Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
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.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in the registrant's 2001 definitive proxy statement.
At March 15, 2001, 299,061,088 common shares were outstanding, and the
aggregate market value of such shares (based upon the closing price on the New
York Stock Exchange) held by non-affiliates of the registrant was approximately
$898 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 2001 definitive proxy statement (to be filed
not later than 120 days after the end of the registrant's fiscal year) are
incorporated by reference into Part III.
The financial statements required by Rule 3.09 of Regulation S-X of the
registrant's significant investee, Globalstar, L.P., are incorporated by
reference herein from the Annual Report on Form 10-K filed by Globalstar
Telecommunications Limited and Globalstar, L.P.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
PART I
ITEM 1. BUSINESS
THE COMPANY
OVERVIEW
Loral Space & Communications Ltd. together with its subsidiaries ("we",
"us", "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:
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 and infomedia services through
CyberStar, L.P. ("CyberStar LP" and together with Loral CyberStar, the "Loral
CyberStar Group").
In addition, a subsidiary of Loral acts as the managing general partner of
Globalstar, L.P. ("Globalstar"), which owns and operates a global
telecommunications network designed to serve virtually every populated area of
the world by means of a 52-satellite constellation, including four in-orbit
spares, a satellite operations control center and a ground operations control
center (the "Globalstar System"). The Globalstar System commenced operations in
the first quarter of 2000 and as of February 15, 2001, the Globalstar System
provided coverage to over 109 countries, of which more than half were in full
service, served by 25 gateways. Loral, through its interests in various joint
ventures, continues to participate and to fund its share of the operations of
Globalstar service providers in Brazil, Canada, Mexico and Russia. These
Globalstar service providers have constructed and operate gateways, are licensed
to provide services and, through their sales and marketing organizations, are
actively selling Globalstar service, in their respective territories.
Loral's strategy is to capitalize on its market position, extensive space
assets and advanced technologies to expand its business and to exploit new
opportunities as they arise. Where appropriate, Loral seeks to further this
strategy through acquisitions or joint ventures and through dispositions of
non-core assets. Towards that end, Loral regularly engages in discussions with
telecommunications service providers, equipment manufacturers and others about
possible strategic transactions and alliances, including participation in the
Loral Global Alliance and strategic relationships involving its satellite
manufacturing operations, which could involve business combinations.
Loral was incorporated on January 12, 1996 as a Bermuda exempt company and
has its registered and principal executive offices at Cedar House, 41 Cedar
Avenue, Hamilton, HM 12, Bermuda.
FIXED SATELLITE SERVICES
Following its acquisition of the Loral Skynet business from AT&T in March
1997, Loral has rapidly established itself through a series of subsequent
acquisitions and joint venture transactions as one of the world's leading
providers of fixed satellite services. These satellites, which are known as GEO
satellites, fly in geosynchronous earth orbit approximately 22,000 miles above
the equator. In this orbit, the satellites remain in a fixed position relative
to points on the earth's surface. GEO satellites provide reliable, high
bandwidth services anywhere in their coverage areas and therefore serve as the
backbone for many forms of telecommunications.
1
3
In the United States and other developed countries, customers lease
transponder capacity primarily for distribution of network and cable television
programming, for direct-to-home, or DTH, video transmission and for live video
feeds from breaking news and sporting events. In the developing world, a
substantial portion of such capacity is dedicated to long-distance telephone
service as well as television services. GEO satellites are increasingly used
throughout the world for international Internet communications, high-speed data
services for businesses through very small aperture terminal, or VSAT, networks,
and for distance learning and educational television.
Loral Global Alliance
Through the Loral Global Alliance, Loral offers its customers an integrated
portfolio of satellite capacity that provides "one stop shopping" for local,
regional and global GEO satellite services. The alliance, which consists of
Loral Skynet, Loral CyberStar, Skynet do Brasil, Satmex and Europe*Star,
currently has ten satellites in orbit with a total of 171 C-band and 273 Ku-band
36 MHz transponder-equivalents (all references to transponders are in 36 MHZ
equivalents, unless otherwise noted) and a collective footprint covering almost
all of the world's population. As of December 31, 2000, the Loral Global
Alliance backlog (including 100% of Satmex and Europe*Star backlog) totaled $2.4
billion, utilizing approximately 315 36 MHz transponder-equivalents, and had
approximately 129 additional 36 MHz transponder-equivalents available for lease.
The Loral Global Alliance provides for cross-selling arrangements among the
alliance members' respective sales forces and for cooperative marketing and
promotional activities. We believe that such arrangements will enable the
members of the alliance to compete more effectively in sales of communications
satellite services worldwide. In addition, the alliance offers in-orbit backup
capabilities for its members in regions where members' fleets have overlapping
coverage.
2
4
LORAL GLOBAL ALLIANCE
- ------------------------------------------------------------------------------------------------------------------
SATELLITE LOCATION FREQUENCY COVERAGE
- ------------------------------------------------------------------------------------------------------------------
Loral Skynet Telstar 4(1) 89(degrees)W.L. C-band, Ku-band U.S., Northern Mexico, Southern
Canada
- ------------------------------------------------------------------------------------------------------------------
Telstar 5 97(degrees)W.L. C-band, Ku-band U.S., Mexico, Canada, Northern
Central America
- ------------------------------------------------------------------------------------------------------------------
Telstar 6 93(degrees)W.L. C-band, Ku-band U.S., Mexico, Southern Canada,
Central America
- ------------------------------------------------------------------------------------------------------------------
Telstar 7 129(degrees)W.L. C-band, Ku-band U.S., Mexico, Southern Canada,
Northern Central America
- ------------------------------------------------------------------------------------------------------------------
Loral CyberStar Telstar 10/ 76.5(degrees)E.L. C-band, Ku-band Asia and portions of Europe,
Apstar IIR portions of Africa and Australia
- ------------------------------------------------------------------------------------------------------------------
Telstar 11(2) 37.5(degrees)W.L. Ku-band Europe, SE Canada, U.S. East of the
Rockies and portions of Mexico
- ------------------------------------------------------------------------------------------------------------------
Telstar 12(2) 15(degrees)W.L. Ku-band Eastern U.S., SE Canada, Europe,
Russia, Middle East, North Africa,
portions of South America, portions
of Central America
- ------------------------------------------------------------------------------------------------------------------
Skynet do Brasil Anik 1(3) 63(degrees)W.L. C-band, Ku-band Brazil, North America and North
Atlantic
- ------------------------------------------------------------------------------------------------------------------
Satmex Solidaridad 1(4) 109.2(degrees)W.L. C-band, Ku-band Mexico, portions of U.S., portions
of South America, Central America.
Out of service. See note (4) below.
- ------------------------------------------------------------------------------------------------------------------
Solidaridad 2 113.0(degrees)W.L. C-band, Ku-band Mexico, portions of U.S., portions
of South America, Central America
- ------------------------------------------------------------------------------------------------------------------
Satmex 5 116.8(degrees)W.L. C-band, Ku-band Mexico, Continental U.S., Southern
Canada, South America, Central
America
- ------------------------------------------------------------------------------------------------------------------
Morelos 2(5) 120(degrees)W.L. C-band Alaska
- ------------------------------------------------------------------------------------------------------------------
Europe*Star E*Star 1 45(degrees)E.L. Ku-band Europe, SE Asia, Middle East, South
Africa and India
- ------------------------------------------------------------------------------------------------------------------
- ---------------
(1) We have asked the FCC to modify our authorizations for these satellites to
relocate Telstar 4 to 77(degrees) W.L. and Telstar 8 to 89(degrees) W.L.
(2) On November 15, 1999, the following satellites were renamed: the satellite
formerly known as Orion 1 is now known as Telstar 11; the satellite formerly
known as Orion 2 is now known as Telstar 12.
(3) Operating in inclined orbit and is not currently generating revenues.
Estrela do Sol, the replacement satellite for this slot, is currently under
construction at SS/L and is expected to be launched in October 2002.
(4) Satellite lost on August 28, 2000. Customers temporarily moved to other
satellites, most of which are part of the Loral Global Alliance. Replacement
satellite, Satmex 6, is scheduled to be launched in January 2003.
(5) Currently operating in inclined orbit beyond its designed life and
generating only modest revenues. Continued operations depend on obtaining
special regulatory approvals.
Loral Skynet
Loral Skynet's core business is providing satellite capacity to support
distribution of U.S. television network programming. The CBS and Fox television
networks are its major customers. All CBS and Fox stations have their antennae
pointed at Loral Skynet's satellites, creating a configuration known as a
"neighborhood" that is attractive to other users requiring similar distribution
channels. Other Loral Skynet customers include HBO, Disney, Time Warner, Boeing
and Gilat and third-party resellers, such as sports syndicators and distance
learning providers.
Loral Skynet currently has four high power GEO satellites in operation.
Telstar 4 was placed in service in November 1995 and has 24 C-band and 24
Ku-band transponders. Telstar 4 provides coverage over the continental United
States, Hawaii, Alaska, Puerto Rico, U.S. Virgin Islands and into Canada.
Telstar 5, with
3
5
24 C-band and 24 Ku-band transponders, was built by SS/L and was placed into
service on July 1, 1997. Telstar 5 provides coverage over the continental United
States, Hawaii, Puerto Rico, the Caribbean and into Canada and portions of Latin
America.
Telstar 6, built by SS/L, was launched in February 1999 and commenced
commercial operations in March 1999. Telstar 6 is a broadcast video and data
communications satellite with 24 C-band and 24 Ku-band transponders. It provides
coverage over the continental United States, Hawaii, Puerto Rico, the Caribbean
and into Canada and Latin America.
Telstar 7, built by SS/L, was launched in September 1999 and commenced
commercial operations in November 1999. Telstar 7 is a broadcast video and data
communications satellite with 24 C-band and 24 Ku-band transponders. It provides
coverage over the continental United States, Hawaii, Puerto Rico, the Caribbean,
and into Canada and Latin America.
In addition, Loral plans to launch three satellites in 2002, one of which
will fill Skynet do Brasil's newly acquired orbital slot at 63(degrees) W.L.
covering Brazil and other parts of Latin America. The addition of these three
satellites will substantially increase Loral's capacity within the United States
and will further extend its coverage of Canada and portions of Latin America,
subject to obtaining landing rights from regulatory authorities in those
regions.
Loral CyberStar
On March 20, 1998, Loral acquired Orion Network Systems, Inc., a rapidly
growing provider of satellite-based communications services, which changed its
name to Loral CyberStar, Inc. Loral completed its integration plan for Loral
CyberStar and transferred management of Loral CyberStar's satellite capacity
leasing and satellite operations to Loral Skynet, effective January 1, 1999.
Loral CyberStar's leasing business currently provides satellite capacity
for video distribution, satellite news gathering and other satellite services
primarily to broadcasters, news organizations, telecommunications service
providers and Internet Service Providers, or ISPs. Loral Cyberstar's customers
include HBO, Disney, Cable & Wireless and United Pan Europe Communications.
Telstar 11 (formerly known as Orion 1), a high power satellite with 48
Ku-band transponders, commenced operations in January 1995, and provides
coverage in North America as far west as Phoenix and Denver and in Europe as far
east as Istanbul, Kiev and Tallinn.
Telstar 12 (formerly known as Orion 2), a high power satellite with 57
Ku-band transponders, commenced operations in January 2000 and expands Loral
CyberStar's European coverage and extends coverage to portions of the former
Soviet Union, Latin America, the Middle East and South Africa.
On May 4, 1999, the Orion 3 satellite was placed into a lower-than-expected
orbit after its launch on a Delta III rocket. According to Boeing, the Delta III
rocket apparently failed to complete its second stage burn, and, as a result,
the satellite, manufactured by Hughes Space and Communications Corporation,
achieved an orbit well below the planned final altitude and could not be used
for its intended purpose. The satellite and launch were fully insured for
approximately $266 million, which was received in 1999.
To replace Orion 3, on September 28, 1999, Loral CyberStar purchased from
APT Satellite Company Limited ("APT") all transponder capacity (except for one
C-band transponder retained by APT) and existing customer leases on the Apstar
IIR satellite for approximately $273 million. Insurance proceeds from the May 4,
1999 launch failure of the Orion 3 satellite were used to fund substantially all
of this purchase price.
Loral CyberStar has full use of 28 C-band and 24 Ku-band transponders
aboard Apstar IIR for the remaining life of the satellite. Located at 76.5
degrees E.L., Apstar IIR covers a region that includes Asia, Europe, Africa and
Australia, which represents over 75% of the world's population. Under the
purchase agreement, Loral CyberStar will also have the option to lease
replacement satellites from APT upon the end of life of Apstar IIR. In November
1999, the satellite was renamed Telstar 10/Apstar IIR.
4
6
Satmex
Satmex, our 49% owned affiliate, is currently the dominant satellite
communications company providing fixed satellite services in Mexico, and intends
to expand its services to become a leading provider of satellite services
throughout Latin America.
Satmex provides satellite transmission capacity to broadcasting customers
for network and cable television programming, DTH service and on-site
transmission of live news reports, sporting events and other video feeds. Satmex
also provides satellite transmission capacity to telecommunications service
providers for public telephone networks in Mexico and elsewhere and to corporate
customers for their private business networks for data, voice and video
applications. Satmex has landing rights to provide broadcasting and
telecommunications transmission capacity in Mexico, the United States, Canada
and 29 nations and territories in the Latin American region. Satmex's
broadcasting customers include Televisa, MVS Multivision and Television Azteca,
and its telecommunications services and data customers include Telmex, Bell
South, Hughes Network Systems and the Mexican subsidiaries of Ford and
DaimlerChrysler.
Satmex's satellites, Solidaridad 2 and Satmex 5, have a total of 96 36-MHz
transponder-equivalents operating in the C and Ku-band, with an aggregate
footprint covering substantially all of the continental United States and the
Caribbean as well as all of Latin America, other than certain regions in Brazil.
On August 29, 2000, Satmex's Solidaridad 1 satellite ceased operation and was
considered irretrievably lost. Satmex received net insurance proceeds of $235
million relating to this loss. Satmex has contracted with SS/L to build its
replacement satellite. This satellite, known as Satmex 6, is scheduled to be
launched in January 2003 and is designed to provide broader coverage and higher
power levels than any other satellite currently in the Satmex fleet. In the
interim, most of Solidaridad 1's customers have been transferred to other
satellites in the Loral Global Alliance.
We believe that this capacity is one of the largest blocks of satellite
capacity dedicated primarily to the Latin American region. Satmex holds 20-year
concession titles to operate in these three orbital locations, each of which
will expire on October 22, 2017. The concession titles are renewable thereafter,
subject to certain conditions, for an additional 20-year term without additional
payment. In addition, Satmex operates two satellite control centers.
Europe*Star
Europe*Star, a joint venture between Loral and Alcatel, launched
Europe*Star 1, an all Ku-band satellite, in October 2000. Europe*Star 1,
marketed as part of the Loral Global Alliance, commenced commercial service in
January 2001.
Loral currently owns 47% of Europe*Star, and pursuant to the terms of the
shareholders agreement has permitted its joint venture partner, 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 match the amount of such loans or permit Alcatel to elect to
convert some or all its loans into equity, diluting our equity in the venture to
as little as approximately 22%.
FSS Segment Results
Total revenues for the fixed satellite services segment, including
intercompany and affiliate sales, were $461 million, $342 million and $254
million for 2000, 1999 and 1998, respectively. The segment's intercompany sales
were $37 million in 2000, $11 million in 1999 and $5 million in 1998. Affiliate
sales for Satmex were $136 million in 2000 and 1999 (including approximately $28
million to Loral companies in 1999) and $105 million in 1998. Segment EBITDA was
$282 million, $193 million and $171 million for 2000, 1999 and 1998,
respectively. Total assets for the segment were $4.0 billion, $3.9 billion and
$3.4 billion as of December 31, 2000, 1999 and 1998, respectively.
As of December 31, 2000 and 1999, funded backlog for the segment was $2.4
billion and $1.5 billion, respectively, including intercompany backlog of $65
million in 2000 and $3 million in 1999 and affiliate backlog of $546 million for
Satmex and Europe*Star in 2000 and $364 million for Satmex in 1999.
Approximately $440 million of the segment's 2000 funded backlog is expected to
be realized in 2001.
5
7
SATELLITE MANUFACTURING AND TECHNOLOGY
SS/L is a worldwide leader in the design, manufacture and integration of
satellites and space systems. SS/L draws on its 40-year history, during which
satellites manufactured by SS/L have achieved more than 800 years of cumulative
on-orbit experience. SS/L also provides Loral with visibility into emerging and
new satellite-based technologies and applications. SS/L manufactures satellites
that provide telecommunications, weather forecasting and broadcast services.
SS/L is the leading supplier of satellites to Intelsat, an international
consortium of member nations which is currently the world's largest operator of
commercial communications satellites. Other significant customers include
EchoStar, WildBlue, Loral Skynet, Sirius Satellite Radio (formerly known as CD
Radio), Shin Satellite and Cable & Wireless Optus of Australia.
As one of the premier providers of satellites and other space systems, SS/L
competes principally on the basis of technical excellence, a long record of
reliable performance, competitive pricing and on-orbit delivery packages. We
believe that SS/L's advanced manufacturing and testing facilities and long-term
customer relationships have enabled SS/L to compete effectively in the
commercial space systems marketplace.
SS/L has a history of technical innovation that includes the first
three-axis stabilized satellites, bipropellant propulsion systems for commercial
satellites that permit significant increases in the satellites' payload and
extend the satellites' on-orbit lifetime, rechargeable nickel-hydrogen batteries
with a life span of 10 years or more, the use of advanced composites to
significantly enhance satellite performance at lighter weights and the first
communications satellite with more than ten kilowatts of power. SS/L was also
the first satellite manufacturer to employ heat pipes to control heat transfer
in commercial satellites, thereby providing a more benign temperature
environment and increased reliability. SS/L also created the first multi-mission
geostationary satellite and was one of the first U.S. companies to acquire space
technology from Russia's space industry, obtaining exclusive rights outside the
former Eastern bloc to an electric propulsion subsystem that is five times more
efficient than bipropellant propulsion systems.
SS/L's geostationary satellite product portfolio continues to evolve to
best meet the current and future needs of the market. SS/L now offers a line of
three products that provide customers with a great span of power and capability:
the space-proven 1300, the advanced 1300S, and the 20.20, one of the most
powerful commercial spacecraft offered today. The power on SS/L-designed
satellites reaches from 5 kilowatts to as high as 30 kilowatts, and the number
of transponders that can be accommodated goes from as few as 1 to as many as
150.
Total revenues for the satellite manufacturing and technology segment,
including intercompany sales, were $1.0 billion for 2000, and $1.4 billion for
1999 and 1998. The segment's intercompany sales were $192 million in 2000, $255
million in 1999 and $272 million in 1998. Segment EBITDA was $36 million in 2000
after $77 million of increased costs relating to manufacturing delays and
customer contract issues, $102 million in 1999 after a $44 million charge
relating to an agreement reached with a customer regarding a satellite contract
and $118 million in 1998. Total assets for the segment were $1.2 billion, $1.6
billion and $1.7 billion as of December 31, 2000, 1999 and 1998, respectively.
As of December 31, 2000 and 1999, funded backlog for the segment was $1.7
billion and $1.3 billion, respectively, including intercompany backlog of $477
million in 2000 and $256 million in 1999. Approximately $800 million of the 2000
external funded backlog is expected to be realized in 2001. Revenues recorded
under contracts with Globalstar were $134 million, $360 million and $599 million
for 2000, 1999 and 1998, respectively. In addition, sales to two other customers
represented in excess of 10% of the Company's consolidated revenues in 2000,
1999 and 1998. For 2000, 1999 and 1998, the segment expended $26 million, $35
million and $35 million for research and development projects, respectively.
DATA SERVICES
Using the 10-satellite GEO constellation of the Loral Global Alliance and
third party capacity, orbital slots around the world, access to fiber networks
and internet backbone entry (peering) points, Loral can
6
8
provide its customers with the ability to distribute large, complex digital
video and data files to multiple locations throughout the world rapidly and cost
effectively. The Loral CyberStar Group currently:
- delivers U.S.-based Internet content via satellite to more than 173 ISPs
in more than 36 foreign countries, which reach approximately seven
million residential customers around the world;
- distributes high-speed data over private corporate VSAT (very small
aperture terminals) networks which currently reach 183 customers, 621
sites and approximately 11,000 desktops; and
- offers business television (BTV) services by satellite to corporations
for the delivery of teleconferences, distance learning and training, and
special events.
Loral CyberStar also recently began beta trials for its streaming media
services with a select group of corporate customers. Loral believes that with
the technical advantages inherent in satellite delivery, streaming media service
will be a valuable addition to Loral CyberStar's service offering to its
customers.
In January of 2001, Loral announced that in keeping with its strategy to
redirect the Company's resources and attention to its core businesses, it has
substantially revised its plan for participation in the broadband communications
market. Loral will not deploy a proprietary direct-to-the-consumer broadband
service, as previously planned, with its attendant time-to-market, partner,
marketing and financial challenges. Rather, Loral will participate in the
broadband market by providing its customers with satellite platforms for their
broadband offerings, through Loral's expansion of its fixed satellite services
fleet and related capabilities and through its satellite design and production
capabilities. With this new strategy, Loral will build on existing expertise,
strengths and resources to address the expanding market for today's broadband
services. Loral's fixed satellite services and satellite manufacturing
businesses will be leading merchant suppliers to customers who require access to
Loral's technology or satellites in order to meet their business objectives.
Loral's manufacturing facilities, satellites and services will support current
and future customers who are operating or planning to operate within one of the
many niches in the broadband environment by providing a data delivery platform
to them, designing and building a satellite for them, managing their satellites,
leasing transponders to them or tailoring Loral's satellite services to their
business specifications.
The following companies have announced their intention to deliver broadband
services directly to consumers: Echostar, Boeing, Gilat, Hughes Network Systems,
Netsat Express, Wildblue, Direct TV, Pegasus, Skybridge and Teledesic. As many
of these providers are existing customers of either Loral's fixed satellite
services or satellite manufacturing business, Loral will be able to leverage
these existing relationships and provide them with a scaleable level of service
so as to meet their individual needs.
In addition, Loral brings resources to support its broadband offering.
Loral owns two Ku-band satellites in-orbit at 89 degrees and 93 degrees West
Longitude, both well placed for servicing the North American market. Loral is
also designing two Ka-band satellites with spot beam capacity for those same
slots. Ku-band capacity is available now for limited broadband transmission,
allowing customers immediate entry into the broadband market. Loral's Telstar 8
satellite under construction is scheduled to be launched in 2002 and will
include Ka-band capacity as part of Loral Skynet's fixed satellite services.
Satellite-based broadband delivery systems have a number of favorable
technical characteristics, including point-to-multipoint broadcasting
capability, geographic ubiquity, rapid development, high capacity and low cost.
Loral believes that these characteristics will be of increasing importance in
the near future as broadband Internet access becomes an increasingly universal
requirement and Internet content continues to become richer and more complex,
particularly in the most popular sites.
Total revenues for the data services segment were $130 million, $85 million
and $40 million for 2000, 1999 and 1998, respectively. Segment EBITDA was a loss
of $30 million, $36 million and $47 million in 2000, 1999 and 1998,
respectively. Total assets for the segment were $226 million, $114 million and
$153 million as of December 31, 2000, 1999 and 1998, respectively.
As of December 31, 2000 and 1999, funded backlog for the segment was $191
million and $236 million, respectively, which was all from external sources.
Approximately $60 million of 2000 external funded backlog is expected to be
realized in 2001.
7
9
Investment in Globalstar
A subsidiary of Loral acts as the managing general partner of Globalstar,
which owns and operates a satellite constellation that forms the backbone of a
global telecommunications network designed to serve virtually every populated
area of the world.
Globalstar commenced commercial operations in the first quarter of 2000,
and as of February 15, 2001, was providing service through 25 gateways, covering
109 countries, including all of North and South America (excluding northwestern
Alaska and portions of Canada above 70 degrees north latitude), Europe and
Russia. As of December 31, 2000, Globalstar had approximately 31,000 commercial
subscribers on its system. For the year ended December 31, 2000, Globalstar
recorded net revenues of $3.65 million and provided 6,604,000 minutes of
billable telecommunication services. Globalstar's revenues during 2000 were well
below Globalstar management's initial expectations and have not provided
sufficient cash flows to fund Globalstar's operations or service its debt
obligations. Globalstar's revenue performance during the fourth quarter of 2000
caused Globalstar management, in conjunction with its service provider partners,
to perform a reassessment of its business plan and long term revenue
projections.
In January 2001, Globalstar suspended indefinitely principal and interest
payments on its debt and dividend payments on its redeemable preferred
partnership interests in order to conserve cash for operations so as to provide
it with additional time to expand its customer base, develop new applications
and demonstrate its viability. Loral does not intend to provide any further
funding to Globalstar, which expects to have sufficient cash, after suspension
of debt and dividend payments, to fund its operations through 2001. As of
December 31, 2000, our direct and indirect investment in connection with
Globalstar related activities included about 39% of Globalstar's common equity,
about 27% of its debt, an investment in GTL preferred stock and investments in
and advances to Globalstar service provider partnerships. Loral, through its
interests in various joint ventures, continues to participate and to fund its
share of the operations of Globalstar service providers in Brazil, Canada,
Mexico and Russia. These Globalstar service providers have constructed and
operate gateways, are licensed to provide services and, through their sales and
marketing organizations, are actively selling Globalstar service, in their
respective territories.
In the fourth quarter of 2000, Globalstar recorded a $2.9 billion
impairment charge related to the $3.2 billion carrying value of the Globalstar
System, including spare satellites, launch deposits, unsold production gateways,
user terminals and related assets. This charge resulted from the revision of
estimates of gross cash flows through 2009, the estimated end of useful life of
the Globalstar System, and the determination that these assets were impaired.
The fair value, for purposes of measuring Globalstar's impairment at December
31, 2000, was determined by discounting these cash flows. Gross cash flows were
based on revenue projections offset by estimated expenditures for operations and
capital expenditures. Revenue projections were based on Globalstar's current
market outlook, which is significantly influenced by service provider
projections. Including the $2.9 billion impairment charge, Globalstar's net loss
applicable to ordinary partnership interests in 2000 was $3.8 billion.
8
10
REGULATION
TELECOMMUNICATIONS REGULATION
As an operator of a privately-owned global satellite system, Loral is
subject to: (i) the regulatory authority of the U.S. government; (ii) the
regulatory authority of other countries in which Loral operates; (iii) the
Intelsat consultation process; and (iv) the frequency coordination process of
the International Telecommunications Union ("ITU"). Loral's ability to provide
satellite service in a particular country or region is subject to the technical
constraints of its satellites, international coordination, local regulatory
approval and any limitation as to the scope of the approval so obtained.
U.S. REGULATION
The ownership and operation of Loral's satellite systems in the U.S. is
regulated by the Federal Communications Commission (the "FCC"). Loral is subject
to the FCC's jurisdiction primarily for: (i) the licensing of satellites and
earth stations; (ii) avoidance of interference with other radio stations; and
(iii) compliance with FCC rules governing U.S.-licensed satellite systems.
Violations of the FCC's rules can result in various sanctions including fines,
loss of authorizations, or the denial of new authorizations or renewal
authorizations. Loral is not regulated as a common carrier and, therefore, is
not subject to rate regulation or the obligation not to discriminate among
customers. Loral must pay FCC filing fees in connection with its space station
and earth station applications; must pay annual regulatory fees that are
intended to defray the FCC's regulatory expenses; must file annual status
reports with the FCC; and, to the extent Loral is deemed to be providing
interstate/international telecommunications, must contribute to funds used to
support universal service.
Authorization to Launch and Operate Satellites
The FCC grants authorizations to satellite operators that meet its legal,
technical and financial qualification requirements. The FCC often receives
applications from multiple operators to operate a satellite at a given orbital
slot. There can be no assurance that in the process of resolving such mutually
exclusive applications, Loral's application will be granted. Under the FCC's
financial qualification rules, an applicant must demonstrate that it has
sufficient funds to construct, launch, and operate each requested satellite for
one year. Most satellite authorizations also include specific construction and
launch milestones which Loral must meet. Licenses are usually issued for an
initial ten-year term and FCC policy provides licensees with an "expectancy"
with respect to the replacement of their authorized satellites. At the end of a
ten-year license term, a satellite that has not been replaced, or that has been
relocated to another orbital location following its replacement, may be allowed
to continue operations for a limited period of time pursuant to a grant of
special temporary authority from the FCC. Such operations, however, are subject
to certain restrictions.
Loral has final FCC authorization for the following satellites which
operate in the C-band, the Ku-band, or both bands: Telstar 4 at 89(degrees)
W.L., Telstar 5 at 97(degrees) W.L., Telstar 6 at 93(degrees) W.L., Telstar 7 at
129(degrees) W.L., Telstar 8 at 77(degrees) W.L., Telstar 9 at 69(degrees) W.L.,
Telstar 11 at 37.5(degrees) W.L., Telstar 12 at 15(degrees) W.L. and Orion A at
47(degrees) W.L. R/L DBS Company, L.L.C., a joint venture in which Loral owns a
50% interest, also has 11 odd numbered DBS channels 1-21 at 61.5(degrees) W.L.
Certain of these authorizations are subject to pending petitions for
reconsiderations submitted by third parties. The final FCC authorizations for
certain of these satellites also do not cover certain design changes or
milestone extension requests that are the subject of pending modification
applications. Certain of these modification applications have been opposed by
other satellite operators. There can be no assurance that such design changes or
milestone extensions will be granted by the FCC. The failure to obtain a
milestone extension could result in the loss of the related FCC authorization.
If Loral is unable to obtain FCC approval to implement its requested technical
modifications for any particular authorization, it will be obligated to operate
the related satellite in accordance with the original authorization.
In addition, Loral has final authorization to operate at the following
orbital slots: Ka-band at 89(degrees) W.L., 81(degrees) W.L., 93(degrees) W.L.,
115(degrees) W.L., 78(degrees) E.L., 105.5(degrees) E.L., 67(degrees) W.L. and
126.5(degrees) E.L. and hybrid Ka/Ku-band at 47(degrees) W.L. Loral has requests
for technical modifications and requests for milestones extensions pending
before the FCC. There can be no assurance that the FCC will grant such
modifications or milestone extensions.
9
11
Loral also has conditional authorizations and applications pending before
the FCC for other orbital locations. Under the FCC's rules, an applicant may
commence satellite construction prior to receiving an authorization to launch
and operate, although it must notify the FCC that it intends to commence
construction. Any construction engaged in is at the applicant's own risk. While
Loral therefore may proceed with the construction of planned satellites without
prior FCC approval, it must accept the risk that the FCC may not grant the
application, may not assign the satellite to its proposed orbital location, or
otherwise may act in a manner that limits or eliminates some or all of the value
of the construction previously done on the satellite.
Scope of Services Authorized
In 1996, the FCC largely eliminated the regulatory distinction between U.S.
domestic satellites and U.S.-licensed international satellites. As a result,
each of Loral's satellites may be used, to the extent technically feasible, to
provide both U.S. domestic and international services.
Coordination Requirements
The FCC requires applicants to demonstrate that their proposed satellites
would be compatible with the operations of adjacent satellites. The FCC requires
adjacent satellite operators to coordinate with one another to minimize
frequency conflicts. The FCC reserves the right to require that an FCC licensed
satellite be relocated to a different orbital location if it determines that
such a change is in the public interest. The FCC might exercise this authority
in instances where operators are unable to coordinate with each other.
REGULATION BY NON-U.S. NATIONAL TELECOMMUNICATIONS AUTHORITIES
Foreign laws and regulatory practices governing the provision of satellite
services to licensed entities and directly to end users vary substantially from
country to country. Some countries may require Loral to confirm that it has
successfully completed technical consultation with Intelsat before providing
services on a given satellite. In addition, Loral may be subject to
communications and/or broadcasting laws with respect to its provision of
international satellite services, which vary from country to country.
Many countries have liberalized their regulations to permit entities to
seek licenses to provide voice, data or video services. This trend should
accelerate with the commitments by many World Trade Organization ("WTO")
members, in the context of the WTO Agreement on Basic Telecommunications
Services, to open their satellite markets to competition. Other countries,
however, have maintained strict monopoly regimes. In such markets, the provision
of service from Loral and other U.S.-licensed satellites may be more
complicated.
In addition to the orbital slots licensed by the FCC, Loral has been
assigned orbital slots by certain other countries. For example, Loral has been
authorized to use numerous Ku- and Ka-orbital slots by the Papua New Guinea
government. In March 1999, the Brazilian telecommunications authority announced
that Loral had won Brazil's auction for its 63(degrees) W.L. Ku-band orbital
slot. Loral operates capacity on the Telstar 10/ Apstar IIR C/Ku-band satellite
licensed by China and located at 76.5(degrees) E.L. Satmex, of which Loral owns
49%, is licensed by Mexico to operate the C/Ku-band satellites at 109.2(degrees)
W.L., 113.0(degrees) W.L., and 116.8(degrees) W.L. Europe*Star, of which Loral
owns 47%, is licensed by Germany to operate Ku-band satellites at 45(degrees)
E.L. and 47.5(degrees) E.L.
Intelsat Consultation
In connection with its international satellite services, Loral must
currently complete a consultation process with Intelsat under Article XIV of the
Intelsat Agreement to ensure technical compatibility of Loral's facilities and
their operation with the spectrum and orbital locations of existing or planned
Intelsat satellites. This process, however, may be eliminated as a result of the
privatization of Intelsat.
10
12
The ITU Frequency Coordination Process
All satellite systems are subject to ITU frequency coordination
requirements and must obtain appropriate authority to provide service in a given
territory. The result of the required international coordination process may
limit the extent to which all or some portion of a particular authorized orbital
slot may be used for commercial operations, with a corresponding impact on the
useable capacity of a satellite at that location. In addition, the result of the
process by which satellite systems must seek authorization to provide service in
a given territory may limit the extent to which such service may be provided
from a given orbital location.
All of the registrations for Loral's satellites are or will be subject to
the ITU coordination process. Only national governments file required
coordination documents at the ITU. These documents are used by Loral and other
satellite operators as a basis for coordination of satellite systems. There may
be more than one ITU filing submitted for any particular orbital slot, or an
orbital slot adjacent thereto, thus requiring coordination between or among the
affected operators. The results of this coordination process may impose
technical constraints on Loral's ability to operate its satellites at a given
orbital location, if at all. Loral cannot guarantee successful frequency
coordination for its satellites.
APPLICATIONS AND ITU FILINGS
Loral has ITU filings at 3.5(degrees) E.L., 8(degrees) E.L., 1(degrees)
E.L., 11(degrees) E.L., 30(degrees) E.L., 81(degrees) E.L., 105.5(degrees) E.L.,
135(degrees) E.L., 58(degrees) W.L., 95(degrees) W.L., 115(degrees) W.L. and
135(degrees) W.L. for use of the V-band frequency. Loral also has ITU filings at
98(degrees) E.L., 122(degrees) E.L., 130(degrees) E.L., 167.45(degrees) E.L.,
121(degrees) W.L. and 175(degrees) W.L. for use of the C- and Ku-band
frequencies. Europe*Star has ITU filings at 43(degrees) E.L. and 47.5(degrees)
E.L. for use of the Ku-band frequency.
Loral has applications pending at 77(degrees) W.L. for use of the Extended
C/Ku-band frequencies, at 81(degrees) W.L. for use of the Ku-band and extended
Ku-band frequencies and at 135(degrees) W.L., 115(degrees) W.L., 95(degrees)
W.L. and at 58(degrees) W.L. for use of the V-band frequency. Loral has
applications pending at 126(degrees) E.L. for use of the Ku/Extended Ku/C and
Extended C-band frequencies, and at 95(degrees) W.L. and 15(degrees) W.L. for
use of the Ka-band frequency.
EXPORT REGULATION
Exports from the United States of commercial communication satellites, and
certain related items, technical data and services, are subject to United States
export control laws and regulations. These export control laws and regulations
affect the export of satellites and certain related items, technical data and
services to foreign launch providers, insurers, customers, potential customers
and business partners, as well as to foreign Loral employees, foreign regulatory
bodies, foreign national telecommunications authorities and to foreign persons
generally. Commercial communications satellites and certain related items,
technical data and services have been added to the United States Munitions List
and export jurisdiction over these satellites and certain related items,
technical data and services has been transferred to the U.S. Department of State
and made subject to the Arms Export Control Act and the International Traffic in
Arms Regulations. Other items, technical data and services exported by Loral
remain subject to the export jurisdiction of the U.S. Department of Commerce,
pursuant to the Export Administration Act and the Export Administration
Regulations.
U.S. Government licenses or other approvals generally must be applied for
by Loral and obtained before such exports are made. There can be no assurance
that such licenses or approvals will be granted. Also, licenses or approvals may
be granted with limitations, provisos or other requirements imposed by the U.S.
Government as a condition of approval, which may affect the scope of permissible
activity under the license or approval. U.S. Government approval may be required
before such satellites and related items, technical data and services are
re-exported or transferred from one foreign person to another foreign person.
There can be no assurance that such approvals will be granted. Also, such
approvals may be granted subject to limitations, provisos or other requirements
imposed by the U.S. Government as a condition of approval, which may affect the
scope of permissible activity under the license or approval.
11
13
PATENTS AND PROPRIETARY RIGHTS
SS/L relies, in part, on patents, trade secrets and know-how to develop and
maintain its competitive position. It holds 184 patents in the United States and
296 patents abroad and has applications for 91 patents pending in the United
States and 329 patents pending abroad. SS/L patents include those relating to
communications, station keeping, power control systems, antennae, filters and
oscillators, phase arrays and thermal control as well as assembly and
inspections technology. The SS/L patents that are currently in force expire
between 2001 and 2018.
Loral CyberStar and CyberStar LP have three and four patents in the United
States, respectively. In addition, Loral CyberStar, Loral SpaceCom Corporation
and CyberStar LP have two, four and 12 patents pending in the United States,
respectively, and one, 11 and 13 patents pending abroad, respectively.
There can be no assurance that any of the pending patent applications by
the Company will be issued. Moreover, because the U.S. patent application
process is confidential, there can be no assurance that third parties, including
competitors, do not have patents pending that could result in issued patents
which the Company would infringe. In such an event, the Company could be
required to pay royalties to obtain a license, which could increase costs.
FOREIGN OPERATIONS
Sales to foreign customers, primarily in Europe and Asia, represented 23%,
14% and 16% of the Company's consolidated revenues for 2000, 1999 and 1998,
respectively. As of December 31, 2000, 1999 and 1998, the Company had
substantially all of its long-lived assets located in the United States with the
exception of the in-orbit satellites. See "Certain Factors that May Affect
Future Results -- We face risks in conducting business internationally" for a
discussion of the risks related to operating internationally.
EMPLOYEES
As of December 31, 2000, the Company had approximately 3,700 full-time
employees (including approximately 225 employees for Satmex), some of whom are
subject to collective bargaining agreements. We consider our employee relations
to be satisfactory.
12
14
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This annual report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
from time to time, we or our representatives have made or may make forward-
looking statements, orally or in writing. They can be identified by the use of
forward-looking words such as "believes", "expects", "plans", "may", "will",
"would", "could", "should", "anticipates", "estimates", "project", "intend", or
"outlook" or their negatives or other variations of these words or other
comparable words, or by discussions of strategy that involve risks and
uncertainties. Such forward-looking statements may be included in, but are not
limited to, various filings made by us with the Securities and Exchange
Commission, press releases or oral statements made by or with the approval of an
authorized executive officer. We warn you that forward-looking statements are
only predictions. Actual events or results may differ materially as a result of
risks that we face, including those presented below. We undertake no obligation
to update any forward-looking statements. The following are representative of
factors that could affect the outcome of the forward-looking statements.
WE HAVE SUBSTANTIAL DEBT AND GUARANTEE OBLIGATIONS.
We and our subsidiaries and operating affiliates have a significant amount
of outstanding debt and guarantee obligations. As of December 31, 2000:
- Our consolidated total debt was $2.5 billion.
- Our unconsolidated affiliate, Globalstar, had $1.45 billion principal
amount of senior notes outstanding. In addition, it had $500 million
outstanding under its credit facility, $250 million of three-year notes
and $788 million of vendor financing; a significant portion of this debt
is owed to us. Globalstar has suspended indefinitely principal and
interest payments on its debt, including on debt owed to us.
- Satmex, our 49%-owned Mexico affiliate, had total debt of $572 million.
In addition, Servicios Corporativos Satelitales, S.A. de C.V., the parent
company of Satmex, in which we have a 65% interest, has an obligation to
the government of Mexico with an initial face amount of $125 million
which accretes at 6.03% over a seven-year period, expiring in December
2004. We have agreed to maintain our stock ownership interests in the
parent company of Servicios in a trust to collateralize this obligation.
We intend to use our cash and available credit ($459 million at December
31, 2000) to help fund the growth and operation of our businesses. If any of our
subsidiaries or affiliates finds itself faced with default, we may be faced with
a choice between providing additional support to that company or accepting the
loss of some or all of our investment. We do not intend to provide any further
funding to Globalstar, which expects to have sufficient cash, after suspension
of debt, interest and dividend payments, to fund its operations through 2001.
DUE TO POOR SUBSCRIBER TAKE-UP RATES, GLOBALSTAR IS UNABLE TO PAY ITS DEBT
OBLIGATIONS AS THEY BECOME DUE, AND WILL REQUIRE ADDITIONAL FINANCING TO
CONTINUE ITS OPERATIONS. DURING 2000, WE HAVE RECORDED AFTER-TAX CHARGES OF
APPROXIMATELY $1.4 BILLION FOR GLOBALSTAR RELATED ACTIVITIES.
In January 2001, Globalstar suspended indefinitely principal and interest
payments on its debt and dividend payments on its redeemable preferred
partnership interests in order to conserve cash for operations. Globalstar is
currently in default under its $500 million credit facility due to Loral, its
vendor financing facility with QUALCOMM, and its 11 3/8% senior notes due
February 15, 2004. Globalstar expects that events of default will occur with
regard to Globalstar's other three senior note indentures when interest payments
become due in May and June of 2001. The aforementioned debt that is currently in
default is now subject to immediate acceleration by its holders. Globalstar has
retained The Blackstone Group as its financial adviser to assist in evaluating
its business plan and develop initiatives, including restructuring its debt,
identifying funding opportunities and pursuing other strategic alternatives.
As of December 31, 2000, our direct and indirect investment in connection
with Globalstar related activities included about 39% of Globalstar's common
equity, about 27% of its debt, an investment in GTL preferred stock and
investments in and advances to Globalstar service provider partnerships. During
2000, we
13
15
recorded after-tax charges of approximately $1.4 billion related to our
investment in and advances in connection with Globalstar related activities,
which included our after-tax share of Globalstar's impairment charges of
approximately $882 million and after-tax impairment charges of $112 million,
resulting from the write-down of investments in and advances to Globalstar
service provider partnerships to their estimated fair value. After these
charges, our investment in Globalstar related activities was approximately $62
million as of December 31, 2000. In addition, Loral intends to continue to fund
its share of the operations of those Globalstar service provider ventures in
which it participates as an equity owner. If Globalstar is unable to effectuate
a successful restructuring, Loral's remaining investment in Globalstar and any
additional investment in Globalstar service providers would be impaired.
Globalstar is currently developing a new business plan that will offer a
basis for a restructuring proposal that it will provide to its creditors. If it
is unable to effectuate an out-of-court restructuring, Globalstar may file for
bankruptcy protection. Moreover, its creditors may seek to initiate involuntary
bankruptcy proceedings against Globalstar. Our equity interests in Globalstar
may be eliminated entirely in any such bankruptcy proceeding, as it might in an
out-of-court restructuring. The Globalstar debt obligations we hold are senior
unsecured obligations that rank equally in right of payments with all other
Globalstar debt obligations. In other situations in the past, challenges have
been initiated seeking subordination or recharacterization of debt held by an
affiliate of an issuer. While we know of no reason why such a claim would
prevail with respect to the debt we hold 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 us as preferential
payments subject to repayment. We may also find ourselves subject to other
claims brought by Globalstar creditors and securities holders, who may seek to
impose liabilities on us as a result of our relationship with Globalstar. For
example, we have been named as a defendant in various lawsuits brought by
shareholders of Globalstar Telecommunications Limited ("GTL") alleging
controlling person liability in respect of certain statements made by GTL and
its representatives. While these proceedings are in their very early stages,
management believes that these matters will not have a material adverse effect
on the consolidated financial position or results of operations of Loral.
THE ABILITY OF OUR SUBSIDIARIES TO PAY DIVIDENDS TO US OR OTHERWISE SUPPORT OUR
OBLIGATIONS IS LIMITED BY THE TERMS OF THEIR DEBT INSTRUMENTS.
Loral SpaceCom Corporation's ("Loral SpaceCom") credit facility allows
dividend payments to us if cumulative dividend payments do not exceed 50% of its
cumulative consolidated net income and the ratio of its funded debt to EBITDA is
less than 3.0 to 1.0. For the year ended December 31, 2000, Loral SpaceCom had
no capacity under this covenant to pay us any dividends. The credit facility
further provides that Loral SpaceCom may pay dividends to us of up to $70
million subject to there being at least $700 million in shareholders' equity. In
December 2000, Loral SpaceCom used up this capacity in full when it paid a $70
million dividend to its parent.
Loral Satellite Inc.'s credit agreement also imposes restrictions on its
ability to pay dividends to its parent, which is a wholly-owned subsidiary of
the Company. Such restrictions include, for instance, that dividends can be paid
only after Loral Satellite shall have made loans to Loral in an aggregate
principal outstanding amount of $100 million or more.
Under the terms of its indentures, Loral CyberStar is currently prevented
from paying dividends and is unlikely to pay any dividends in the foreseeable
future.
IF OUR BUSINESS PLAN DOES NOT SUCCEED, OUR OPERATIONS MIGHT NOT GENERATE ENOUGH
CASH TO PAY OUR OBLIGATIONS.
For the year ended December 31, 2000, we had a deficiency of earnings to
cover fixed charges of $153 million. In addition to our debt service
requirements, our businesses are capital intensive and need substantial
investment before returns can be realized. For example, we will incur
significant expenditures to construct and launch new satellites for our fixed
satellite services business. Loral CyberStar also anticipates that it will have
additional cash requirements over the next three years to pay for certain
investments including purchase of VSATs, other capital expenditures, senior note
interest payments and other operating needs, which it will need to secure from
us or externally. We are subject to substantial financial risks from possible
14
16
delays or reductions in revenue, unforeseen capital needs or unforeseen
expenses. Our ability to meet our obligations and execute our business plan
could depend upon our ability, and that of our operating subsidiaries and
affiliates, to raise cash in the capital markets. We are uncertain whether this
source of cash will be available in the future on favorable terms if at all.
LAUNCH FAILURES HAVE DELAYED SOME OF OUR OPERATIONS IN THE PAST AND MAY DO SO
AGAIN IN THE FUTURE.
We depend on third parties, in the United States and abroad, to launch our
satellites. Satellite launches are risky, and launch attempts have ended in
failure. We ordinarily insure against launch failures, but at considerable cost.
The cost and the availability of insurance vary depending on market conditions
and the launch vehicle used. Our insurance typically does not cover business
interruption, and so launch failures result in uninsured economic losses.
Replacement of a lost satellite typically requires up to 24 months from the time
a contract is executed until the launch date of the replacement satellite.
AFTER LAUNCH, OUR SATELLITES REMAIN VULNERABLE TO IN-ORBIT FAILURE, WHICH MAY
RESULT IN UNINSURED LOSSES.
Failure of satellite components in space may result in damage to or loss of
a satellite before the end of its expected life. Satellites are carefully built
and tested and have some redundant systems to save the satellite in case of
failure. However, in-orbit failure may result from various causes, some random,
including:
- component failure;
- loss of power or fuel;
- inability to maintain positioning of the satellite;
- solar and other astronomical events; and
- space debris.
Repair of satellites in space is not feasible. Many factors affect the
useful lives of our satellites including:
- fuel consumption;
- the quality of construction;
- degradation of solar panels; and
- the durability of components.
Although some failures may be covered in part by insurance, they may result
in uninsured losses as well. For example, when Loral Skynet experienced the
total loss of two satellites in 1994 and 1997 while under AT&T's ownership, it
suffered a substantial drop in its profits due to the loss of revenues.
SOME OF THE SATELLITES WE CURRENTLY HAVE IN-ORBIT HAVE EXPERIENCED OPERATIONAL
PROBLEMS.
- In November 1995, a component on Telstar 11 malfunctioned, resulting in a
two-hour service interruption. Full service was restored using a back-up
component; if that backup component fails, Telstar 11 would lose a
significant amount of usable capacity.
- On August 29, 2000 Satmex's Solidaridad 1 satellite ceased operation and
was considered 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 & Communications and launched in 1994,
experienced a failure of its primary control processor in April 1999, and
the satellite had been operating on its back-up processor since that
time. Satmex received net insurance proceeds of $235 million relating to
this loss. Satmex has contracted with SS/L to build its 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.
While we have in the past, consistent with industry practice, typically
obtained in-orbit insurance for our satellites, we cannot guarantee that upon a
policy's expiration, we will be able to renew the insurance on terms acceptable
to us, especially on satellites that have, or that are part of a family of
satellites that have, experienced problems in the past. For example, the
existing insurance policy for Solidaridad 2 expires in November 2002 and a
renewal policy may not insure against in-orbit failure arising from the loss of
the satellite's control processor, the same component that failed on Solidaridad
1 and other Hughes satellites. An
15
17
uninsured loss of a satellite will have a material adverse effect on our results
of operations and financial condition.
A loss of transponders on a satellite can also hurt us. Loral Skynet has in
the past 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
provides a warranty for a period of 10 to 14 years, in the case of sales
contracts, and the lease term, in the case of the prepaid leases. Depending on
the contract, Loral Skynet may be required under its prepaid leases and sales
contracts 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 our subsidiaries or affiliates, have experienced
minor losses of power from their solar arrays. SS/L is currently investigating
the cause of these failures. Although, to date, neither we 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. Until the cause of the failures can
be identified or other adequate remedial measures can be taken, launches of
satellites under construction and construction of new satellites may be delayed.
Delays in the production or launch of satellites could have a material adverse
effect on the operation of SS/L's business and the complete or partial loss of
satellites could result in a loss of orbital incentive payments and, in the case
of satellites owned by our subsidiaries and affiliates, a loss of revenue and
customers. This investigation is in its very early stages and not all relevant
information is now known. 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, we believe that this matter will not have a material adverse
effect on our consolidated financial position or results of operations.
WE DEPEND ON SPACE SYSTEMS/LORAL FOR A LARGE PORTION OF REVENUE AND OPERATING
INCOME.
SS/L generates a significant part of our revenue and operating income.
SS/L, in turn, has historically derived a large part of its revenue and
operating income from a few customers. For example, for the year ended December
31, 2000, three of SS/L's customers, one of which was Globalstar, accounted for
about 13%, 12% and 11%, respectively, of Loral's consolidated revenues. As a
result, our revenue and operating results would be hurt if completed or canceled
contracts are not promptly replaced with new orders. Some of SS/L's customers
are start-up companies, and there can be no assurance that these companies will
be able to fulfill their payment obligations under their contracts with SS/L.
SS/L's accounting for long-term contracts sometimes requires adjustments to
profit and loss based on revised estimates during the performance of the
contract. These adjustments may have a material effect on our results of
operations in the period in which they are made. The estimates giving rise to
these risks, which are inherent in long-term, fixed-price contracts, include the
forecasting of costs and schedules, contract revenues related to contract
performance, including revenues from orbital incentives, and the potential for
component obsolescence due to procurements long before assembly.
SS/L's major contracts fall into two categories: firm fixed-price contracts
and cost-plus-award-fee contracts. Under firm fixed-price contracts, work
performed and products shipped are paid for at a fixed price without adjustment
for actual costs incurred in connection with the contract. While cost savings
under these fixed-price contracts would result in gains to SS/L, cost increases
would result in losses borne solely by SS/L. The majority of SS/L's contracts
are fixed-price contracts. Under such contracts, SS/L may receive progress
16
18
payments, or it may receive partial payments upon the occurrence of certain
program milestones. Under a cost-plus-award-fee contract, the contractor
recovers its actual allowable costs incurred and receives a fee consisting of a
base amount that is fixed at the inception of the contract (the base amount may
be zero) and an award amount that is based on the customer's subjective
evaluation of the contractor's performance based on criteria stated in the
contract.
Many of SS/L's contracts and subcontracts may be terminated at will by the
customer or the prime contractor. In the event of a termination at will, SS/L is
normally entitled to recover the purchase price for delivered items,
reimbursement for allowable costs for work in process and an allowance for
profit or an adjustment for loss, depending on whether completion of performance
would have resulted in a profit or loss. Such terminations may occur in the
future.
SS/L MAY FORFEIT PAYMENTS FROM CUSTOMERS DUE TO SATELLITE FAILURES OR LOSSES
AFTER LAUNCH OR BE LIABLE FOR PENALTY PAYMENTS UNDER CERTAIN CIRCUMSTANCES, AND
THESE LOSSES MAY BE UNINSURED.
Some of SS/L's satellite manufacturing contracts provide that some of the
total price is payable as "incentive" payments earned over the life of the
satellite. SS/L has in the past generally not insured for such losses and in
fact may be prohibited from insuring these incentive payments under certain
circumstances. Some of SS/L's contracts call for in-orbit delivery, transferring
the launch risk to SS/L. SS/L generally insures against that exposure.
SS/L records as revenue the present value of incentive payments as the
costs associated with these incentive payments are incurred. SS/L generally
receives the present value of these incentive payments if there is a launch
failure or a failure is caused by customer error. SS/L forfeits these payments,
however, if the loss is caused by satellite failure or as a result of its own
error.
In addition, some of SS/L's contracts provide that SS/L may be liable to a
customer for penalty payments under certain circumstances, including upon late
delivery. These payments are not insured by SS/L.
SS/L IS CURRENTLY IN ARBITRATION PROCEEDINGS WITH PANAMSAT CORPORATION OVER A
SATELLITE REFLECTOR DISPUTE.
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. SS/L believes it has meritorious defenses to the claim and that its
liability is limited to a loss of a portion of the applicable orbital
incentives, the estimated impact of which is included in Loral's consolidated
financial statements. PanAmSat has received a recovery from its insurance
carrier that should reduce any damage claim. Loral and PanAmSat have reached an
agreement in principle, subject to documentation, and in light of reserves
provided, this matter will not have a material adverse effect on the
consolidated financial position or results of operations of Loral.
WE ARE SUBJECT TO EXPORT CONTROLS, WHICH MAY RESULT IN DELAYS, UNFORESEEN
ADDITIONAL COSTS AND UNCERTAINTIES IN CERTAIN MARKETS.
Like other exporters of space-related products and services, SS/L needs
licenses from the U.S. government when it sells a satellite to a foreign
customer or launches abroad. Foreign launches have been politically sensitive
because of the relationship between launch technology and missile technology.
U.S. government policy has limited, and is likely in the future to limit,
launches from the former Soviet Union and China. For example, the U.S.
government delayed a Globalstar launch from Kazakhstan by several months when it
stopped granting case-by-case approval of launches from that location pending an
intergovernmental agreement covering technology security matters. Changes in
governmental policies, political leadership or legislation in the United States,
Russia, Kazakhstan or China could adversely affect our ability to launch from
these countries or increase the costs of doing so.
The launch of ChinaSat-8 has been delayed pending SS/L's obtaining the
approvals required for the launch. On December 23, 1998, the Office of Defense
Trade Controls, or ODTC, of the U.S. Department of State temporarily suspended a
previously approved technical assistance agreement under which SS/L had been
preparing for the launch of the ChinaSat-8 satellite. According to ODTC, the
purpose of the temporary
17
19
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 to either obtain a refund from the
launch provider or to find a replacement customer for the Chinese launch
vehicle.
SS/L IS THE TARGET OF A GRAND JURY INVESTIGATION WHICH MAY ADVERSELY AFFECT
SS/L'S ABILITY TO EXPORT ITS PRODUCTS.
SS/L could be accused of criminal violations of the export control laws
arising out of the participation of its employees in a committee formed to
review the findings of the Chinese regarding the 1996 crash of a Long March
rocket in China. Under the applicable regulations, SS/L could be barred from
export privileges without being convicted of any crime if it is merely 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 will remain subject
to the State Department's general statutory authority to prohibit exports of
satellites and related services if it finds that SS/L has violated the Arms
Export Control Act. Further, the State Department can suspend export privileges
whenever it determines that grounds for debarment exist and that suspension "is
reasonably necessary to protect world peace or the security or foreign policy of
the United States." 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;
- could be debarred from certain export privileges; and
- could be debarred from participation in government contracts.
Since some of SS/L's satellites are built for foreign customers and/or are
launched on foreign rockets, a debarment would seriously harm SS/L's business,
which in turn would hurt Loral.
THE WORLD MARKET SHARE OF U.S. SATELLITE MANUFACTURERS HAS DECLINED, FOLLOWING
RECENT CHANGES IN U.S. EXPORT CONTROL POLICIES.
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.
In the period 1992 through 1999, satellites ordered from the leading U.S.
satellite manufacturers, including SS/L, accounted for 79% of all commercial
satellite bookings. In 2000, following changes in federal export control
regulations, policies and procedures, this percentage dropped to 47%. For
bookings by non-U.S. customers in those periods, the corresponding percentages
were 21% and 53%, respectfully.
18
20
If these policies do not change, our competitors abroad may continue to
gain both workflow and additional capabilities and expertise. In such event, it
would become increasingly difficult for the U.S. satellite manufacturing
industry to recapture this lost market share.
SS/L COMPETES WITH LARGE MANUFACTURERS THAT HAVE SIGNIFICANT RESOURCES.
In the manufacture of our satellites, we compete with very large
well-capitalized companies, including several of the world's largest, such as
The Boeing Company, Lockheed Martin, Alcatel Space Industries and Astrium. These
companies have considerable financial resources which they may use to gain
advantages in marketing and in technological innovation. SS/L's success depends
on its ability to innovate on a cost-effective and timely basis.
WE COMPETE FOR MARKET SHARE AND CUSTOMERS; TECHNOLOGICAL DEVELOPMENTS FROM
COMPETITORS OR OTHERS MAY REDUCE DEMAND FOR OUR SERVICES.
We face heavy competition in fixed satellite services from companies such
as PanAmSat Corporation, GE Americom, SES Astra and quasi-governmental
organizations such as Intelsat and Eutelsat. Competition in this market may
lower prices, which may adversely affect our results.
Our data business also faces competition from providers of land-based data
communications services, such as cable operators, digital subscriber line, or
DSL, providers, wireless local loop providers and traditional telephone service
providers. We cannot assure you that the Loral CyberStar Group will attract
enough customers either to compete effectively or to implement fully its
business plan.
As land-based telecommunications services expand, demand for some
satellite-based services may be reduced. New technology could render
satellite-based services less competitive by satisfying consumer demand in other
ways or through the use of incompatible standards.
We also compete for local regulatory approval in places in which both we
and a competitor may want to operate. We also compete for scarce frequency
assignments and fixed orbital positions.
OUR BUSINESS IS REGULATED, CAUSING UNCERTAINTY AND ADDITIONAL COSTS.
Our business is regulated by authorities in multiple jurisdictions,
including the Federal Communications Commission, the International
Telecommunications Union, or ITU, and the European Union. As a result, some of
the activities which are important to our strategy are beyond our control. The
following are some strategically important activities which are regulated:
- the expansion of Loral Skynet's operations beyond the domestic U.S.
market;
- the international service offered by the Loral CyberStar Group;
- the manufacture, export and launch of satellites;
- the expansion of Satmex's Latin American business; and
- the implementation of Europe*Star's business plan.
Regulatory authorities in the various jurisdictions in which we operate can
modify, withdraw or impose charges or conditions upon the licenses which we
need, and so increase our costs. The regulatory process also requires
potentially costly negotiations with third parties operating or intending to
operate satellites at or near orbital locations where we place our satellites so
that the frequencies of those other satellites do not interfere with our own.
For example, as part of our coordination effort on Telstar 12, we agreed to
provide four 54 MHz transponders on Telstar 12 to Eutelsat for the life of the
satellite and have retained risk of loss with respect to those transponders. We
also granted Eutelsat the right to acquire, at cost, four transponders on the
next replacement satellite for Telstar 12. Moreover, as part of this
international coordination process, we continue 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. We cannot guarantee successful frequency coordination for our
satellites.
Failure to successfully coordinate our satellites' frequencies or to
resolve other required regulatory approvals could hurt our consolidated
financial position and results of operations.
19
21
WE FACE RISKS IN CONDUCTING BUSINESS INTERNATIONALLY.
Some of our business is conducted outside the United States. For the year
ended December 31, 2000, approximately 23% of our revenue was generated outside
of the United States. We could be harmed financially and operationally by
changes in foreign regulations and telecommunications standards, tariffs or
taxes and other trade barriers. Although almost all of our contracts with
foreign customers require payment in U.S. dollars, customers in developing
countries could have difficulty in obtaining the U.S. dollars they owe us,
including as a result of exchange controls. Exchange rate fluctuations may
adversely affect the ability of our customers to pay us in U.S. dollars. If we
ever need to pursue legal remedies against our foreign business partners or
customers, we may have to sue abroad, where it could be hard for us to enforce
our rights.
WE SHARE CONTROL OF OUR AFFILIATES WITH THIRD PARTIES.
Third parties have significant ownership, voting and other rights in many
of our subsidiaries and affiliates. As a result, we do not always have full
control over management of these entities. The rights of these third parties and
fiduciary duties under applicable law could result in others acting or omitting
to act in ways which are not in our best interest. To the extent that these
entities are or become customers of SS/L, these conflicts could become acute.
For example:
- Primary control of Satmex is vested in Mexican nationals, as required by
Mexican law, subject to certain supermajority rights which we retain.
- The Europe*Star joint venture is under control by Alcatel, subject to our
supermajority rights.
- Future joint ventures between Alcatel and us within the Loral Global
Alliance will be controlled by the initiating party, subject to
supermajority rights in favor of the non-initiating party.
- Alcatel is an investor in CyberStar LP and has supermajority rights in
it.
- Although we are the managing general partner and largest equity owner of
Globalstar, our control is limited by important supermajority rights of
Globalstar's limited partners.
WE RELY ON KEY PERSONNEL.
We need highly qualified personnel. Except for Mr. Bernard L. Schwartz, our
Chairman and Chief Executive Officer, none of our officers has an employment
contract nor do we maintain "key man" life insurance. The departure of any of
our key executives could have an adverse effect on our business.
ITEM 2. PROPERTIES
The Company leases approximately 47,000 square feet for its corporate
offices in New York. The Company also maintains office space, manufacturing and
telemetry, tracking and control facilities primarily in the United States.
Fixed Satellite Services
Loral Skynet owns two telemetry, tracking and control stations covering
approximately 65,000 square feet on 212 acres in Hawley, Pennsylvania and Three
Peaks, California and leases approximately 68,000 square feet of office space in
Bedminster, New Jersey and Richmond, California.
Data Services
Loral CyberStar owns seven acres of land in Mt. Jackson, Virginia and
leases approximately 86,000 square feet for office space worldwide.
CyberStar LP leases approximately 38,000 square feet of office space
worldwide.
Satellite Manufacturing and Technology
SS/L's research, production and testing facilities are carried on in
SS/L-owned facilities covering approximately 562,000 square feet on 28 acres in
Palo Alto, California. In addition, SS/L leases approximately 727,000 square
feet of space on 45 acres from various third parties primarily in Palo Alto,
California, Menlo Park, California and Mountain View, California.
20
22
Management believes that the facilities are sufficient for its current
operations.
ITEM 3. LEGAL PROCEEDINGS
Export Control Matters. Various agencies and departments of the U.S.
government regulate Loral's ability to pursue business outside the United
States. Exports of space-related products, services and technical information
require U.S. government licenses. There can be no assurance that Loral or SS/L
will be able to obtain necessary licenses or approvals, and the inability to do
so, or the failure to comply with the terms thereof when granted, could have a
material adverse effect on their respective businesses.
On February 15, 1996, a Chinese Long March rocket carrying an Intelsat
satellite built by SS/L crashed seconds after launch. Thereafter, at the request
of insurance companies concerned about underwriting future Long March launches,
the manufacturer of the Long March, China Great Wall Industries Corporation
("CGWIC"), asked SS/L employees and personnel from other interested companies to
serve on a committee formed to consider whether studies of the crash made by the
Chinese had correctly identified the cause of the failure. In meetings with
CGWIC, the committee reviewed CGWIC's launch failure analysis, which consisted
of a preliminary explanation for the crash (a failed solder joint) and CGWIC's
plan for further studies it planned to make.
In May 1996, an SS/L employee transmitted a copy of the committee's
preliminary report to the members of the committee and, contrary to the
intentions of SS/L's management, to CGWIC before consulting with the U.S. State
Department. Upon becoming apprised of the facts, SS/L immediately informed the
State Department, and thereafter submitted a detailed voluntary written
disclosure to the State Department that included copies of the written materials
provided to CGWIC and descriptions of the committee's meetings with the Chinese
and of the events surrounding disclosure of the preliminary report. For the next
18 months, the Company had no notice of any adverse action being taken or
contemplated in connection with the matter.
SS/L was informed in 1998 that it was a target of a grand jury
investigation being conducted by the U.S. Attorney for the District of Columbia
as to whether an unlawful transfer of technology occurred in connection with the
committee's work. The Company and several of its employees have received
subpoenas from that grand jury. SS/L is not in a position to predict the outcome
of this 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 for each violation, and could be debarred from certain export privileges
and, possibly, from participation in government contracts. Since many of SS/L's
satellites are built for foreign customers and/or launched on foreign rockets,
such a debarment would have a material adverse effect on SS/L's business, which
would in turn affect 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 will remain subject to the State Department's
general statutory authority to prohibit exports of satellites and related
services if it finds a violation of the Arms Export Control Act that puts 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 those conclusions.
On December 23, 1998, the Office of Defense Trade Controls, or ODTC, of the
U.S. Department of State temporarily suspended the 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
21
23
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 to either obtain a refund from the
launch provider or to find a replacement customer for the Chinese launch
vehicle.
SS/L Matters. 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. SS/L believes it has meritorious defenses to the
claim and that its liability is limited to a loss of a portion of the applicable
orbital incentives, the estimated impact of which is included in Loral's
consolidated financial statements. PanAmSat has received a recovery from its
insurance carrier that should reduce any damage claim. Loral and PanAmSat have
reached an agreement in principle, subject to documentation, and in light of
reserves provided, this matter will not have a material adverse effect on the
consolidated financial position or results of operations of Loral.
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 arrangements are terminable upon one-year's notice by
either party, and SS/L gave the contemplated 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.
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").
22
24
Eleven additional purported class action complaints were 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, Inc. and Phil Sigel, Michael Ceasar, as
Trustee for Howard Gunty Profit Sharing Plan, Colin Barry, James D. Atlas and
Lawrence Phillips, on each of March 2, 2001, March 2, 2001, March 6, 2001, March
7, 2001, March 7, 2001, March 9, 2001, March 16, 2001, March 21, 2001, March 21,
2001, March 22, 2001 and March 23, 2001, respectively. These complaints allege
claims against GTL, Loral and Mr. Schwartz (and, in the case of the
Sequoia/Sigel and Atlas complaints, two additional individual
defendants -- Messrs. Michael DeBlasio and Anthony Navarra) that are
substantially identical to those set forth in the Eismann action. The class of
plaintiffs on whose behalf these lawsuits have been asserted are: with respect
to the Kraus, Davis, Maiorino, Batyrev, Ceasar and Phillips actions, buyers of
GTL common stock in the period from December 6, 1999 through October 27, 2000;
with respect to the Murphy and Barry actions, buyers of GTL securities in the
period from December 6, 1999, through October 27, 2000; with respect to the
Sequoia/Sigel and Atlas actions, buyers of GTL common stock in the period from
December 6, 1999 through July 19, 2000; and with respect to the Garfinkel
action, buyers of GTL debt securities in the period from December 6, 1999
through October 27, 2000, in each case, other than the Excluded Persons.
Loral believes that it has meritorious defenses to the above Globalstar
Related Matters and intends to pursue them vigorously.
CCD Lawsuits. On September 12, 1991, Loral Fairchild Corp. ("Loral
Fairchild"), a subsidiary of Loral Corporation, filed suit against a number of
companies including Sony Corporation ("Sony"), Matsushita Electronics
Corporation ("Matsushita") and NEC Corp. claiming that such companies had
infringed Loral Fairchild's patents for a "charged coupled device" ("CCD"),
commonly used as an optical sensor in video cameras and fax machines. Although
the CCD patents have expired, Loral Fairchild is seeking reasonable royalties
through the expiration date from a number of defendants. On February 22, 1996, a
jury in the United States District Court for the Eastern District of New York
found unanimously that Sony had infringed the CCD patents. The trial judge,
however, in an order dated July 12, 1996, reversed the jury verdict. Loral
Fairchild appealed and sought certiorari unsuccessfully. Although Loral
Fairchild has settled its claim against one of the other defendants for
approximately $450,000, its claims against some of the other defendants were
precluded by the Sony ruling. Claims against the remaining defendants were also
dismissed. That ruling is on appeal to the Federal Circuit. Matsushita has been
granted a declaratory judgment that it has a valid and enforceable license under
the CCD patents. In addition, a trial on Matsushita's claim against Loral
Fairchild for tortious interference was conducted during July 1996, and a
verdict was rendered in favor of Loral Fairchild in September 1997.
Environmental Regulation. Operations at SS/L, Loral Skynet, Loral
CyberStar and CyberStar LP are subject to regulation by various federal, state
and local agencies concerned with environmental control. The Company believes
that these facilities are in substantial compliance with all existing federal,
state and local environmental regulations. With regard to certain sites,
environmental remediation is being performed by prior owners who retained
liability for such remediation arising from occurrences during their period of
ownership. To date, these prior owners have been fulfilling such obligations and
the size and current financial condition of the prior owners make it probable
that they will be able to complete their remediation obligations without cost to
the Company.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
23
25
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
(a) MARKET PRICE AND DIVIDEND INFORMATION
The Company's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol LOR. The following table presents, the reported high
and low sales prices of the Company's common stock as reported on the NYSE:
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 2000
Quarter ended March 31, 2000................................ $25.75 $ 9.88
Quarter ended June 30, 2000................................. 10.50 6.13
Quarter ended September 30, 2000............................ 8.50 5.00
Quarter ended December 31, 2000............................. 6.56 2.69
YEAR ENDED DECEMBER 31, 1999
Quarter ended March 31, 1999................................ $22.44 $14.44
Quarter ended June 30, 1999................................. 20.75 14.38
Quarter ended September 30, 1999............................ 22.88 16.25
Quarter ended December 31, 1999............................. 24.75 13.50
The Company does not currently anticipate paying any dividends or
distributions on its common stock. As required, Loral is currently paying
dividends on its 6% Series C Convertible Redeemable Preferred Stock (the "Series
C Preferred Stock") and its 6% Series D Convertible Redeemable Preferred Stock
(the "Series D Preferred Stock"). Loral's indenture relating to its 9.5% senior
notes also imposes limitations on Loral's ability to pay dividends to its
shareholders. The credit facility maintained by the Company's wholly owned
subsidiary, Loral SpaceCom Corporation ("Loral SpaceCom"), restricts the ability
of Loral SpaceCom to transfer cash or pay dividends to its parent (see Note 8 to
Loral's consolidated financial statements). Loral Satellite Inc.'s $500 million
credit facility restricts it from making dividend payments to its parent. Loral
CyberStar's indentures relating to its senior notes and its senior discount
notes also contain restrictions on Loral CyberStar's ability to make dividend
payments to its parent.
In March 2001, Loral announced increases in its exchange offers for shares
of the Company's Series C Preferred Stock and Series D Preferred Stock. Under
the terms of the voluntary exchange program, each share of Series C Preferred
Stock may be now exchanged for 5.5 shares of common stock and each share of
Series D Preferred Stock may now be exchanged for 5.7 shares of common stock. As
of December 31, 2000, there were 13,497,863 shares of the Series C Preferred
Stock outstanding and 8,000,000 shares of the Series D Preferred Stock
outstanding. Each offer is extended to all outstanding shares of the related
preferred stock, and is conditioned upon a minimum tender of 50% of that issue's
outstanding shares, which may be waived at Loral's option. Both offers extend to
all outstanding shares of the Series C and D preferred stock, and these offers
remain open until 5 p.m., New York City time, April 5, 2001, unless extended
again.
If all holders of the Series C and Series D preferred stock exchange their
holdings in connection with the current offer by the April 5, 2001 deadline,
Loral would save the requirement to pay approximately $48 million in dividends
for the remainder of 2001. Over the next six to seven years Loral would replace
the requirement to pay approximately $375 million in dividends and approximately
$1.1 billion in mandatory redemption payments due in 2006 and 2007 with
approximately 120 million shares of common stock. This issuance of common stock
would represent approximately 66 million of additional shares, above the 54
million issuable under the conversion terms of the Series C and Series D
preferred stock. There can be no assurance as to the amount of Series C and
Series D preferred stock that will tender into the exchange offers. Assuming all
holders of the Series C and Series D preferred stock exchange their holdings in
connection with the current offer by the April 5, 2001 deadline, at an assumed
price of $2.30 per share of common stock, Loral will incur a non-cash dividend
charge in the period in which an exchange occurs of approximately $152 million.
An exchange will have no impact on Loral's total shareholders' equity.
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At February 28, 2001, there were 6,320 holders of record of the Company's
common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated selected financial data has been derived from,
and should be read in conjunction with, the related consolidated financial
statements.
24
26
LORAL SPACE & COMMUNICATIONS LTD.
(in thousands, except per share and ratio data)
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
-------------------------------------------------- DECEMBER 31,
2000(1) 1999(2) 1998(3) 1997(3) 1996(3)
----------- ---------- ---------- ---------- ------------
STATEMENT OF OPERATIONS DATA:
Revenues............................ $ 1,224,111 $1,457,720 $1,301,702 $1,312,591 $ 5,088
Operating income (loss)............. (86,086) (62,263) (33,780) 13,552 (12,201)
Equity in net loss of affiliates,
net of taxes(4)................... (1,294,910) (177,819) (120,417) (49,037) (4,709)
Globalstar related impairment
charges, net of taxes............. (112,241)
Net income (loss)................... (1,469,678) (201,916) (138,798) 40,004 8,877
Preferred dividends and
accretion(5)...................... (67,258) (44,728) (46,425) (26,315)
Net income (loss) applicable to
common stockholders............... (1,537,206) (246,644) (185,223) 13,689 8,877
Earnings (loss) per share -- basic
and diluted....................... (5.20) (.85) (.68) .06 .04
OTHER DATA:
Ratio of earnings to fixed
charges........................... 1.9x 3.7x
Deficiency of earnings to cover
fixed charges..................... $ 152,595 $ 191,932 $ 140,438
CASH FLOW DATA:
Provided by (used in) operating
activities........................ $ 258,056 $ (6,933) $ 86,795 $ (173,609) $ (3,003)
Used in investing activities........ 376,740 679,005 555,613 1,079,411 1,962
Provided by (used in) equity
transactions...................... 352,415 (24,633) 589,187 (18,097) 602,413
Provided by (used in) financing
transactions...................... (79,551) 403,664 199,856 316,912 583,292
Dividends paid per common share.....
DECEMBER 31,
---------------------------------------------------------------
2000(1) 1999(2) 1998(3) 1997(3) 1996(3)
----------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 394,045 $ 239,865 $ 546,772 $ 226,547 $1,180,752
Total assets........................ 4,678,318 5,610,421 5,229,215 3,010,447 1,699,326
Debt, including current portion..... 2,456,844 1,999,322 1,555,775 435,398
Non-current liabilities............. 251,247 252,052 231,384 230,411 26,834
Convertible preferreds(5)........... 583,292
Shareholders' equity................ 1,586,388 2,750,664 2,935,721 1,980,520 1,070,069
- ---------------
(1) The results of operations for 2000 includes $77 million of increased costs
relating to manufacturing delays and customer contract issues ($46 million
after taxes), Loral's share of Globalstar after-tax impairment charges of
$882 million (approximately $1.2 billion on a pre-tax basis), which is
included in equity in net loss of affiliates and after-tax impairment
charges of $112 million ($125 million pre-tax) relating to Loral's
investments in and advances to Globalstar service provider partnerships.
(2) The results of operations for 1999 includes a pre-tax charge of $35 million
($21 million after taxes) relating to an agreement reached with a customer
to extend the delivery date of a satellite and other modifications to the
contract in return for providing transponders on another Loral satellite for
their remaining lives.
(3) On March 20, 1998, Loral acquired all of the outstanding stock of Loral
CyberStar in exchange for common stock of Loral. The 1998 financial
information includes Loral Cyberstar commencing from April 1, 1998. In 1997,
Loral increased its ownership in SS/L to 100%; prior to 1997, SS/L was
accounted for under the equity method of accounting. On March 14, 1997,
Loral acquired Loral Skynet from AT&T; Loral's financial information
includes the results of Loral Skynet from that date.
(4) The Company's principal affiliates are Globalstar, Satmex since November 17,
1997 and Europe*Star since December 1998. Loral also has investments in
SkyBridge and other ventures, which are accounted for under the equity
method. Loral sold its interest in K&F Industries, Inc. in 1997.
(5) Convertible preferred equivalent obligations were exchanged for 6% Series C
Preferred Stock and were reclassified to shareholders' equity in 1997 upon
approval by the Company's shareholders.
25
27
GLOBALSTAR, L.P.
(in thousands, except per partnership interest data)
YEARS ENDED DECEMBER 31,
------------------------------------------------------
2000(1) 1999(2) 1998(2) 1997 1996
---------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net revenue................................................. $ 3,650 $ -- $ -- $ -- $ --
Operating loss.............................................. 3,472,998 186,505 146,684 88,071 61,025
Net loss applicable to ordinary partnership interests....... 3,816,401 232,584 151,740 88,788 71,969
Net loss per weighted average ordinary partnership interest
outstanding -- basic and diluted.......................... 61.23 3.99 2.69 1.74 1.53
Cash distributions per ordinary partnership interest........
OTHER DATA:
Deficiency of earnings to cover fixed charges............... 3,824,533 466,369 330,475 184,683 81,869
CASH FLOW DATA:
Used in operating activities................................ 455,741 56,576 24,958 68,615 51,756
Used in investing activities................................ 95,156 721,733 682,884 622,004 379,130
Provided by partners' capital transactions.................. 331,275 463,329 14,825 132,990 284,714
Provided by other financing activities...................... 266,348 386,432 287,552 998,137 95,750
December 31,
------------------------------------------------------------
2000(1) 1999 1998 1997 1996
---------- ---------- ---------- ---------- --------
BALANCE SHEET DATA:
Cash and cash equivalents(3)................................ $ 196,849 $ 173,921 $ 56,739 $ 464,154 $ 21,180
Total current assets........................................ 257,453 292,902 236,288 493,780 21,786
Total assets................................................ 702,276 3,781,459 2,670,025 2,149,053 942,913
Current liabilities......................................... 2,599,121 671,302 401,190 143,810 75,267
Long-term debt, including vendor financing.................. 448,051 2,055,422 1,640,165 1,297,254 226,694
Other long-term liabilities................................. 50,318 26,406 26,289 24,072 23,729
Redeemable preferred partnership interests.................. 358,968 303,089 302,037
Partners' capital (deficiency).............................. (2,395,214) 1,028,329 602,401 380,828 315,186
- ---------------
(1) The results of operations for 2000 includes a $2.9 billion charge for the
impairment of the Globalstar system.
(2) The results of operations for 1999 and 1998 include launch related costs of
$30 million and $17 million, respectively.