EXHIBIT 99(A)
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
INDEX
PAGE
----
Management's Discussion and Analysis of Results of Operations and
Financial Condition..................................................... A-2
Audited Consolidated Financial Statements
Report of Independent Auditors......................................... A-7
Consolidated Statements of Operations.................................. A-8
Consolidated Balance Sheets............................................ A-9
Consolidated Statements of Changes in Net Assets....................... A-10
Consolidated Statements of Cash Flows.................................. A-11
Notes to Consolidated Financial Statements............................. A-12
A-1
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
YEAR ENDED MARCH 31, 1995
BUSINESS ENVIRONMENT
The Company's core business areas are electronic combat, training and
simulation, tactical weapons, C/3/I/reconnaissance and systems integration.
The decline in the U.S. defense budget since the mid 1980s has resulted in
program delays, cancellations and scope reductions for defense contractors
generally. While the reductions in spending have lessened, there can be no
assurance that the U.S. defense budget for 1996 will increase, especially in
the procurement budget, or reflect a decline versus 1995. The Company's
business areas focus primarily on U.S. and allied essential defense
requirements. Management believes that to the extent a higher proportion of
available funds will be allocated to the improvement of existing weapons
systems and electronics on military platforms, rather than to new program
starts, the Company is likely to benefit from its substantial incumbency in
existing weapons systems and its experience in systems upgrades. The Company
also believes its range of programs and systems are well suited for, and
provide growth opportunities in, the international market place. In addition,
the Company has a diverse base of programs, none of which is expected to
account for more than 6% of fiscal 1996 revenues. In light of these factors,
management believes the Company's program base is better suited for the
current defense spending environment than those contractors with significant
dependence on new program starts or a less diverse program base.
In addition, the areas of the Company's expertise provide opportunities to
selectively apply its proprietary technologies to non-military applications;
primary examples include systems integration programs for civilian agencies
such as the FAA, the U.S. Postal Service and the U.S. Treasury Department.
RESULTS OF OPERATIONS
In fiscal 1993 and 1994, major acquisitions made by the Company
significantly affected results of operations. The acquisitions have been
accounted for as purchases and, as such, the results of operations are
included from the respective effective dates of acquisitions. (See Note 3 to
Consolidated Financial Statements.)
Effective January 1, 1994, the Company, through Loral Federal Systems
Company ("LFS"), acquired substantially all the assets and liabilities of the
Federal Systems Company, a division of International Business Machines
Corporation ("IBM"). LFS, headquartered in Bethesda, Maryland, is a leading
systems integrator and supplier of advanced information technology products
and services to defense and non-defense government agencies worldwide.
Historical operating results of Federal Systems Company for its fiscal year
ended December 31, 1993 include sales of $2.292 billion, operating income of
$117.5 million, funded backlog at December 31, 1993 of $3.215 billion and
approximately 10,000 employees.
On August 31, 1992, the Company, through Loral Vought Systems Corporation
("LVS"), acquired the missile business of LTV Aerospace and Defense Company.
LVS, headquartered in Dallas, Texas, designs and manufactures missile systems
primarily for the U.S. Army. Historical operating results of the missile
business for its fiscal year ended December 31, 1991 include sales of $750.1
million, operating income of $36.2 million, funded backlog at August 31, 1992
of $1.134 billion and approximately 4,000 employees.
On May 5, 1995, the Company acquired the Defense Systems operations of
Unisys Corporation. Unisys Defense Systems, headquartered in McLean, Virginia,
is a leading systems integrator and software developer for defense and non-
defense government agencies worldwide, as well as a supplier of electronic
countermeasures, navigation and communication subsystems for surface ships and
submarines. Historical operating results of Unisys Defense Systems for its
fiscal year ended December 31, 1994 include sales of $1.431 billion, operating
income of $157.1 million, funded backlog at December 31, 1994 of $1.098
billion and approximately 8,600
A-2
employees. The acquisition will be accounted for as a purchase and,
accordingly, will impact operations commencing in fiscal 1996. (See Note 14 to
Consolidated Financial Statements.)
Fiscal Year Ended March 31, 1995 Compared with Fiscal Year Ended March 31,
1994
During fiscal 1995, sales increased to $5.484 billion from $4.009 billion in
the prior year. Income increased to $296.2 million compared with $231.8
million in the prior year. The results of operations of LFS contributed $46.4
million to the current year's earnings compared with $7.2 million in the prior
year.
The sales increase was attributable to the sales of LFS business divisions
which, including $605.3 million of sales relating to new business awards
subsequent to the acquisition, contributed $1.810 billion to the increase.
Sales also includes higher volume of $38.5 million for ALR-56 radar warning
systems, $19.6 million for foreign F-15 flight simulators and $17.9 million
for the Atmospheric Infrared Sounder (AIRS) that will fly on NASA's Earth
Observing System platform; offset by lower volume of $62.9 million for the
Multiple Launch Rocket System (MLRS), $50.2 million for the F/A-18 Forward-
Looking Infrared (FLIR) targeting and weapon delivery system, $37.0 million
for gyro-optic assemblies for Maverick missiles, $33.9 million for the
Automated Remote Tracking Station (ARTS) and $33.7 million for the Digital
Scene Matching Area Correlation (DSMAC) guidance system. The Company has a
diverse base of programs and the change in sales from period to period
includes increases and decreases on a variety of programs which individually
are not significant to the overall sales change. The Company believes the
increases and decreases for individual programs noted above do not necessarily
represent trends of future sales contributions, except for the gyro-optic
assemblies for Maverick missiles and ARTS programs which have been
substantially completed.
Operating income increased to $564.5 million from $401.0 million in the
prior year. Operating income of the acquired LFS business increased to $179.3
million from $21.5 million in the prior year, included from the January 1,
1994 effective date of acquisition. Operating income as a percentage of sales
increased to 10.3% in fiscal 1995 from 10.0% in fiscal 1994. However,
excluding the effect of the acquisition of LFS, operating income as a
percentage of sales increased to 12.3% in fiscal 1995 from 11.0% in fiscal
1994, due primarily to net improved margins as a result of sales mix and
operating efficiencies particularly for the MLRS and Army Tactical Missile
System (ATACMS) programs, a higher pension credit and lower postretirement
health care and life insurance costs due to various plan amendments (See Note
10 to Consolidated Financial Statements). Operating income for the MLRS and
ATACMS programs improved by $13.8 million primarily due to program performance
and cost control measures implemented in the current and prior years.
Interest expense, net of interest and investment income, increased to $86.9
million from $30.7 million in the prior year, primarily due to the full-year
impact of debt incurred to finance the acquisition of LFS. Interest expense
due to the LFS acquisition was $100.6 million in fiscal 1995 as compared with
$9.5 million in fiscal 1994. This increase includes the effect of refinancing
a portion of the acquisition debt in June 1994 and the increase in interest
rates during the year affecting the Company's commercial paper. The $34.9
million decrease in interest expense, net of the LFS increase, is primarily
due to strong cash flow used to repay debt. The Company's Free Cash Flow (net
cash from operating activities, less net capital expenditures, plus proceeds
of stock purchases by employee benefit plans and exercises of stock options)
was $573.0 million for the twelve months ended March 31, 1995 and $283.4
million for the twelve months ended March 31, 1994.
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 was signed
into law, including a provision that increased the Federal corporate income
tax rate by 1%, to 35%, effective January 1, 1993. In fiscal 1994, this
increase was partially offset by the benefit resulting from revaluing deferred
tax assets at the higher rate. As a result, the Company's effective tax rate
increased to 38.0% in fiscal 1995 from 37.4% in the prior year. (See Note 7 to
Consolidated Financial Statements.)
Fiscal Year Ended March 31, 1994 Compared with Fiscal Year Ended March 31,
1993
During fiscal 1994, sales increased to $4.009 billion from $3.335 billion in
the prior year. Income increased to $231.8 million compared with $164.3
million in the prior year, before an extraordinary item and the
A-3
cumulative effect of adopting SFAS 106. The results of the acquired LFS and
LVS businesses contributed $75.5 million to fiscal 1994 earnings compared to
$17.2 million contributed by LVS in the prior year.
The sales increase was attributable to the sales of the acquired LFS and LVS
businesses which, including $167.8 million of sales relating to new business
awards subsequent to the acquisitions, contributed $796.2 million to the
increase. Sales also includes higher volume of $42.5 million for the Vertical
Launch Antisubmarine Rocket (VLA) and $39.8 million for ALR-56M radar warning
systems; offset by lower volume of $42.5 million for Simulated Area Weapons
Effect (SAWE) training system, $41.7 million for Sidewinder air-to-air
missiles, $39.9 million for ALQ-178 radar warning and electronic
countermeasures systems for foreign F-16 aircraft and $39.8 million for the
AN/BSY-2 combat control system for the U.S. Navy's SSN-21 attack submarine.
The Company has a diverse base of programs and the change in sales from period
to period includes increases and decreases on a variety of programs which
individually are not significant to the overall sales change.
Operating income increased to $401.0 million from $295.4 million in the
prior year. Operating income of the acquired LFS and LVS businesses increased
to $143.5 million from $37.8 million in the prior year for LVS. Operating
income as a percentage of sales increased to 10.0% in fiscal 1994 from 8.9% in
fiscal 1993, due primarily to net improved margins of the acquired LVS
business, the full-year impact of lower pension costs resulting from acquired
pension plans and lower postretirement health care and life insurance costs
due to various plan amendments (see Note 10 to Consolidated Financial
Statements), offset by lower margins of the acquired LFS business. Excluding
the effect of the acquisitions of LFS and LVS, operating income, as a
percentage of sales, increased to 9.6% in fiscal 1994 from 9.2% in fiscal
1993.
After the full-year impact of debt incurred as a result of the acquisition
of LVS and interest expense from the effective date of acquisition of LFS,
interest expense, net of interest and investment income, increased to $30.7
million from $30.2 million in the prior year. The increase of only $.5 million
in net interest expense despite the increase in acquisition debt is primarily
due to the benefits of strong Free Cash Flow and the benefit of a series of
debt reshaping steps which reduced interest expense by approximately $8.5
million. The Company's Free Cash Flow was $283.4 million for the twelve months
ended March 31, 1994 and $229.0 million for the twelve months ended March 31,
1993.
As a result of the early redemption of certain long-term debt issues and the
cancellation of an existing credit facility, the Company recorded in fiscal
1993 an extraordinary charge of $28.2 million pre-tax, $17.8 million after-
tax. The extraordinary charge consisted of redemption premiums and the write-
off of unamortized discounts and financing costs.
As a result of the tax rate increase in the Omnibus Budget Reconciliation
Act of 1993, the Company's effective tax rate increased to 37.4% in fiscal
1994 from 37.1% in the prior year. (See Note 7 to Consolidated Financial
Statements.)
The minority interest charge was eliminated due to the Company's
acquisition, effective June 1, 1992, of the minority partners' interest in
Loral Aerospace Holdings, Inc. ("LAH"). (See Note 3 to Consolidated Financial
Statements.)
Effective April 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Then Pensions" ("SFAS 106"). As a result of adopting SFAS 106
in 1993, the Company recorded charges for the cumulative effect of the
accounting change of $323.7 million pre-tax, $226.6 million after-tax. (See
Note 10 to Consolidated Financial Statements.)
FINANCIAL CONDITION AND LIQUIDITY
Cash Provided and Used
Net Cash Provided by Operating Activities: Cash provided by operating
activities was $604.0 million in fiscal 1995, an increase of $244.9 million or
68% over fiscal 1994. The increase was due primarily to higher
A-4
earnings including adjustments for non-cash items in fiscal 1995, as net
income increased to $296.2 million from $231.8 million, depreciation and
amortization increased to $250.1 million from $178.2 million and deferred
income taxes increased to $111.8 million from $27.5 million. Earnings after
adjustments for non-cash items provided $658.1 million in fiscal 1995 compared
with $437.5 million in fiscal 1994, offset by changes in operating assets and
liabilities, which used $54.1 million in fiscal 1995 compared with $78.4
million in fiscal 1994.
The Company's current ratio improved slightly to 1.5:1 at March 31, 1995
from 1.4:1 at March 31, 1994 as the Free Cash Flow of $573.0 million was
applied primarily to reduce debt and seller financing for the LFS acquisition.
Debt and seller financing repayments in fiscal 1995 totalled $531.9 million of
which $224.3 million was classified in current liabilities at March 31, 1994.
Based on prior historical financial statements, the May 1995 acquisition of
Unisys Defense Systems is not expected to have a significant impact on the
current ratio.
Net Cash Used in Investing Activities: Cash used in investing activities
decreased to $89.0 million in fiscal 1995 from $1.502 billion in fiscal 1994,
primarily due to the acquisition cost, net of cash acquired, of $1.401 billion
for LFS in fiscal 1994. Capital expenditures in fiscal 1995 were $122.7
million, compared with $103.0 million in fiscal 1994. Capital expenditures
were primarily for manufacturing and test equipment, facility expansion and
renovation. Disposition of property, plant and equipment in fiscal 1995 was
$37.5 million, compared with $6.5 million in fiscal 1994, primarily as a
result of facility relocation and reduction of fixed asset levels at certain
locations.
Net Cash (Used) Provided in Financing Activities: Cash used in financing
activities was $627.8 million in fiscal 1995, compared with cash provided from
financing activities of $1.264 billion in fiscal 1994. As a result of strong
Free Cash Flow during fiscal 1995, debt was reduced by $531.9 million.
Accordingly, the Company's debt (net of cash) to net assets ratio decreased to
..83:1 at March 31, 1995 from 1.28:1 at March 31, 1994.
The LFS purchase price was financed initially through cash on hand and
commercial paper borrowings. As originally planned, in order to fix interest
costs and lengthen maturities, in June 1994, the Company issued $250 million 7
5/8% Senior Notes due 2004 and $400 million 8 3/8% Senior Debentures due 2024,
under a shelf registration statement which was increased to $800 million in
May 1994. The proceeds were used to reduce the Company's outstanding
commercial paper borrowings, including the $173.5 million, which was
classified as current portion of debt at March 31, 1994.
The Unisys Defense Systems purchase price was financed through additional
commercial paper borrowings which were supported by the $1.2 billion revolving
credit facility. (See Notes 6 and 14 to Consolidated Financial Statements).
The Company expects that, based on prior historical performance and current
projections, Unisys Defense Systems will make a positive contribution to the
Company's Free Cash Flow.
Financial Instruments
The Company uses off balance sheet derivative financial instruments,
including foreign currency forward contracts to minimize foreign currency
risk. The Company does not hold or issue derivative financial instruments for
speculative purposes.
The majority of the Company's foreign currency forward contracts are entered
into at the direction of the customer pursuant to contractual requirements.
Any gain or loss on the hedges accrues for the benefit or detriment of the
customer and does not expose the Company to risk.
At March 31, 1995, the Company had open forward contracts to sell
approximately 41.5 million Pound Sterling to minimize the effect of currency
exposure on future cash payments from foreign operations. Gains and
A-5
losses on foreign currency forward contracts are recorded when the
transactions being hedged are realized. For the year ended March 31, 1995,
gains and losses on these contracts were not material. Other forward contracts
are not material.
Backlog
The Company's funded backlog at March 31, 1995, totalled $6.367 billion,
compared with $6.548 billion at March 31, 1994. It is expected that 52% of the
March 31, 1995 backlog will be recorded as sales in fiscal 1996. Approximately
87% of the total backlog was directly or indirectly for U.S. and foreign
government defense contracts; approximately 11% of the total backlog was
directly or indirectly for U.S. and foreign government non-defense contracts.
Foreign customers account for about 39% of the total backlog. New orders in
fiscal 1995 totalled $5.303 billion, compared with $3.467 billion in fiscal
1994, primarily due to the results of LFS; new orders increased by 13% after
factoring in LFS for the full prior year.
Research and Development
Company-sponsored research and development, including bid and proposal
costs, increased to $228.0 million from $172.6 million the prior year. In
addition, customer-funded research and development was $1.630 billion for
fiscal 1995, compared with $844.0 million for the prior year. The increase in
customer-funded research and development is due primarily to the results of
LFS.
Environmental Matters
Management is continually assessing its obligations with respect to
applicable environmental protection laws. While it is difficult to determine
the timing and ultimate cost to be incurred by the Company in order to comply
with these laws, based upon available internal and external assessments, the
Company believes that even without considering potential insurance recoveries,
if any, there are no environmental loss contingencies that, individually or in
the aggregate, are material. The Company accrues for these contingencies when
it is probable that a liability has been incurred and the amount of the loss
can be reasonably estimated. The Company has been named a Potentially
Responsible Party ("PRP") at a number of sites. In several of these situations
the Company acquired the site pursuant to a purchase agreement which provided
that the seller would retain liability for environmental remediation and
related costs arising from occurrences prior to the sale. In other situations
the Company is party to an interim or final allocation plan that has been
accepted by other PRPs whose size and current financial condition make it
probable that they will be able to pay the environmental costs apportioned to
them. The Company believes that it has adequately accrued for future
expenditures in connection with environmental matters and that such
expenditures will not have a material adverse effect on its financial
condition or results of operations.
Inflation
The effect of inflation on the Company's sales and earnings is minimal.
Although a majority of the Company's sales are made under long-term contracts,
the selling prices of such contracts, established for deliveries in the
future, generally reflect estimated costs to be incurred in these future
periods. In addition, some contracts provide for price adjustments through
escalation clauses.
Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"),
which is required to be adopted by fiscal 1997. SFAS 121 establishes the
accounting standards for the impairment of long-lived assets, certain
intangible assets and cost in excess of net assets acquired to be held and
used, and for long-lived assets and certain intangible assets to be disposed
of. The Company is currently evaluating the impact, if any, of SFAS 121.
A-6
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
Loral Corporation:
We have audited the accompanying consolidated balance sheets of Loral
Corporation and Subsidiaries--Retained Business (the "Company") as of March
31, 1995 and 1994 and the related consolidated statements of operations,
changes in net assets and cash flows for each of the three years in the period
ended March 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Loral
Corporation and Subsidiaries--Retained Business as of March 31, 1995 and 1994,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended March 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Notes 7 and 10 to the consolidated financial statements, in
1993 the Company changed its methods of accounting for income taxes and
postretirement benefits other than pensions.
/s/ Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York 10019
May 11, 1995 (except as to the information presented
in Notes 1 and 14, for which the date is January 12, 1996)
A-7
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
Sales....................................... $5,484,401 $4,008,733 $3,335,403
Costs and expenses.......................... 4,919,857 3,607,765 3,040,050
---------- ---------- ----------
Operating income............................ 564,544 400,968 295,353
Interest and investment income.............. 9,484 8,275 12,422
Interest expense............................ 96,405 39,016 42,583
---------- ---------- ----------
Income before income taxes and minority
interest................................... 477,623 370,227 265,192
Income taxes................................ 181,456 138,420 98,314
---------- ---------- ----------
Income before minority interest............. 296,167 231,807 166,878
Minority interest........................... (2,586)
---------- ---------- ----------
Income before extraordinary item and
cumulative effect of changes in
accounting................................. 296,167 231,807 164,292
Extraordinary item-loss on extinguishment of
debt, net of income taxes of $10,440....... (17,776)
Cumulative effect of changes in accounting,
net of income taxes of $97,122............. (226,618)
---------- ---------- ----------
Net income (loss)........................... $ 296,167 $ 231,807 $ (80,102)
========== ========== ==========
See notes to consolidated financial statements.
A-8
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
CONSOLIDATED BALANCE SHEETS
MARCH 31,
---------------------
1995 1994
---------- ----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 125,674 $ 238,498
Contracts in process................................... 1,147,233 1,328,338
Deferred income taxes.................................. 138,374 104,063
Other current assets................................... 141,846 173,714
---------- ----------
Total current assets................................. 1,553,127 1,844,613
---------- ----------
Property, plant and equipment............................ 1,899,804 1,926,978
Less, accumulated depreciation and amortization.......... 758,279 620,554
---------- ----------
1,141,525 1,306,424
---------- ----------
Cost in excess of net assets acquired, less
amortization............................................ 1,265,932 1,342,872
Deferred income taxes.................................... 6,486 42,100
Prepaid pension cost and other assets.................... 591,217 480,907
---------- ----------
$4,558,287 $5,016,916
========== ==========
LIABILITIES AND NET ASSETS
Current liabilities:
Current portion of debt................................ $ 958 $ 173,928
Accounts payable, trade................................ 169,743 248,657
Billings and estimated earnings in excess of cost...... 313,379 350,648
Accrued employment costs............................... 235,260 201,238
Income taxes........................................... 80,642 77,815
Other current liabilities.............................. 216,585 237,881
---------- ----------
Total current liabilities............................ 1,016,567 1,290,167
---------- ----------
Postretirement benefits.................................. 611,911 639,266
Other liabilities................... .................... 178,798 241,368
Long-term debt........................................... 1,315,530 1,624,061
Commitments and contingencies (Notes 9 and 13)
Net assets............................................... 1,435,481 1,222,054
---------- ----------
$4,558,287 $5,016,916
========== ==========
See notes to consolidated financial statements.
A-9
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED MARCH 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
Balance, beginning of year................. $1,222,054 $1,050,836 $ 780,178
Shares issued:
Exercise of stock options and related tax
benefits, net of shares tendered........ 11,614 9,392 23,714
Employee benefit plans................... 42,698 11,398 15,169
Restricted Stock Purchase Plan........... (1) 38
Conversion of subordinated debentures.... 70,284
Acquisition of minority interest in LAH.. 195,179
Purchase of treasury stock................. (3,103)
Amortization of restricted options......... 3,351 3,246 10,772
Shares earned under Restricted Stock
Purchase Plan............................. 5,655 3,919 7,827
Net income (loss).......................... 296,167 231,807 (80,102)
Dividends.................................. (49,663) (45,183) (37,361)
Changes in net assets applicable to Space
and Communications Operations............. (100,580) (25,774) 68,161
Additional minimum pension liability....... 5,085 (16,049)
Foreign currency translation adjustment.... (900) (1,537) 80
---------- ---------- ----------
Balance, end of year....................... $1,435,481 $1,222,054 $1,050,836
========== ========== ==========
See notes to consolidated financial statements.
A-10
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31,
---------------------------------
1995 1994 1993
---------- ---------- ---------
(IN THOUSANDS)
Operating activities:
Net income (loss)......................... $ 296,167 $ 231,807 $ (80,102)
Extraordinary item........................ 17,776
Cumulative effect of changes in
accounting............................... 226,618
Depreciation and amortization............. 250,122 178,184 154,005
Deferred income taxes..................... 111,769 27,500 14,818
Minority interest......................... 2,586
Changes in operating assets and liabilities:
Contracts in process...................... 30,966 31,850 (29,963)
Other current assets...................... 31,868 (56,713) (39,368)
Prepaid pension cost and other assets..... (40,956) (22,767) (38,444)
Accounts payable and accrued liabilities.. (59,703) (21,247) 1,539
Income taxes.............................. 2,827 17,375 27,063
Postretirement benefits and other
liabilities.............................. (23,279) (26,366) 23,392
Other..................................... 4,185 (562) (914)
---------- ---------- ---------
Net cash from operating activities.......... 603,966 359,061 279,006
---------- ---------- ---------
Investing activities:
Acquisition of businesses, net of cash
acquired................................. (3,750) (1,426,103) (252,976)
Proceeds from note receivable............. 20,935
Investment in other assets................ (15,265)
Capital expenditures...................... (122,733) (102,952) (97,268)
Disposition of property, plant and
equipment................................ 37,482 6,492 8,309
---------- ---------- ---------
(89,001) (1,501,628) (357,200)
---------- ---------- ---------
Financing activities:
Net (payments) borrowings under revolving
credit facilities and commercial paper... (1,131,737) 808,018 115,531
Proceeds from borrowings.................. 651,273 503,534 120,803
Payments of debt.......................... (1,037) (47,578) (211,201)
Distributions to Space and Communications
Operations............................... (100,580) (25,774) (3,189)
Dividends paid............................ (49,663) (45,183) (37,361)
Proceeds from issuance of common stock.... 54,312 20,789 38,921
Purchase of treasury stock................ (3,103)
Seller financing in connection with
acquisition of business.................. (50,357) 50,357
Other..................................... (16,418)
---------- ---------- ---------
(627,789) 1,264,163 3,983
---------- ---------- ---------
Net (decrease) increase in cash and cash
equivalents................................ (112,824) 121,596 (74,211)
Cash and cash equivalents, beginning of
year....................................... 238,498 116,902 191,113
---------- ---------- ---------
Cash and cash equivalents, end of year...... $ 125,674 $ 238,498 $ 116,902
========== ========== =========
Supplemental information:
Interest paid during the year............. $ 93,385 $ 46,342 $ 48,729
========== ========== =========
Income taxes paid during the year, net of
refunds.................................. $ 62,563 $ 73,729 $ 42,549
========== ========== =========
See Notes 2 and 3 for additional information.
See notes to consolidated financial statements.
A-11
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On January 7, 1996, Loral Corporation ("Loral") and Lockheed Martin
Corporation ("Lockheed Martin") entered into a definitive Agreement and Plan
of Merger (the "Merger Agreement") among Loral, Lockheed Martin and LAC
Acquisition Corporation ("LAC"), a wholly-owned subsidiary of Lockheed Martin,
providing for the transactions that will result in Loral becoming a subsidiary
of Lockheed Martin and the spin-off by Loral of its direct and indirect
interests in Globalstar, L.P. ("Globalstar"), Space Systems/Loral, Inc.
("SS/L") and K & F Industries, Inc. ("K & F"), to Loral Corporation's
shareholders (the "Space & Communications Operations") (See Note 14).
The accompanying consolidated financial statements reflect the portion of
Loral that will become a subsidiary of Lockheed Martin (the "Retained
Business" or the "Company"). However, the financial position and results of
operations, as presented herein may not have been the same as would have
occurred had Retained Business and the Space & Communications Operations been
independent entities.
All significant intercompany balances and transactions have been eliminated.
Certain other assets of Loral will also be distributed to Space &
Communications Operations as of the closing date of the merger. These assets,
consisting of certain fixed assets and other miscellaneous assets, have been
included in the accompanying financial statements since they have been used
principally by the Retained Business.
Allocation of Certain Expenses
The financial statements reflect the allocations of certain expenses to
Space & Communications Operations based upon estimates of actual services
performed by the Company (See Note 13). The amount of corporate office
expenses allocated to Space & Communications Operations have been estimated
based primarily on the allocation methodology prescribed by government
regulations pertaining to government contractors, which management believes to
be a reasonable allocation method.
Interest Expense
The financial statements exclude interest of $9,456,000, $8,253,000 and
$10,550,000 for the years ended March 31, 1995, 1994 and 1993, respectively,
which has been allocated to Space & Communications Operations based upon the
Company's historical weighted average debt cost applied to Loral's average
investment in affiliates for each period.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity of
three months or less at time of purchase.
Statements of Cash Flows
Changes in operating assets and liabilities are net of the impact of
acquisitions and final purchase price allocations. Investing activities do not
include certain marketable securities transactions in 1993 which were not
settled in cash.
A-12
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Contracts In Process
Sales on long-term production-type contracts are recorded as units are
shipped; profits applicable to such shipments are recorded pro rata, based
upon estimated total profit at completion of the contract. Sales and profits
on cost reimbursable contracts are recognized as costs are incurred. Sales and
estimated profits under other long-term contracts are recognized under the
percentage of completion method of accounting using the cost-to-cost method.
Amounts representing contract change orders or claims are included in sales
only when they can be reliably estimated and realization is probable.
Costs accumulated under long-term contracts include applicable amounts of
selling, general and administrative expenses. Losses on contracts are
immediately recognized in full when determinable. Revisions in profit
estimates are reflected in the period in which the facts which require the
revision become known.
In accordance with industry practice, contracts in process contain amounts
relating to contracts and programs with long production cycles, a portion of
which may not be realized within one year.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided
primarily on the straight-line method over the estimated useful lives of the
related assets. Leasehold improvements are amortized over the shorter of the
lease term or the estimated useful life of the improvements.
Cost in Excess of Net Assets Acquired
The excess of the cost of purchased businesses over the fair value of the
net assets acquired is being amortized using a straight-line method generally
over a 40-year period. Accumulated amortization amounted to $107,857,000 and
$70,207,000 at March 31, 1995 and 1994, respectively.
The carrying amount of Cost in Excess of Net Assets Acquired is evaluated on
a recurring basis. Current and future profitability as well as current and
future undiscounted cash flows, excluding financing costs, of the acquired
businesses are primary indicators of recoverability. For the three years ended
March 31, 1995, there were no adjustments to the carrying amount of the cost
in excess of net assets acquired resulting from these evaluations.
Foreign Currency Translation
Assets and liabilities of foreign operations are translated into U.S.
dollars at current rates and income and expenses are translated at average
rates during the period. The effects of the translation adjustments are
included as a component of Net Assets.
Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"),
which is required to be adopted by fiscal 1997. SFAS 121 establishes the
accounting standards for the impairment of long-lived assets, certain
intangible assets and cost in excess of net assets acquired to be held and
used and for long-lived assets and certain intangible assets to be disposed
of. The Company is currently evaluating the impact, if any, of SFAS 121.
A-13
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACQUISITIONS
On March 1, 1994, effective January 1, 1994, the Company, through its newly
formed wholly owned subsidiary, Loral Federal Systems Company ("LFS"),
acquired substantially all the assets and liabilities of the Federal Systems
Company, a division of International Business Machines Corporation, for
$1,511,500,000 in cash, including acquisition costs. The assets and
liabilities recorded in connection with the purchase price allocation were
$1,857,655,000 and $346,155,000, respectively. The acquisition was financed
through cash on hand and commercial paper borrowings.
On August 31, 1992, the Company, through its newly formed wholly owned
subsidiary, Loral Vought Systems Corporation ("LVS"), acquired substantially
all the assets and liabilities of the missile business of LTV Aerospace and
Defense Company for $254,250,000 in cash, including acquisition costs. The
assets and liabilities recorded in connection with the purchase price
allocation were $564,502,000 and $310,252,000, respectively. The acquisition
was financed through cash on hand and borrowings under existing credit
facilities.
In October 1990, Loral Aerospace Holdings, Inc. ("LAH"), a company owned by
the Company and certain partnerships affiliated with Lehman Brothers Holdings
Inc. (the "Lehman Partnerships"), acquired substantially all the businesses of
Ford Aerospace Corporation ("FAC"). The FAC businesses were acquired by
separate subsidiaries of LAH; Loral Aerospace Corp. ("Loral Aerospace")
purchased all the businesses other than FAC's Space Systems Division, which
was purchased by SS/L.
Effective June 1, 1992, the Company acquired the minority equity interest in
LAH held by the Lehman Partnerships through the issuance of 12,313,810 shares
of Loral Common Stock and 627.3 shares of LAH Series S Preferred Stock. Each
share of Series S Preferred Stock represents a beneficial interest in one
share of common stock of SS/L. As a result of the issuance of the Series S
Preferred Stock, the Lehman Partnerships have no economic interest in LAH
other than with respect to the SS/L operations. This transaction increased Net
Assets by $195,179,000, eliminated Minority Interest, decreased Changes in Net
Assets Applicable to Space and Communications Operations by $71,350,000 and
increased Cost in Excess of Net Assets Acquired by $159,960,000.
In 1995, the Company acquired a business for $3,750,000 in cash and in 1994,
the Company acquired two other businesses for $27,422,000 in cash. These
acquisitions did not have a material effect on the operations of the Company.
The acquisitions of LFS, LVS and the Lehman Partnerships' equity interest in
LAH have been accounted for as purchases. As such, the Company's consolidated
financial statements reflect the results of operations of the acquired
entities and the elimination of the minority interest from the respective
effective dates of acquisition.
Performance under acquired contracts in process, the accounting for which is
described in Note 4, contributed after-tax income of $62,328,000, $49,061,000,
and $43,283,000, net of after-tax interest cost on debt related to the
acquisitions and incremental amortization of cost in excess of net assets
acquired aggregating $85,922,000, $29,125,000 and $18,653,000 for 1995, 1994,
and 1993, respectively.
Had the acquisition of LFS occurred on April 1, 1993, the unaudited proforma
sales and income before extraordinary item and cumulative effect of changes in
accounting for the year ended March 31, 1994 would have been: $5,853,700,000
and $231,500,000. The results, which are based on various assumptions, are not
necessarily indicative of what would have occurred had the acquisition been
consummated as of April 1, 1993.
A-14
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. CONTRACTS IN PROCESS
Billings and accumulated costs and profits on long-term contracts,
principally with the U.S. Government, comprise the following:
MARCH 31,
------------------------
1995 1994
----------- -----------
(IN THOUSANDS)
Billed contract receivables........................ $ 380,240 $ 423,894
Unbilled contract receivables...................... 1,702,967 1,901,156
Inventoried costs.................................. 477,955 557,259
----------- -----------
2,561,162 2,882,309
Less, unliquidated progress payments............... (1,413,929) (1,553,971)
----------- -----------
Net contracts in process........................... $ 1,147,233 $ 1,328,338
=========== ===========
Unbilled contract receivables represent accumulated costs and profits earned
but not yet billed to customers at year-end. The Company believes that
substantially all such amounts will be billed and collected within one year.
The following data has been used in the determination of costs and expenses:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Selling, general and administrative costs
included in inventoried costs................... $ 51,468 $ 64,212 $ 82,676
Selling, general and administrative costs
incurred........................................ 563,342 462,890 389,404
Independent research and development, including
bid and proposal costs, included in S,G&A
incurred........................................ 228,005 172,604 124,718
In connection with the determination of the fair value of assets acquired
(Note 3) and pursuant to the provisions of Accounting Principles Board Opinion
No. 16, the Company has valued acquired contracts in process at contract
price, minus the estimated cost to complete and an allowance for the Company's
normal profit on its effort to complete such contracts.
5. PROPERTY, PLANT AND EQUIPMENT
MARCH 31,
---------------------
1995 1994
---------- ----------
(IN THOUSANDS)
Land.................................................. $ 106,879 $ 116,347
Buildings and improvements............................ 569,724 560,163
Machinery, equipment, furniture and fixtures.......... 1,095,149 1,125,261
Leasehold improvements................................ 128,052 125,207
---------- ----------
$1,899,804 $1,926,978
========== ==========
Depreciation and amortization expense in 1995, 1994 and 1993 was
$192,473,000, $141,853,000, and $113,447,000, respectively.
A-15
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. DEBT
MARCH 31,
----------------------
1995 1994
---------- -----------
(IN THOUSANDS)
Commercial paper (6.22% and 3.76% at March 31, 1995
and 1994, respectively)........................... $ 241,811 $ 1,373,548
7 5/8% Senior Notes due 2004....................... 250,000
9 1/8% Senior Debentures due 2022.................. 100,000 100,000
8 3/8% Senior Debentures due 2023.................. 100,000 100,000
7% Senior Debentures due 2023...................... 200,000 200,000
8 3/8% Senior Debentures due 2024.................. 400,000
Other.............................................. 24,677 24,441
---------- -----------
1,316,488 1,797,989
Less current maturities............................ 958 173,928
---------- -----------
Total long-term debt........................... $1,315,530 $ 1,624,061
========== ===========
The aggregate maturities of long-term debt, excluding commercial paper
borrowings classified as long-term, for the years 1996 through 2000 are as
follows: $958,000, $10,868,000, $1,214,000, $985,000 and $941,000.
At March 31, 1995, the Company has a $1,200,000,000 revolving credit
facility with a group of banks expiring in November 1999. This facility
supports the Company's commercial paper borrowings and is available for other
corporate purposes. The amount available for borrowings is reduced by the
outstanding commercial paper. Borrowings are unsecured and bear interest, at
the Company's option, at various rates based on the base rate, or on margins
over the CD rate or EuroDollar rate. The Company pays a commitment fee on the
unused portion. The margins and the commitment fee are subject to adjustment.
Borrowings are prepayable at any time and are due at expiration. The facility
is subject to financial covenants requiring the Company to maintain certain
levels of net worth and an interest coverage ratio, as well as a limitation on
indebtedness and dividends.
Commercial paper outstanding at March 31, 1995 is classified as long-term
since the Company intends to refinance these borrowings on a long-term basis
either through continued commercial paper borrowings or utilization of the
available credit facilities.
In May 1994, the Company increased its existing shelf registration statement
to issue up to $800,000,000 of debt and equity securities. In June 1994, the
Company issued $250,000,000 7 5/8% Senior Notes due 2004 and $400,000,000 8
3/8% Senior Debentures due 2024. The proceeds were used to reduce outstanding
commercial paper.
All of the Company's Senior Notes and Senior Debentures are not redeemable
prior to maturity and are not subject to any sinking fund requirements.
In fiscal 1993, the Company recorded an extraordinary charge of $28,216,000
pre-tax or $17,776,000 after-tax for the early redemption of certain long-term
debt issues and the cancellation of an existing credit facility. The
extraordinary charge consisted of redemption premiums and the write-off of
unamortized discounts and financing costs. In addition, in fiscal 1993, the
Company issued 3,149,710 shares of Loral Common Stock in connection with the
conversion of $69,694,000 principal amount of certain convertible debentures.
A-16
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES
In 1993, the Company adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), which changed the method of
accounting for income taxes from the deferred method to the liability method.
Under the liability method, deferred tax assets and liabilities are recognized
based on the temporary differences between the carrying amounts of assets and
liabilities for financial statement purposes and income tax purposes using
currently enacted tax rates. The adoption of SFAS 109 did not result in a
material cumulative effect of a change in accounting principle or have a
material effect on the financial position or results of operations for the
year ended March 31, 1993.
The components of the provision for income taxes are as follows:
1995 1994 1993
-------- -------- -------
(IN THOUSANDS)
Currently payable:
Federal......................................... $ 45,273 $ 91,358 $68,061
State and local................................. 13,622 15,534 12,566
Foreign......................................... 10,792 4,028 2,869
-------- -------- -------
69,687 110,920 83,496
-------- -------- -------
Deferred:
Federal......................................... 100,993 21,491 13,103
State and local................................. 10,776 6,009 1,715
-------- -------- -------
111,769 27,500 14,818
-------- -------- -------
Total provision for income taxes.............. $181,456 $138,420 $98,314
======== ======== =======
The provision for income taxes excludes: current tax benefits related to the
exercise of stock options, credited directly to Net Assets, of $4,503,000,
$3,643,000 and $10,237,000 for 1995, 1994 ad 1993, respectively; a deferred
tax credit of $3,251,000 and a deferred tax benefit of $10,261,000, related to
the additional minimum pension liability recorded directly to Net Assets for
1995 and 1994, respectively; and, in 1993, the tax benefit of $10,440,000,
related to the extraordinary item and the deferred tax benefit of $97,122,000,
related to the cumulative affect of the change in accounting for SFAS 106.
The effective income tax rate differs from the statutory Federal income tax
rate for the following reasons:
1995 1994 1993
---- ---- ----
Statutory Federal income tax rate......................... 35.0% 35.0% 34.0%
Research and development and other tax credits............ (.6) (1.1) (.4)
State and local income taxes, net of Federal income tax
benefit and state and local income tax credits........... 3.3 3.8 3.6
Foreign sales corporation tax benefit..................... (.6) (.7) (.8)
Other, net................................................ .9 .4 .7
---- ---- ----
Effective income tax rate................................. 38.0% 37.4% 37.1%
==== ==== ====
A-17
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The significant components of the deferred income tax assets and liabilities
are:
MARCH 31,
-----------------
1995 1994
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Postretirement benefits other than pensions............. $185,169 $191,678
Inventoried costs....................................... 128,059 100,927
Intangible assets....................................... 33,149 1,616
Compensation and benefits............................... 18,406 14,545
Installment sales....................................... 9,100
Other, net.............................................. 21,315 36,867
-------- --------
386,098 354,733
-------- --------
Deferred tax liabilities:
Pension costs........................................... 175,146 126,771
Property, plant and equipment........................... 49,815 64,912
Income recognition on long-term contracts............... 16,277 16,887
-------- --------
241,238 208,570
-------- --------
Net deferred income tax asset............................. $144,860 $146,163
======== ========
The net deferred income tax asset is classified as follows:
MARCH 31,
-----------------
1995 1994
-------- --------
(IN THOUSANDS)
Current deferred income tax asset......................... $138,374 $104,063
======== ========
Long-term deferred income tax asset....................... $ 6,486 $ 42,100
======== ========
8. NET ASSETS
Stock Plans
Under the Company's 1994 Stock Option Plan, options are granted at fair
market value at date of grant. Under the Company's various other stock option
plans, for which 105,000 shares are available for future grant, options may be
granted at prices determined by the Compensation and Stock Option Committee
(the "Committee"). The Committee determines the exercise and expiration dates
of the options, which may not be later than 10 years from the date of grant.
Unearned compensation for options granted at less than their market value at
date of grant is included as a component of Net Assets and is amortized over
the period that the options vest.
Options outstanding have been granted at prices ranging from $4.50 to $39.00
per share.
A-18
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the option transactions follows:
1995 1994 1993
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Options outstanding,
beginning of year........... 5,065 3,764 5,500
Options granted.............. 684 1,895 1,340
Options exercised............ (529) (508) (2,944)
Exercise price............... ($5.00 ($4.50 ($2.85
to $25.81) to $19.56) to $20.19)
Options cancelled............ (145) (86) (132)
------------- ------------- -------------
Options outstanding, end of
year........................ 5,075 5,065 3,764
============= ============= =============
Options exercisable, end of
year........................ 2,129 1,781 1,390
============= ============= =============
In July 1994, the shareholders approved an increase of 5,500,000 shares of
common stock available for future grants. There were 4,980,302 shares, 51,026
shares and 1,859,140 shares of common stock available for future option grants
at March 31, 1995, 1994, and 1993, respectively.
Under the Company's Restricted Stock Purchase Plan (the "Plan"), established
in 1988, 2,000,000 shares of the Company's common stock were issued under the
Plan, upon payment by the employee of the par value per share. The total
number of shares earned under the Plan each year equals 3% of the Company's
pre-tax profit divided by the grant value (currently $105 per share) of
restricted shares outstanding. Any shares not earned at the earlier of
completion of the seventh year after grant or termination of employment will
be essentially forfeited by being repurchased by the Company at par value.
Under the Plan, 133,463 shares, 104,846 shares and 341,714 shares were earned
for the years ended March 31, 1995, 1994 and 1993, respectively. At March 31,
1995, 14,275 shares of common stock are still to be earned. Unearned
compensation related to these shares, included as a component of Net Assets,
is amortized as the shares are earned.
Of the shares available for future grants at March 31, 1995, up to 1,500,000
shares will be available for the Company's 1994 Incentive Stock Purchase Plan
(the "Incentive Plan"). Under the Incentive Plan, the Committee may permit
participants to defer up to 100% of their annual bonus into a Restricted Stock
Purchase Account (the "Restricted Account"). The Restricted Account will be
used to purchase Loral Common Stock equal to 150% of the deferred bonus,
subject to limits the Committee may establish from time to time. The shares in
the Restricted Account vest 25% per year commencing upon the second
anniversary of the grant date. The Committee may establish specified
performance conditions that, if attained, will result in accelerated vesting.
All non-vested shares are forfeited upon termination of employment and the
remaining balance of the Restricted Account equal to the lesser of the
original cost or the market value of the shares is returned to the
participant. No shares were issued under the Incentive Plan in 1995.
Net Assets
The components of certain amounts included in Net Assets are:
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Unearned compensation--stock options............... $10,651 $13,644 $ 8,424
Unearned compensation--Restricted Stock Purchase
Plan.............................................. 605 5,521 7,504
Cumulative translation adjustment.................. 2,804 1,904 367
Additional minimum pension liability............... 10,964 16,049
------- ------- -------
$25,024 $37,118 $16,295
======= ======= =======
A-19
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under agreements
expiring at various dates through 2080. At March 31, 1995, future minimum
payments for noncancellable operating and capital leases with initial or
remaining terms in excess of one year are as follows:
OPERATING LEASES
---------------------
REAL ESTATE EQUIPMENT CAPITAL LEASES TOTAL
----------- --------- -------------- --------
(IN THOUSANDS)
1996.................. $ 44,363 $11,788 $ 1,243 $ 57,394
1997.................. 31,275 9,084 11,394 51,753
1998.................. 18,866 7,070 1,243 27,179
1999.................. 12,535 5,756 1,243 19,534
2000.................. 4,098 5,198 1,243 10,539
Thereafter............ 78,741 8,385 87,126
-------- ------- ------- --------
$189,878 $38,896 $24,751 $253,525
======== ======= ======= ========
Real estate lease commitments have been reduced by minimum sublease rentals
of $60,939,000 due in the future under noncancellable subleases. The present
value of the minimum lease payments for capital leases is $17,168,000, net of
imputed interest of $7,583,000.
Leases covering major items of real estate and equipment contain renewal and
or purchase options which may be exercised by the Company. Rent expense, net
of sublease income of $11,429,000, $7,285,000 and $4,499,000, was $84,884,000,
$60,891,000 and $47,175,000, in 1995, 1994 and 1993, respectively.
At March 31, 1995, outstanding letters of credit were approximately
$262,000,000.
In April 1995, the Federal Aviation Administration ("FAA") awarded the
Company a contract modification valued at $955,000,000 to upgrade the nation's
air traffic control system, thereby eliminating the uncertainty concerning the
status of the program. This contract modification was issued following the
conclusion of the FAA's comprehensive review, begun in December 1993, of the
Company's air traffic control program.
Management is continually assessing its obligations with respect to
applicable environmental protection laws. While it is difficult to determine
the timing and ultimate cost to be incurred by the Company in order to comply
with these laws, based upon available internal and external assessments, the
Company believes that even without considering potential insurance recoveries,
if any, there are no environmental loss contingencies that, individually or in
the aggregate, are material. The Company accrues for these contingencies when
it is probable that a liability has been incurred and the amount of the loss
can be reasonably estimated. The Company has been named a Potentially
Responsible Party ("PRP") at a number of sites. In several of these situations
Loral acquired the site pursuant to a purchase agreement which provided that
the seller would retain liability for environmental remediation and related
costs arising from occurrences prior to the sale. In other situations the
Company is party to an interim or final allocation plan that has been accepted
by other PRPs whose size and current financial condition make it probable that
they will be able to pay the environmental costs apportioned to them. The
Company believes that it has adequately accrued for future expenditures in
connection with environmental matters and that such expenditures will not have
a material adverse effect on its financial position or results of operations.
There are a number of lawsuits or claims pending against the Company and
incidental to its business. However, in the opinion of management, the
ultimate liability on these matters, if any, will not have a material adverse
effect on the financial position or results of operations of the Company.
A-20
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. PENSIONS AND OTHER EMPLOYEE BENEFITS
Pensions
The Company maintains a number of pension plans, both contributory and
noncontributory, covering certain employees. Eligibility for participation in
these plans varies and benefits are generally based on members' compensation
and years of service. The Company's funding policy is generally to contribute
in accordance with cost accounting standards that affect government
contractors, subject to the Internal Revenue Code and regulations thereon.
Plan assets are invested primarily in U.S. government and agency obligations
and listed stocks and bonds. The pension credit of $18,608,000 in 1995 is net
of $14,992,000 pension cost for LFS.
Pension credit includes the following components:
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
Service cost-benefits earned during the
period.................................. $ 58,699 $ 29,530 $ 25,387
Interest cost on projected benefit
obligation.............................. 164,266 158,681 123,560
Actual return on plan assets............. (4,814) (271,974) (123,292)
Net amortization and deferral............ (236,759) 64,221 (38,886)
--------- --------- ---------
Total pension credit................. $ (18,608) $ (19,542) $ (13,231)
========= ========= =========
The following presents the plans' funded status and amounts recognized in
the balance sheet:
MARCH 31,
-------------------------------------------------------
1995 1994
--------------------------- ---------------------------
ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS ACCUMULATED BENEFITS
BENEFITS EXCEED ASSETS BENEFITS EXCEED ASSETS
------------- ------------- ------------- -------------
(IN THOUSANDS)
Actuarial present value
of benefit obligations:
Vested benefits....... $1,797,076 $ 162,120 $1,844,260 $ 235,480
========== ========= ========== =========
Accumulated benefits.. $1,807,500 $ 162,810 $1,871,754 $ 236,467
Effect of projected
future salary
increases............ 95,632 13,406 151,071 13,184
---------- --------- ---------- ---------
Projected benefits.... 1,903,132 176,216 2,022,825 249,651
Plan assets at fair
value.................. 2,263,576 152,734 2,361,527 211,489
---------- --------- ---------- ---------
Plan assets in excess of
(less than) projected
benefit obligation..... 360,444 (23,482) 338,702 (38,162)
Unrecognized net loss... 130,075 31,382 12,879 39,495
Unrecognized prior
service cost........... 814 9,389 (1,714) 12,484
Unrecognized net asset
existing at
transition............. (1,882) (1) (2,241) (1)
Additional minimum
liability.............. (27,364) (38,794)
---------- --------- ---------- ---------
Prepaid (accrued)
pension cost........... $ 489,451 $ (10,076) $ 347,626 $ (24,978)
========== ========= ========== =========
The principal actuarial assumptions were:
1995 1994 1993
---- ---- ----
Discount rate.............................................. 8.5% 7.75% 9.0%
Rate of increase in compensation levels.................... 4.75% 4.75% 6.0%
Expected long-term rate of return on plan assets........... 9.5% 9.5% 9.5%
A-21
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Postretirement Health Care and Life Insurance Benefits
In addition to providing pension benefits, the Company provides certain
health care and life insurance benefits for retired employees and dependents
at certain locations. Participants are eligible for these benefits when they
retire from active service and meet the eligibility requirements for the
Company's pension plans. These benefits are funded primarily on a pay-as-you-
go basis with the retiree generally paying a portion of the cost through
contributions, deductibles and coinsurance provisions.
Effective April 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" ("SFAS 106"). SFAS 106 requires employers to
recognize the cost of postretirement health and welfare obligations in their
financial statements over the years of employee service. These costs were
previously expensed on a pay-as-you-go basis. The Company elected to
immediately recognize the accumulated postretirement obligation upon adoption
of SFAS 106. A non-recurring charge of $323,740,000 pre-tax or $226,618,000
after-tax was recorded as the cumulative effect of the accounting change in
1993.
In March 1993 and March 1994, the Company adopted various plan amendments
resulting in unrecognized prior service gains, which are being amortized
commencing in the quarter following adoption.
Postretirement health care and life insurance costs include the following
components:
1995 1994 1993
-------- -------- -------
(IN THOUSANDS)
Service cost -- benefits earned during the
period........................................ $ 8,263 $ 6,778 $11,364
Interest cost on accumulated postretirement
benefit obligation............................ 31,340 42,117 45,989
Net amortization............................... (21,712) (14,068)
-------- -------- -------
Total postretirement health care and life in-
surance costs................................. $ 17,891 $ 34,827 $57,353
======== ======== =======
The following table presents the amounts recognized in the balance sheet at:
MARCH 31,
-------------------
1995 1994
-------- ---------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees......................................... $293,506 $ 363,886
Fully eligible plan participants................. 31,311 29,689
Other active plan participants................... 58,011 95,372
-------- ---------
Total accumulated postretirement benefit
obligation.................................... 382,828 488,947
Unrecognized prior service gain related to plan
amendments........................................ 231,019 252,200
Unrecognized net loss.............................. (12,012) (126,859)
-------- ---------
Accrued postretirement health care and life
insurance costs................................... $601,835 $ 614,288
======== =========
Actuarial assumptions used in determining the accumulated postretirement
benefit obligation include a discount rate of 8.5% and 7.75% for 1995 and
1994, respectively, and an assumed health care cost trend rate of 11.7%
decreasing gradually to an ultimate rate of 6% by the year 2003. Changing the
assumed health care cost trend rate by 1% in each year would change the
accumulated postretirement benefit obligation at March 31, 1995 by
approximately $36,000,000 and the aggregate service and interest cost
components for 1995 by approximately $4,800,000.
A-22
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Employee Savings Plans
Under its various employee savings plans, the Company matches the
contributions of participating employees up to a designated level. The extent
of the match, vesting terms and the form of the matching contribution vary
among the plans. Under these plans, the matching contributions, in cash, Loral
common stock or both, for 1995, 1994 and 1993 were $26,701,000, $22,929,000
and $18,625,000, respectively.
Postemployment Benefits
Effective April 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits" ("SFAS 112"). SFAS 112 requires that the costs of benefits provided
to employees after employment but before retirement be recognized on an
accrual basis. The adoption of SFAS 112 did not have a material impact on the
financial position or results of operations of the Company.
11. FINANCIAL INSTRUMENTS
The Company's financial instruments recorded on the balance sheet include
cash and cash equivalents and debt. Due to their short maturity, the fair
value of cash and cash equivalents approximates carrying value. The fair value
of the Company's debt, based on quoted market prices or current rates for
similar instruments with the same maturities, was approximately $1,262,841,000
and $1,777,667,000 at March 31, 1995 and 1994, respectively.
The Company uses off balance sheet derivative financial instruments,
including foreign currency forward contracts and interest rate hedge
transactions, to minimize foreign currency and interest rate risk. The Company
does not hold or issue derivative financial instruments for speculative
purposes.
Foreign Currency Hedges
The majority of the Company's foreign currency forward contracts are entered
into at the direction of the customer pursuant to contractual requirements.
Any gain or loss on the hedges accrues for the benefit or detriment of the
customer and does not expose the Company to risk.
At March 31, 1995, the Company has open forward contracts to sell
approximately $41,500,000 of Pound Sterling to minimize the effect of currency
exposure on future cash payments from foreign operations. At March 31, 1995,
the fair value of the forward contracts is not material. Gains and losses on
foreign currency forward contracts are recorded when the transactions being
hedged are realized. For the year ended March 31, 1995, gains and losses on
these contracts were not material. Other forward contracts are not material.
Interest Rate Hedges
At March 31, 1994, to fix the effective interest rates on the anticipated
refinancing of its outstanding commercial paper, the Company entered into
interest rate hedges by selling U.S. Treasury forward contracts with a
notional value of $500,000,000. The hedges were closed in June 1994 upon the
issuance of the $250,000,000 7 5/8% Senior Notes due 2004 and the $400,000,000
8 3/8% Senior Debentures due 2024. The net realized gain of $17,073,000 was
deferred and is being amortized on a pro rata basis over the term of the
Senior Notes and Senior Debentures.
A-23
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SALES TO PRINCIPAL CUSTOMERS
The Company operates primarily in one industry segment, government
electronic systems. Sales to principal customers are as follows:
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
U.S. Government Agencies.................. $3,548,585 $2,578,004 $2,077,009
Foreign (principally foreign
governments)............................. 1,021,284 564,612 477,501
Other (principally U.S. Government end
use)..................................... 914,532 866,117 780,893
---------- ---------- ----------
$5,484,401 $4,008,733 $3,335,403
========== ========== ==========
Foreign sales comprise the following:
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
Export sales:
Asia.................................... $ 234,307 $ 227,312 $ 190,125
Middle East............................. 151,152 91,049 119,401
Europe.................................. 96,257 106,546 128,707
Other................................... 19,716 28,289 26,733
---------- ---------- ----------
501,432 453,196 464,966
Foreign operations, principally Europe.... 519,852 111,416 12,535
---------- ---------- ----------
Total foreign sales................... $1,021,284 $ 564,612 $ 477,501
========== ========== ==========
13. RELATED PARTY TRANSACTIONS
The Company has a number of transactions with Space & Communications
Operations. The Company believes that the arrangements are as favorable to the
Company as could be obtained from unaffiliated parties. The following
describes the related-party transactions.
The Company bills certain operational, executive, administrative, financial,
legal and other services to SS/L and SS/L charges the Company certain overhead
costs. Net costs billed to SS/L were $11,907,000, $9,446,000 and $10,448,000
in 1995, 1994 and 1993, respectively. In addition, Loral Corporation sells
products to SS/L; net sales to SS/L were $26,031,000, $15,769,000 and
$11,574,000 in 1995, 1994 and 1993, respectively. The Company and SS/L have a
tax sharing agreement whereby certain tax liabilities and benefits are shared
equitably. The Company has guaranteed performance of SS/L under one commercial
contract. To date, SS/L has performed satisfactorily under this contract, and
management believes that it will be successfully completed.
Two of the Company's divisions have entered into contracts, totaling
$28,744,000, to construct a portion of the Globalstar System. Sales to
Globalstar for the year ended March 31, 1995 were $7,429,000. Included in
Other Current Assets are receivables from Globalstar of $2,248,000 at March
31, 1995.
The Company and K&F have agreements covering various real property occupancy
arrangements and agreements under which the Company and K&F provide certain
services, such as benefits administration, treasury, accounting and legal
services to each other. The charges for these services, as agreed to by the
Company and K&F, are based upon the actual cost incurred in providing the
services without a profit. These transactions between the Company and K&F were
not significant. Sales to K&F were $4,181,000, $6,785,000 and $4,796,000 in
1995, 1994 and 1993, respectively.
A-24
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SUBSEQUENT EVENTS
Acquisition:
On May 5, 1995, the Company acquired substantially all the assets and
liabilities of the Defense Systems operations of Unisys Corporation ("Loral
UDS"). The effective purchase price of $803,400,000, as previously reported by
Loral, was adjusted to $862,609,000, net of cash acquired, as a result of
receiving additional net assets. Additionally, acquisition expenses of
$6,000,000 have been recorded. The acquisition was financed through commercial
paper borrowings.
Debt:
In June 1995, the Company issued $150,000,000 7 5/8% Senior Debentures due
2025 utilizing the balance of the Company's existing shelf registration
statement. These securities are not callable and are not subject to any
sinking fund provisions. The proceeds were used to reduce the Company's
outstanding commercial paper borrowings.
Commitments:
In October 1995, the Company agreed to guarantee $250,000,000 of bank debt
of one of the Company's affiliates, Globalstar. In exchange for the guarantee,
the Company will be issued warrants to purchase up to 8% equity interest in
Globalstar on a fully diluted basis. Subject to the approval of its
shareholders, the warrants will be issued by Globalstar Telecommunications
Limited ("GTL"), a general partner of Globalstar, and upon such approval, GTL
will be issued additional warrants representing an approximate 2% equity
interest in Globalstar. If GTL shareholder approval is not obtained,
Globalstar will issue to the Company warrants to purchase partnership
interests representing up to 8% equity interest in Globalstar and no warrants
will be issued to GTL. Globalstar has also agreed to pay the Company a fee
equal to 1.5% per annum of the guaranteed amount outstanding under the bank
financing. Such fee will be deferred and will be paid with interest commencing
90 days after the expiration of the bank financing. It is expected that
Globalstar's other strategic partners will assume a portion of the guarantee.
On December 15, 1995, Globalstar entered into a five-year $250 million credit
agreement with a group of banks. (See Merger below.)
Merger:
On January 7, 1996, Loral Corporation and Lockheed Martin Corporation
("Lockheed Martin") entered into a definitive Agreement and Plan of Merger
(the "Merger Agreement") among Loral Corporation, Lockheed Martin and LAC
Acquisition Corporation ("LAC"), a wholly-owned subsidiary of Lockheed Martin,
providing for the transactions that will result in the defense electronics and
systems integration businesses of Loral Corporation becoming a subsidiary of
Lockheed Martin. Concurrently with the execution of the Merger Agreement,
Loral Corporation, certain wholly-owned subsidiaries of Loral Corporation and
Lockheed Martin, entered into the Restructuring, Financing and Distribution
Agreement (the "Distribution Agreement"), which provides, among other things,
for (i) the transfer of Loral Corporation's space and communications
businesses, including its direct and indirect interests in Globalstar, Space
Systems/Loral, Inc. and other affiliated businesses, as well as certain other
assets, to Loral Space & Communications Ltd., a Bermuda company ("Loral
SpaceCom"), (ii) the distribution of all of the shares of Loral SpaceCom
common stock to holders of Loral Corporation common stock and persons entitled
to acquire shares of Loral Corporation common stock on a one-for-one basis
(the "Spin-Off") each as of a record date (the "Spin-Off Record Date") to be
declared by the Board of Directors of Loral Corporation and to be a date on or
immediately prior to the consummation of the tender offer, and (iii) the
contribution by Lockheed Martin of $712,400,000 to Loral SpaceCom, of which
A-25
LORAL CORPORATION AND SUBSIDIARIES--RETAINED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$344,000,000 represents payment for preferred stock, convertible into a 20%
equity interest in Loral SpaceCom, to be retained by Lockheed Martin following
the Spin-Off and the Merger.
Under the terms of the Merger Agreement, LAC commenced a cash tender offer
on January 12, 1996 for all outstanding shares of common stock, par value $.25
per share, of Loral Corporation at a price of $38.00 per share. Consummation
of the tender offer is subject to, among other things, at least two-thirds of
the shares of Loral Corporation common stock, determined on a fully-diluted
basis, being validly tendered and not withdrawn prior to the expiration of the
tender offer, applicable regulatory approvals and the occurrence of the Spin-
Off Record Date. In connection with the merger, the Stock Option and
Compensation Committee of the Board of Directors of Loral established January
12, 1996, as the accelerated date for vesting of all stock options.
Under the terms of the Merger Agreement, Lockheed Martin agreed to assume
the obligations of the Company as guarantor under the above described Credit
Agreement and receive up to 60% of such warrants. In addition, Loral SpaceCom
has agreed to (i) indemnify Lockheed Martin, under certain circumstances, for
up to $100,000,000 for its guarantee of Globalstar's obligations under the
Credit Agreement, and (ii) use its reasonable efforts to cause Globalstar's
partners to assume up to $150,000,000 of the obligations as guarantor under
the Credit Agreement. To the extent the Loral SpaceCom indemnity is
applicable, Loral SpaceCom will receive the pro-rata portion of the warrants
in respect thereof. To the extent Globalstar's partners agree to assume the
obligations as guarantor, rights to a proportionate amount of such warrants
will be transferred to them, and the Lockheed Martin guarantee and the Loral
SpaceCom indemnification will be reduced accordingly.
A-26