
=========
Segment EBITDA before eliminations... $ 69.9 $ 25.3 $(11.0) $ (10.8) $ 73.4
======== ======== ====== ========
EBITDA of unconsolidated
affiliates(5)...................... (21.1)
Intercompany EBITDA(6)............... (8.0)
---------
EBITDA(7)............................ 44.3
Depreciation and amortization(8)..... (54.2)
---------
Operating loss....................... $ (9.9)
=========
OTHER DATA:
Depreciation and amortization before
affiliate eliminations(8).......... $ 54.9 $ 9.2 $ 4.6 $ 0.9 $ 69.6
======== ======== ====== ========
Depreciation and amortization of
unconsolidated affiliates(5)(8).... (15.4)
---------
Depreciation and amortization(8)..... $ 54.2
=========
Total assets before affiliate
eliminations....................... $3,744.5 $1,551.5 $213.2 $1,192.8 $ 6,702.0
======== ======== ====== ========
Total assets of unconsolidated
affiliates(5)...................... (1,289.7)
---------
Total assets......................... $ 5,412.3
=========
</Table>
18
20
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9) SEGMENTS -- (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2000
<Table>
<Caption>
SATELLITE
FIXED MANUFACTURING
SATELLITE AND DATA
SERVICES(1) TECHNOLOGY(2) SERVICES(3) CORPORATE(4) TOTAL
----------- ------------- ----------- ------------ -------
REVENUES AND EBITDA:
Revenues from external customers...... $197.1 $362.8 $ 61.7 $ 621.6
Intersegment revenues................. 17.2 183.3 200.5
------ ------ ------ -------
Operating segment revenues............ $214.3 $546.1 $ 61.7 822.1
====== ====== ======
Revenues of unconsolidated
affiliates(5)....................... (66.2)
Intercompany revenues(6).............. (113.6)
-------
Operating revenue as reported......... $ 642.3
=======
Segment EBITDA before eliminations.... $131.9 $ 51.7 $(21.3) $(20.3) $ 142.0
====== ====== ====== ======
EBITDA of unconsolidated
affiliates(5)....................... (40.5)
Intercompany EBITDA(6)................ (10.1)
-------
EBITDA(7)............................. 91.4
Depreciation and amortization(8)...... (107.3)
-------
Operating loss........................ $ (15.9)
=======
OTHER DATA:
Depreciation and amortization before
affiliate eliminations(8)........... $109.1 $ 18.1 $ 9.8 $ 1.1 $ 138.1
====== ====== ====== ======
Depreciation and amortization of
unconsolidated affiliates(5)(8)..... (30.8)
-------
Depreciation and amortization(8)...... $ 107.3
=======
</Table>
10) ACCOUNTING PRONOUNCEMENTS
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives that do not qualify, or are not
effective as hedges, must be recognized currently in earnings. Upon adoption,
the Company recorded a $1.7 million reduction in net income, net of tax, and a
$1.2 million increase in other comprehensive income ("OCI"), net of tax,
relating to the cumulative effect of the change in adopting this new accounting
principle. The Company recorded these adjustments to recognize the fair value of
foreign currency forward contracts that qualify as derivatives under SFAS 133
and to recognize the fair value of firm commitments designated as hedged items
in fair value hedge relationships. Furthermore, the transition adjustments
reflect the derecognition of any deferred gains or losses
19
21
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10) ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)
recorded on the balance sheet prior to the effective date of SFAS No. 133 on
foreign exchange contracts designated as hedges of foreign currency exposures on
long-term construction contracts in process.
Foreign Exchange Exposure Management
The Company enters into long-term construction contracts with customers and
vendors, some of which are denominated in foreign currencies, and hedges
substantially all of the foreign currency risks with foreign currency exchange
contracts (forwards) with maturities matching the expected cash flows.
Derivatives are used to eliminate, reduce, or transfer substantially all foreign
currency risks that can be identified and quantified in order to minimize the
risk of foreign exchange rate fluctuations to operating results and cash flows.
Hedges of expected foreign currency denominated contract revenues and related
purchases are designated and documented at inception as cash flow hedges,
evaluated for effectiveness at least quarterly, and have maturities through
2006. As the critical terms of the currency exchange contracts and expected cash
flows from long-term construction contracts are matched at hedge inception,
currency exchange contract effectiveness is calculated by comparing the fair
value of the derivative to the change in value of the expected cash flow, with
the effective portion of highly effective hedges reflected on the balance sheet
and accumulated in OCI. Forward points are excluded from effectiveness testing
on derivatives that are adjusted due to accelerated or delayed cash flows within
the contract. OCI associated with hedges of foreign currency contract revenues
and costs are reclassified to revenue and cost of sales, respectively, based on
a percentage of contract completion, while gains and losses associated with
hedges of receivables and payables are reclassified to interest income or
expense.
The Company also enters into firm commitments with unrelated parties to
purchase required component and subassembly inventory from vendors, some of
which are denominated in foreign currencies, and hedges substantially all of the
foreign currency risk with foreign currency forward contracts or, for short
periods, with foreign currency balances. Hedges of firm commitments are
designated and documented at inception as fair value hedges and evaluated for
effectiveness at least quarterly. As the critical terms of the forward contracts
and firm commitments are matched at hedge inception, forward contract
effectiveness is calculated by comparing the fair value of the derivative to the
change in value of the expected inventory purchase. Forward points are excluded
from effectiveness testing on hedges that are adjusted due to accelerated or
delayed payments and cash balances. Changes in the value of both highly
effective hedges and the designated firm commitment are reflected on the balance
sheet and recognized currently in interest income or expense.
Ineffectiveness from all hedging activity was immaterial for the three and
six months ended June 30, 2001. For the three and six months ended June 30,
2001, SS/L recognized charges of $0.9 million and $0.9 million, respectively,
for hedges that no longer qualify as fair value hedges and $0.1 million and $0.6
million, respectively, for excluded forward points on accelerated or delayed
cash flows, which were recorded to interest expense.
Unrealized Net Gains on Derivatives
The following table summarizes the activity in OCI (net of taxes) related
to derivatives classified as cash flow hedges for the six months ended June 30,
2001 (in thousands):
<Table>
Cumulative transition adjustment............................ $ 1,220
Net increase in foreign currency exchange contracts......... 8,269
Reclassifications into revenue and cost of sales from OCI... (6,422)
-------
Unrealized net gains on derivatives at June 30, 2001........ $ 3,067
=======
</Table>
20
22
LORAL SPACE & COMMUNICATIONS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10) ACCOUNTING PRONOUNCEMENTS -- (CONTINUED)
At June 30, 2001, the Company anticipates reclassifying $2.2 million of the
balance in OCI to earnings in the next twelve months.
New Accounting Pronouncements
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. The Company has adopted the
applicable disclosure requirements of SFAS No. 140 in its consolidated financial
statements. 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 the other provisions of SFAS No. 140.
In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS
No.142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all
business combinations initiated after June 30, 2001, be accounted for under the
purchase method and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. SFAS
No. 142 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 No. 142 provides
that intangible assets with finite useful lives be amortized and that goodwill
and intangible assets with indefinite lives not be amortized, but will rather be
tested at least annually for impairment. The Company will adopt SFAS No. 142 on
January 1, 2002. Upon adoption of SFAS 142, the Company will stop the
amortization of goodwill with an expected net carrying value of approximately
$892 million at the date of adoption and annual amortization of approximately
$27 million that resulted from business combinations completed prior to the
adoption of SFAS 141. The Company will evaluate goodwill under the new
transitional impairment test in SFAS 142 and accordingly, has not yet determined
whether or not there will be an impairment loss. Any transitional impairment
loss will be recognized as a change in accounting principle.
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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 these factors and conditions include: (i) the Company and its
subsidiaries and affiliates have significant debt and guarantee obligations;
(ii) the Company may be required to take further charges relating to its
investment in connection with Globalstar related activities and may be subject
to claims brought by third parties seeking to impose liabilities on the Company
as a result of its relationships with Globalstar, L.P. ("Globalstar"); (iii) if
the Company's business plan does not succeed, our operations might not generate
enough cash to pay our obligations; (iv) launch failures may delay operations;
(v) some of the satellites the Company currently has in orbit have experienced
operational problems; (vi) Space Systems/Loral, Inc. ("SS/L") is subject to
export control restrictions and is the target of a grand jury investigation that
may adversely affect its ability to export; (vii) severe competition in the
Company's industries; and (viii) governmental or regulatory changes. For a
detailed discussion of these factors and conditions, please refer to the
periodic reports filed with the SEC by Loral, Loral CyberStar, Inc. ("Loral
CyberStar") and Satelites de Mexico, S.A. de C.V. ("Satmex"). In addition, we
caution you that the Company operates in an industry sector where securities
values may be volatile and may be influenced by economic and other factors
beyond the Company's control. 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 manufacturing and satellite-based
communications services. Loral has assembled the building blocks necessary to
provide a seamless, global networking capability for the information age. Loral
is organized into three distinct operating businesses:
Fixed Satellite Services ("FSS"). Through the Loral Global Alliance,
which currently consists of Loral Skynet, Loral CyberStar, Loral Skynet do
Brasil Ltda. ("Skynet do Brasil"), its 49% owned affiliate Satmex, and its
42% owned affiliate Europe*Star Limited ("Europe*Star"), 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"). The Loral Global Alliance currently has
ten 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. Designing and manufacturing
satellites and space systems and developing satellite technology for a
broad variety of customers and applications through SS/L; and
Data Services: Providing managed communications networks and Internet
and intranet services through Loral CyberStar and delivering high-speed
broadband data communications and business television and infomedia
services through CyberStar, L.P. ("CyberStar LP").
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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 and six
months ended June 30, 2001 and 2000 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.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2001 2000 2001 2000
------ ------ ------- -------
(IN MILLIONS) (IN MILLIONS)
REVENUES:
Fixed satellite services(1)................................ $133.5 $112.3 $262.7 $214.3
Satellite manufacturing and technology(2).................. 212.0 297.8 413.1 546.1
Data services(3)........................................... 26.1 29.2 54.8 61.7
------ ------ ------ ------
Segment revenues........................................... 371.6 439.3 730.6 822.1
Affiliate eliminations(4).................................. (36.0) (33.8) (71.6) (66.2)
Intercompany eliminations(5)............................... (60.7) (81.2) (123.0) (113.6)
------ ------ ------ ------
Revenues as reported....................................... $274.9 $324.3 $536.0 $642.3
====== ====== ====== ======
EBITDA(6):
Fixed satellite services(1)................................ $ 89.5 $ 69.9 $173.4 $131.9
Satellite manufacturing and technology(2).................. 15.8 25.3 35.0 51.7
Data services(3)........................................... (3.6) (11.0) (13.6) (21.3)
Corporate expenses(7)...................................... (12.5) (10.8) (21.9) (20.3)
------ ------ ------ ------
Segment EBITDA before eliminations......................... 89.2 73.4 172.9 142.0
Affiliate eliminations(4).................................. (19.5) (21.1) (38.6) (40.5)
Intercompany eliminations(5)............................... (7.5) (8.0) (13.9) (10.1)
------ ------ ------ ------
EBITDA as reported......................................... $ 62.2 $ 44.3 $120.4 $ 91.4
====== ====== ====== ======
</Table>
- ---------------
(1) Includes 100% of Europe*Star's and Satmex's revenues and EBITDA (Europe*Star
commenced revenue service in 2001). Also includes Loral's subsidiary, Loral
Skynet do Brasil since November 2000.
(2) Satellite manufacturing and technology consists of 100% of SS/L's results.
(3) Data services consists of 100% of CyberStar LP and Loral CyberStar's data
services business. Equipment sales for data services were $1.7 million and
$2.2 million for the three months ended June 30, 2001 and 2000 respectively,
and $3.8 million and $6.4 million for the six months ended June 30, 2001 and
2000, respectively.
(4) Represents amounts related to unconsolidated affiliates (Satmex and
Europe*Star), which are eliminated in order to arrive at Loral's
consolidated results. Loral's proportionate share of these affiliates is
included in net loss of affiliates in Loral's 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 eliminating 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.
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THREE MONTHS ENDED JUNE 30, 2001 COMPARED WITH JUNE 30, 2000
Segment revenues for Loral's operating businesses were $372 million in 2001
as compared to $439 million in 2000, before intercompany and affiliate
eliminations of $97 million in 2001 and $115 million in 2000. The decrease in
revenues was due primarily to lower revenues in satellite manufacturing and
technology due primarily to the timing and quantity of bookings, offset by
strong growth in FSS sales due to the increased number of transponders leased in
2001 as compared to 2000. Intercompany eliminations primarily consist of
revenues from satellites under construction by satellite manufacturing and
technology for FSS. The decrease in intercompany eliminations in 2001, primarily
reflects decreased revenue by satellite manufacturing to FSS, which resulted
from the timing of performance under long-term contracts.
EBITDA as reported increased to $62 million in 2001 as compared to $44
million in 2000. This increase arose primarily from strong revenue growth in
fixed satellite services without a proportionate growth in costs, and smaller
losses from data services resulting from cost savings realized from streamlining
operations, offset by lower satellite manufacturing and technology EBITDA, which
was due to lower revenues.
Depreciation and amortization was $55 million and $54 million for the three
months ended June 30, 2001 and 2000, respectively. In 2002, amortization expense
is expected to decrease by approximately $7 million per quarter, as a result of
the Company adopting SFAS No. 142 (see Accounting Pronouncements).
Interest and investment income was $7 million in 2001 as compared to $31
million in 2000. This decrease was principally due to non-cash interest income
in 2000 related to warrants received in connection with the guarantees provided
by Loral subsidiaries of Globalstar's $500 million credit facility, dividend
income in 2000 related to the Company's investment in Globalstar
Telecommunications Limited preferred stock, as well as lower average cash
balances for investment in 2001.
Interest expense was $47 million in 2001, net of capitalized interest of $6
million, as compared to $42 million in 2000, net of capitalized interest of $4
million. The increase is due primarily to interest expense incurred in
connection with the Company's $500 million credit facility.
In 2000, the Company realized a $38 million gain from the sale of a portion
of its investments in available-for-sale securities.
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 2001, the Company recorded no
income taxes on a pre-tax loss of $33 million primarily due to the impact from
non-deductible losses incurred outside the U.S. and non-deductible amortization
of cost in excess of net assets acquired. For 2000, the Company recorded income
tax expense of $5 million on pre-tax income of $17 million. The decrease in tax
expense is primarily attributable to a lower amount of income subject to U.S.
tax during the current period.
The equity in net loss of affiliates was $21 million in 2001 compared to
$107 million in 2000. Loral's share of equity in net losses attributable to
Globalstar related activities, net of the related tax benefit, was $10 million
in 2001 as compared to $102 million in 2000. This decrease is primarily due to
the Company recording its share of Globalstar's equity losses and impairment
charges in the fourth quarter of 2000, which reduced its investment in and
advances in connection with Globalstar to zero. Also included in equity in net
loss of affiliates is Loral's share of losses from Europe*Star (which commenced
service in 2001), Satmex and other affiliates.
The minority interest charge in 2001 primarily reflects the portion of
CyberStar LP's income attributed to CyberStar LP's other investor, who owned
17.6% as of June 30, 2001, as compared to a minority interest benefit related to
CyberStar LP's loss in 2000.
Preferred dividends were $41 million in 2001 as compared to $16 million for
2000. This increase was primarily due to non-cash dividend charges of
approximately $29 million incurred on 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
24
26
Preferred Stock") into the Company's common stock in the second quarter of 2001,
in connection with the Company's exchange offers (see Liquidity and Capital
Resources). The exchange offers were completed by the Company in April 2001 and
will result in the annual elimination of approximately $17 million of future
dividend payments and will avoid approximately $277 million in mandatory
redemption in 2006 and 2007.
As a result of the above, the net loss applicable to common stockholders
was $95 million or $0.29 per basic and diluted share for 2001, compared to the
net loss of $110 million or $0.37 per basic and diluted share for 2000. Basic
and diluted weighted average shares were 327 million for 2001 and 296 million
for 2000. 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 (see
Liquidity and Capital Resources).
SIX MONTHS ENDED JUNE 30, 2001 COMPARED WITH JUNE 30, 2000
Segment revenues for Loral's operating businesses were $731 million in 2001
as compared to $822 million in 2000, before intercompany and affiliate
eliminations of $195 million in 2001 and $180 million in 2000. The decrease in
revenues was due primarily to lower revenues in satellite manufacturing and
technology due primarily to the timing and quantity of bookings, offset by
strong growth in FSS sales due to the increased number of transponders leased in
2001 as compared to 2000.
EBITDA as reported increased to $120 million in 2001 as compared to $91
million in 2000. This increase arose primarily from strong revenue growth in
fixed satellite services without a proportionate growth in costs, and smaller
losses from data services resulting from costs savings realized from
streamlining operations, offset by lower satellite manufacturing and technology
EBITDA, which was due to lower revenues.
Depreciation and amortization was $110 million and $107 million for the six
months ended June 30, 2001 and 2000, respectively. In 2002, amortization expense
is expected to decrease by approximately $7 million per quarter, as a result of
the Company adopting SFAS No. 142 (see Accounting Pronouncements).
Interest and investment income was $14 million in 2001 as compared to $61
million in 2000. This decrease was principally due to non-cash interest income
in 2000 related to warrants received in connection with the guarantees provided
by Loral subsidiaries of Globalstar's $500 million credit facility, dividend
income in 2000 related to the Company's investment in Globalstar
Telecommunications Limited preferred stock, as well as lower average cash
balances for investment in 2001.
Interest expense was $96 million in 2001, net of capitalized interest of
$11 million, as compared to $86 million in 2000, net of capitalized interest of
$6 million. The increase is due primarily to interest expense incurred in
connection with the Company's $500 million credit facility.
In 2000, the Company realized a $53 million gain from the sale of a portion
of its investments in available-for-sale securities.
For 2001, the Company recorded an income tax benefit of $2 million on a
pre-tax loss of $71 million primarily due to the impact from non-deductible
losses incurred outside the U.S. and non-deductible amortization of cost in
excess of net assets acquired. For 2000, the Company recorded income tax expense
of $15 million on pre-tax income of $12 million. The decrease in tax expense is
primarily attributable to a lower amount of income subject to U.S. tax during
the current period.
The equity in net loss of affiliates was $43 million in 2001 as compared to
$215 million in 2000. Loral's share of equity in net losses of affiliates
attributable to Globalstar related activities, net of the related tax benefit,
was $23 million in 2001 as compared to $200 million in 2000. This decrease is
primarily due to the Company recording its share of Globalstar's equity losses
and impairment charges in the fourth quarter of 2000, which reduced its
investment in and advances in connection with Globalstar to zero. Also included
in equity in net loss of affiliates is Loral's share of losses from Europe*Star,
Satmex and other affiliates.
The minority interest benefit in 2001 primarily reflects the portion of
CyberStar LP's loss attributed to CyberStar LP's other investor, who owned 17.6%
as of June 30, 2001.
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27
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which resulted in the Company
recording a charge for the cumulative effect of a change in accounting principle
of $1.7 million (see Accounting Pronouncements).
Preferred dividends were $57 million in 2001 as compared to $35 million for
2000. This increase was primarily due to non-cash dividend charges of
approximately $29 million incurred on the conversion of 3.7 million shares of
Loral's 6% Series C Preferred Stock and 1.9 million shares of Loral's 6% Series
D Preferred Stock into the Company's common stock in the second quarter of 2001,
in connection with the Company's exchange offers.
As a result of the above, the net loss applicable to common stockholders
was $171 million or $0.55 per basic and diluted share for 2001, compared to the
net loss of $252 million or $0.86 per basic and diluted share, for 2000. Basic
and diluted weighted average shares were 313 million for 2001 and 295 million
for 2000. 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 (see
Liquidity and Capital Resources).
RESULTS BY OPERATING SEGMENT FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001
AND 2000
Fixed Satellite Services
FSS revenues (including 100% of Satmex and Europe*Star) were $134 million
as compared to $112 million for the three months ended June 30, 2001 and 2000,
respectively, and $263 million as compared to $214 million for the six months
ended June 30, 2001 and 2000, respectively. These increases were primarily due
to the increased number of transponders leased in 2001 as compared to 2000.
EBITDA (including 100% of Satmex and Europe*Star) was $90 million as compared to
$70 million for the three months ended June 30, 2001 and 2000, respectively, and
$173 million as compared to $132 million for the six months ended June 30, 2001
and 2000, respectively. These increases were primarily due to strong revenue
growth without a proportionate growth in costs. As of June 30, 2001, FSS had 10
operational satellites (three of which are owned by affiliates). Funded backlog
for the segment totaled $2.2 billion at June 30, 2001 as compared to $2.4
billion as of December 31, 2000, including intercompany backlog of $105 million
and $65 million as of June 30, 2001 and December 31, 2000, respectively, and
affiliate backlog for Satmex and Europe*Star of $477 million as of June 30, 2001
and $546 million as of December 31, 2000. The reduction in total funded backlog
resulted from de-bookings arising largely from the restructuring of two customer
contracts in the second quarter of 2001. In one case, Loral reduced the length
of a lease agreement and allowed a reduction in the number of transponders
leased under a multi-year contract. In the other case, Loral reduced the length
of a lease agreement from 13 years to eight. In both instances Loral received
appropriate compensation in exchange for meeting its customers' requirements
and, accordingly, these debookings did not have an adverse impact on results of
operations in the second quarter, nor will they have an adverse impact on
near-term results of operations.
Satellite Manufacturing and Technology
Revenues at SS/L, the Company's satellite manufacturing and technology
subsidiary, before intercompany eliminations were $212 million as compared with
$298 million for the three months ended June 30, 2001 and 2000, respectively,
and $413 million as compared to $546 million for the six months ended June 30,
2001 and 2000, respectively. These decreases were primarily due to the timing
and quantity of bookings. EBITDA was $16 million as compared to $25 million for
the three months ended June 30, 2001 and 2000, respectively, and $35 million as
compared to $52 million for the six months ended June 30, 2001 and 2000,
respectively. These decreases were primarily due to lower revenues. Funded
backlog for SS/L was $1.4 billion as of June 30, 2001 as compared to $1.7
billion as of December 31, 2000, including intercompany backlog of $348 million
as of June 30, 2001 and $477 million as of December 31, 2000.
Data Services
Revenues are derived primarily from Loral CyberStar's corporate data
networking and Internet and intranet services businesses, which has been
impacted by the slowdown of worldwide demand for telecommu-
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28
nications and Internet services. Revenues for data services were $26 million as
compared to $29 million for the three months ended June 30, 2001 and 2000,
respectively. The decrease in revenues was primarily due to lower volume from
the VSAT business. For the six months ended June 30, 2001 and 2000, revenues
were $55 million as compared to $62 million, primarily due to lower volume from
the VSAT business and lower occasional use revenues from business television
services. EBITDA was a loss of $4 million as compared to a loss of $11 million
for the three months ended June 30, 2001 and 2000, and a loss of $14 million as
compared to a loss of $21 million for the six months ended June 30, 2001 and
2000, respectively. This substantial improvement in EBITDA resulted primarily
from cost savings realized from streamlining operations, savings related to the
exit from the direct-to-the-consumer broadband business in 2001 and a
non-recurring facility and equipment write-off in the first quarter of 2000. As
of June 30, 2001, funded backlog was $150 million, as compared to $191 million
as of December 31, 2000 (all from external sources). The decrease in backlog
resulted from de-bookings, due to the continued softness in the Internet
business worldwide.
LIQUIDITY AND CAPITAL RESOURCES
Loral intends to capitalize on its innovative capabilities, market position
and advanced technologies to offer value-added satellite-based services as part
of the evolving worldwide communications networks and, where appropriate, to
form strategic alliances with major telecommunications service providers and
equipment manufacturers to enhance and expand its satellite-based communications
service opportunities. Where appropriate, Loral seeks to further this strategy
through acquisitions or joint ventures and through 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.
Debt
$500 Million Credit Agreement
In November 2000, a subsidiary of Loral entered into a $500 million secured
credit agreement with Bank of America, National Association and the other
lenders party thereto (the "$500 Million Credit Agreement"). The $500 Million
Credit Agreement provides for a $200 million three-year revolving credit
facility (the "Revolver") and a $300 million term loan (the "Term Loan"). The
Term Loan is subject to a remaining amortization payment schedule as follows:
15% of the principal amount on June 30, 2002; 25% of the principal amount on
March 31, 2003; and 58% of the principal amount on August 15, 2003. All amounts
outstanding under the Revolver are due and payable on August 15, 2003.
The $500 Million Credit Agreement is secured by certain assets of a
subsidiary of Loral, including the Telstar 6 and Telstar 7 satellites and the
loans due to Loral under Globalstar's $500 million credit facility. 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 June 30, 2001, the net book value
of Telstar 6 and Telstar 7 was approximately $340 million. Loral has also agreed
to guarantee its subsidiary's obligations under the $500 Million Credit
Agreement.
Loral SpaceCom Credit Agreement
The Amended and Restated Credit Agreement, dated as of November 14, 1997,
as amended, among Loral SpaceCom Corporation ("Loral SpaceCom"), SS/L and the
banks party thereto (the "Credit Agreement"), consists of a $125 million term
loan and a $500 million revolving credit facility and matures in November 2002.
As of June 30, 2001, $580 million was outstanding under the Credit Agreement.
The Credit Agreement requires five principal payments of $25 million each at the
end of the next five quarters, with the remaining balance due at maturity. The
Credit Agreement is secured by the stock of Loral SpaceCom Corporation and SS/L.
As of June 30, 2001, the net book value of the assets that secure the Credit
Agreement was approximately $1.15 billion.
Other Debt Agreements
Loral also has outstanding $350 million of 9.5% senior notes due in 2006.
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Loral CyberStar's outstanding debt as of June 30, 2001, of $1.0 billion, is
non-recourse to Loral, and includes certain restrictions on Loral CyberStar's
ability to pay dividends or make loans to Loral. The accreted principal value of
Loral CyberStar's senior notes and senior discount notes was $896 million at
June 30, 2001.
As of June 30, 2001, Loral believes it was in compliance with all covenants
pertaining to its debt facilities.
Equity
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
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.
Cash and Available Credit
As of June 30, 2001, Loral had $277 million of cash and available credit
(including $52 million of available credit from the above credit facilities).
Loral intends to utilize its existing capital base to further develop satellite
technologies and hardware and to build out its fixed satellite services
business.
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the six months ended June 30,
2001 was $54 million, primarily due to the net loss as adjusted by non-cash
operating items of $58 million and the increase in customer advances of $22
million primarily resulting from the prepayment by a customer for transponder
capacity, offset by an increase in inventory of $26 million due to the timing of
contract satellite awards.
Net cash provided by operating activities for the six months ended June 30,
2000 was $58 million, primarily due to the net loss as adjusted for non-cash
operating items of $54 million, decreases in contracts-in-process of $86 million
primarily as a result of collections on two significant customer contracts in
2000, and deposits of $47 million primarily due to the assignment of launch
vehicles for satellite programs and an increase in long-term liabilities of $31
million primarily due to the recognition of deferred revenue in connection with
a long-term contract for data network services and transponder capacity for a
customer. This was offset by decreases in accounts payable of $98 million
primarily due to launch vehicle payments in 2000 and customer advances of $25
million primarily due to progress on satellite programs and an increase in
accounts receivable of $42 million primarily from billed amounts due in
connection with a long-term contract for data network services and transponder
capacity and increased sales volume from data services.
Net Cash Used in Investing Activities
Net cash used in investing activities for 2001 was $146 million, as a
result of capital expenditures of $126 million primarily for the construction of
satellites and $20 million of investments in and advances to affiliates.
Net cash used in investing activities for 2000 was $190 million, primarily
as a result of capital expenditures of $288 million mainly for the construction
or acquisition of satellites (including $181 million for the final payment for
Telstar 10/Apstar IIR) and $140 million of investments in and advances to
affiliates, offset by a reduction in restricted and segregated cash of $162
million and proceeds from sales of available-for-sale securities of $70 million.
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Net Cash (Used in) Provided by Financing Activities
Net cash used in financing activities for 2001 was $77 million, due
primarily to net repayments of debt obligations of $58 million and preferred
dividend payments of $28 million.
Net cash provided by financing activities for 2000 was $285 million,
primarily due to net proceeds of $388 million from the Company's issuance of the
Series D Preferred Stock, offset by repayments of debt obligations of $90
million.
Other Liquidity Matters
Fixed Satellite Services
Loral Skynet
On April 22, 2001, the Company's Telstar 6 satellite experienced a
component failure on its primary central processing unit ("CPU"). As designed,
the satellite switched to its backup CPU, which is fully operational, and
returned to normal operation. The Company is investigating whether the primary
CPU can be restarted, in which case it would serve as the backup CPU. If the
primary CPU cannot be restarted, a subsequent failure of the currently operating
CPU would result in the loss of Telstar 6 (which is fully insured), and, until a
replacement satellite is placed in-orbit, lost revenues and profits to the
Company.
Satmex
On August 30, 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 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's customers have been provided replacement capacity on other
Satmex satellites or on satellites operated by Loral Skynet. Satmex received net
insurance proceeds of $235 million relating to the loss of Solidaridad 1. In
connection with this lost satellite, Satmex recognized an after-tax gain of $67
million, which resulted from the insurance proceeds in excess of the carrying
amount of the satellite and the incremental costs associated with providing
replacement capacity, as required by its contracts with its customers. Satmex
has contracted with SS/L to build a replacement satellite. This satellite, known
as Satmex 6, is scheduled to be launched in 2003, and is designed to provide
broader coverage and higher power levels than any other satellite currently in
the Satmex fleet.
At June 30, 2001, Solidaridad 2 had a remaining estimated useful life of
eight years. Solidaridad 2 was 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 connection with the privatization 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
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Government Obligation through December 30, 2000 and, thereafter, in an amount
equal to 1.2 times the value of the Government Obligation until maturity. As of
June 30, 2001, Loral and Principia have pledged their respective shares in
Holdings in such trust.
Europe*Star
Through June 30, 2001, Loral has invested $76 million in 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 approximately $175 million in loans to the venture. Loral
has the right to elect either to make a contribution to retain its current
ownership stake or permit Alcatel to convert approximately $30 million of the
loans into equity, which could dilute Loral's equity in the venture to as little
as approximately 38%.
Loral Cyberstar
Loral CyberStar anticipates it will have additional requirements over the
next three years to fund the growth in the business, the purchase of VSATs and
other capital expenditures, senior note interest payments, the replacement of
Telstar 11 which is expected to reach the end of its useful life in 2005, and
other operating needs. Loral CyberStar will need to secure funding from Loral,
or raise additional financing to fund these requirements. Sources of additional
capital may include public or private debt, equity financings or strategic
investments. To the extent that Loral CyberStar seeks to raise additional debt
financing, its indentures limit the amount of such additional debt and prohibit
Loral CyberStar from using Telstar 11, Telstar 10/Apstar IIR and Telstar 12 as
collateral for indebtedness. If Loral CyberStar requires additional financing
and is unable to obtain such financing from Loral or from outside sources in the
amounts and at the times needed, there would be a material adverse effect on
Loral CyberStar.
COMMITMENTS AND CONTINGENCIES
In May 2000, Globalstar finalized $531.1 million of vendor financing
arrangements (including $31.1 million of capitalized interest as of May 2000)
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 June 30, 2001, $583.2 million was outstanding under this facility (including
$83.2 million of capitalized interest).
Loral has agreed that if the principal amount (excluding capitalized
interest of $83.2 million at June 30, 2001) 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 June 30, 2001,
Loral had no guarantee obligation.
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 (six 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. 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.
Eleven of the satellites built by SS/L and launched since 1997, four 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
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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. Losses of satellites owned by Loral and its affiliates are fully
insured. With respect to satellites under construction and construction of new
satellites, based on 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 delays 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 late 1998, following the launch of an SS/L-built satellite sold to
PanAmSat, a manufacturing error was discovered that affected the geographical
coverage of the Ku-band transponders on the satellite. On January 6, 2000,
PanAmSat filed an arbitration proceeding in connection with this error claiming
damages of $225 million for lost profits and increased sales and marketing
costs. On May 25, 2001, the Company settled this matter with PanAmSat. The
charge for the settlement was fully provided for in 2000.
SS/L has an agreement with Alcatel Space Industries pursuant to which the
parties have agreed generally to operate as a team on satellite programs
worldwide. In addition, Alcatel Space has certain rights as a strategic partner
of SS/L for so long as it continues to hold at least 81.6% of the Loral
securities that it acquired in 1997 in exchange for SS/L stock that it
previously owned. Alcatel is permitted two representatives on SS/L's
seven-member board of directors, and certain actions require the approval of its
board representatives. Alcatel also has 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, including the right to use its Loral holdings as part of the SS/L
purchase price. These agreements are terminable upon one-year's notice by either
party, and SS/L gave the one-year notice to Alcatel on February 22, 2001.
Alcatel filed suit on March 16, 2001 in the United States District Court for the
Southern District of New York against Loral and SS/L alleging various breaches
of the agreements, seeking declaratory and injunctive relief to enforce its
rights thereunder and challenging the effectiveness of the termination. On April
26, 2001, the District Court issued its decision granting in part Alcatel's
motion for a preliminary injunction and granting the Company's motion to compel
arbitration. The District Court held that the issue of the termination of the
agreements is a matter that is to be decided in arbitration, as required by the
agreements. The arbitration has commenced. The District Court granted Alcatel's
request for a preliminary injunction requiring that the Company continue to
comply with the agreements pending resolution of the arbitration, or the
expiration of the agreements, whichever occurs earlier. The Company believes
that this matter will not have a material adverse effect on the consolidated
financial position or results of operations of Loral.
SS/L was informed in 1998 that it was a target of a grand jury
investigation being conducted by the office of the U.S. Attorney for the
District of Columbia with respect to possible violations of export control laws
that may have occurred in connection with the participation of SS/L employees on
a committee formed in the wake of the 1996 crash of a Long March rocket in China
and whose purpose was to consider whether studies of the crash made by the
Chinese had correctly identified the cause of the failure. The Company is not in
a position to predict the direction or outcome of the investigation. If SS/L
were to be indicted and convicted of a criminal violation of the Arms Export
Control Act, it would be subject to a fine of $1 million per violation and could
be debarred from certain export privileges and, possibly, from participation in
government contracts. Since many of SS/L's satellites are built for foreign
customers and/or launched on foreign rockets, such a debarment would have a
material adverse effect on SS/L's business and, therefore, the Company.
Indictment for such violations would subject SS/L to discretionary debarment
from further export licenses. Under the applicable regulations, SS/L could be
debarred from export privileges without being convicted of any crime if it is
indicted for these alleged violations, and loss of export privileges would harm
SS/L's business. Whether or not SS/L is indicted or convicted, SS/L remains
subject to the State Department's general statutory authority to prohibit
exports of satellites and related services if it finds a violation of the Arms
Export Control Act that puts SS/L's reliability in question, and it can suspend
export privileges whenever it determines that grounds
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for debarment exist and that such suspension "is reasonably necessary to protect
world peace or the security or foreign policy of the United States."
As far as SS/L can determine, no sensitive information or technology was
conveyed to the Chinese, and no secret or classified information was discussed
with or reported to them. SS/L believes that its employees acted openly and in
good faith and that none engaged in intentional misconduct. Accordingly, the
Company does not believe that SS/L has committed a criminal violation of the
export control laws. The Company does not expect the grand jury investigation or
its outcome to result in a material adverse effect upon its business. However,
there can be no assurance as to these conclusions.
On December 23, 1998, the Office of Defense Trade Controls, 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. According to ODTC, the purpose of the temporary suspension
was to permit that agency to review the agreement for conformity with then
newly-enacted legislation (Section 74 of the Arms Export Control Act) with
respect to the export of missile equipment and technology. 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. SS/L and the State Department are
now in discussions regarding SS/L's obtaining the approvals required for the
launch of ChinaSat-8.
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 two 36 MHz and one 54 MHz transponders on Telstar 10/Apstar IIR for
ChinaSat's use for the life of those transponders. As a result, SS/L 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.
In March 1999, jurisdiction for satellite licensing was transferred from
the Commerce Department to the State Department and the State Department has
issued regulations relating to the export of and disclosure of technical
information related to, satellites and related equipment. It has been SS/L's
experience that obtaining licenses and technical assistance agreements under
these new regulations takes more time and is considerably more burdensome than
in the past. Delays in obtaining the necessary licenses and technical assistance
agreements may delay SS/L's performance on existing contracts, and, as a result,
SS/L may incur penalties or lose incentive payments under these contracts. In
addition, such delays may have an adverse effect on SS/L's ability to compete
against unregulated foreign satellite manufacturers for new satellite contracts.
Under an agreement reached with Eutelsat, Loral CyberStar agreed to operate
Telstar 12, which was originally intended to operate at 12 degrees W.L., at 15
degrees W.L. while Eutelsat 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 CyberStar's
behalf. As part of this coordination effort, Loral CyberStar agreed to provide
to Eutelsat four transponders on Telstar 12 for the life of the satellite and
has retained risk of loss with respect to such transponders. Eutelsat also has
the right to acquire, at cost, four transponders on the next replacement
satellite for Telstar 12. As part of the international coordination process,
Loral continues to conduct discussions with various administrations regarding
Telstar 12's operations at 15 degrees W.L. If these discussions are not
successful, Telstar 12's useable capacity may be reduced.
The Company estimated the recovery of certain insurance proceeds in its
2000 consolidated financial statements in connection with an insurance claim
with its insurance carrier and received the proceeds in May 2001.
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Loral holds debt obligations from Globalstar (see Note 5). In a bankruptcy
or restructuring proceeding involving Globalstar, challenges could be initiated
seeking subordination or recharacterization of the debt Loral holds from
Globalstar. While we know 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 any restructuring or bankruptcy proceeding
involving Globalstar. Moreover, there can be no assurance that actions will not
be initiated in a Globalstar bankruptcy proceeding to characterize payments
previously made by Globalstar to Loral as preferential payments subject to
repayment. Loral also may be subject to other claims brought by Globalstar
creditors and securities holders, who may seek to impose liabilities on the
Company as a result of the Company's relationships with Globalstar. For example,
see Globalstar Related Matters below.
Globalstar Related Matters. On February 28, 2001, plaintiff Eric Eismann
filed a purported class action complaint against Globalstar Telecommunications
Limited ("GTL") in the United States District Court for the Southern District of
New York. The other defendants named in the complaint are Loral Space &
Communications Ltd. and Bernard Schwartz. The complaint alleges that (a) GTL and
Mr. Schwartz 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 GTL's business and
prospects; and (b) that Loral and Mr. Schwartz are secondarily liable for these
alleged misstatements and omissions under Section 20(a) of the Exchange Act as
alleged "controlling persons" of GTL. The class of plaintiffs on whose behalf
this lawsuit has been asserted consists of all buyers of GTL common stock from
December 6, 1999 through October 27, 2000, excluding the defendants and certain
persons related or affiliated therewith (the "Excluded Persons").
Eighteen additional purported class action complaints have been filed in
the United States District Court for the Southern District of New York by
plaintiffs Chaim Kraus, L.A. Murphy, Eddie Maiorino, Damon Davis, Iskander
Batyrev, Shelly Garfinkel, Sequoia Land Development and Phil Sigel, Michael
Ceasar as Trustee for Howard Gunty Profit Sharing Plan, Colin Barry, James D.
Atlas, Lawrence Phillips, Kent A. Hillemeir, Sarah Harman, Pablo Lozza, Joseph
and Eudice Meyers, The 60223 Trust, Antonio and Lucia Maddalena and Chaim Troman
on each of March 2, March 2, March 6, March 7, March 7, March 9, March 16, March
21, March 21, March 22, March 23, March 28, March 28, April 2, April 3, April
11, April 27, and May 1, 2001, respectively. These complaints allege claims
against GTL, Loral, and Mr. Schwartz (and, in the case of the Sequoia, Atlas and
Meyers complaints, two additional individual defendants, Messrs. Navarra and
DeBlasio) that are substantially identical to those set forth in the Eismann
action. The class of plaintiffs on whose behalf these lawsuits have been
allegedly asserted are: with respect to the Kraus, Davis, Maiorino, Batyrev,
Ceasar, Phillips, Hillemeir, Harman and The 60223 Trust actions, buyers of GTL
common stock in the period from December 6, 1999, through October 27, 2000; with
respect to the Murphy, Barry and Troman actions, buyers of GTL securities in the
period from December 6, 1999, through October 27, 2000; with respect to the
Sequoia/Sigel, Atlas and Meyers actions, buyers of GTL common stock in the
period from December 6, 1999, through July 19, 2000; with respect to the
Garfinkel and Lozza actions, buyers of GTL debt securities in the period from
December 6, 1999, through October 27, 2000; and with respect to the Maddalena
action, buyers of GTL securities in the period from October 11, 1999 through
October 27, 2000. In each case, the Excluded Persons are excepted from the
class.
On May 22, 2001, plaintiffs Philip J. Hage, Jr. and Ron Maggiaro filed a
purported class action complaint against Loral in the United States District
Court for the Southern District of New York. The other defendants named in the
complaint are Bernard Schwartz and Richard Townsend. The complaint alleges that
(a) the 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 Globalstar's and Loral's business and prospects; and (b)
that Messrs. Schwartz and Townsend are secondarily liable for these alleged
misstatements and omissions under Section 20(a) of the Exchange Act as alleged
"controlling persons" of Loral. The class of plaintiffs on whose behalf this
lawsuit has been asserted consists of all buyers of Loral common stock from
November 4, 1999 through February 1, 2001, excluding the defendants and certain
persons related or affiliated therewith.
Six additional purported class action complaints have been filed in the
United States District Court for the Southern District of New York by plaintiffs
Merchants TNS Pension Trust, Laura S. Dalton, Michael T.
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Benson, Marilyn Funt and Trident, Ltd., Profit Sharing Plan, Alexander Igdalski
and James Dwyer on May 25, May 29, June 1, June 6, June 28, and July 23, 2001
respectively. These complaints allege claims against Loral and Messrs. Schwartz
and Townsend that are substantially identical to those set forth in the Hage
action, and the class of plaintiffs on whose behalf these lawsuits have been
asserted is the same as the purported class in the Hage action.
Loral believes that it has meritorious defenses to the above Globalstar
Related Matters and intends to pursue them vigorously.
The Company has contingent liabilities of approximately $22 million in
connection with Globalstar service provider partnerships.
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.
OTHER MATTERS
Accounting Pronouncements
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives that do not qualify, or are not
effective as hedges, must be recognized currently in earnings. Upon adoption,
the Company recorded a $1.7 million reduction in net income, net of tax, and a
$1.2 million increase in other comprehensive income (OCI), net of tax, relating
to the cumulative effect of the change in adopting this new accounting
principle. The Company recorded these adjustments to recognize the fair value of
foreign currency forward contracts that qualify as derivatives under SFAS 133
and to recognize the fair value of firm commitments designated as hedged items
in fair value hedge relationships. Furthermore, the transition adjustments
reflect the derecognition of any deferred gains or losses recorded on the
balance sheet prior to the effective date of SFAS No. 133 on foreign exchange
contracts designated as hedges of foreign currency exposures on long-term
construction contracts in process.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. The Company has adopted the
applicable disclosure requirements of SFAS No. 140 in its consolidated financial
statements. 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 the other provisions of SFAS No. 140.
In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS
No.142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all
business combinations initiated after June 30, 2001, be accounted for under the
purchase method and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. SFAS
No. 142 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 No. 142 provides
that intangible assets with finite useful lives be amortized and that goodwill
and intangible assets with indefinite lives not be amortized, but will rather be
tested at least annually for impairment. The Company will adopt SFAS No. 142 on
January 1, 2002. Upon adoption of SFAS 142, the Company will stop the
amortization of goodwill with an expected net carrying value of approximately
$892 million at the date of adoption and annual amortization of approximately
$27 million that resulted from business combinations completed prior to the
adoption of SFAS 141. The Company will evaluate goodwill under the new
transitional impairment test in SFAS 142 and accordingly, has not yet determined
whether or not there will be an impairment loss. Any transitional impairment
loss will be recognized as a change in accounting principle.
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PART II. OTHER INFORMATION
ITEM 2. LEGAL PROCEEDINGS
See legal proceedings disclosure in Commitments and Contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 23, 2001, at the Company's Annual Meeting of Stockholders, the
following proposals were acted on:
(1) In an uncontested election, three nominees for the Board of
Directors were elected to three year terms expiring in 2004. The votes were
as follows:
<Table>
<Caption>
FOR WITHHELD
----------- ----------
Robert Hodes........................................ 249,640,132 13,422,519
Charles Lazarus..................................... 254,133,296 8,929,355
Daniel Yankelovich.................................. 254,115,119 8,947,532
</Table>
(2) The selection of Deloitte & Touche LLP to serve as independent
auditors for the fiscal year ending December 31, 2001, was approved. The
votes were as follows:
<Table>
For......................................................... 260,094,584
Against..................................................... 2,130,106
Abstentions................................................. 837,961
</Table>
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
<Table>
<Caption>
DATE OF REPORT DESCRIPTION
- -------------- -----------
May 25, 2001 Item 5 -- Other Shareholder Class Action Complaint
Events
</Table>
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LORAL SPACE & COMMUNICATIONS LTD.
Registrant
/s/ RICHARD J. TOWNSEND
--------------------------------------
Richard J. Townsend
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer) and
Registrant's Authorized Officer
Date: August 8, 2001
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EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibit 12 Computation of Deficiency of Earnings to Cover Fixed Charges
--
</Table>