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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1996
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Commission file number 1-14180
LORAL SPACE & COMMUNICATIONS LTD.
600 Third Avenue
New York, New York 10016
Telephone: (212) 697-1105
Jurisdiction of incorporation: Bermuda
IRS identification number: 13-3867424
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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 or
such shorter period. The registrant has not been subject to such filing
requirements for the past 90 days.
No disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is contained herein, and will not be contained, to the best of registrant's
knowledge, in information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
At May 31, 1996, 183,592,308 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
$2,894,000,000.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Loral Space & Communications Ltd. ("Loral SpaceCom" or the "Company")
manages and is the largest equity owner of both Globalstar, L.P. ("Globalstar")
and Space Systems/Loral, Inc. ("SS/L") (together the "Operating Affiliates").
The Company will also act as a Globalstar service provider in Canada, Brazil and
Mexico, and is evaluating additional satellite-based service opportunities.
Loral SpaceCom was formed to effectuate the distribution of Loral Corporation's
("Loral") space and telecommunications businesses (the "Distribution") to
shareholders of Loral and holders of options to purchase Loral common stock
pursuant to a merger agreement (the "Merger") dated January 7, 1996 between
Loral and Lockheed Martin Corporation ("Lockheed Martin").
Globalstar and SS/L have established strategic alliances with world-class
telecommunications service providers and equipment manufacturers and with
leading aerospace companies. In addition, the Company has established a
relationship with Lockheed Martin through which the Company and its Operating
Affiliates will have certain rights to use intellectual property and access to
research and development, technical consulting and support services.
The Company, in partnership with established international
telecommunications companies, as well as local wireless or telephone companies,
will act as a Globalstar service provider in several key territories, including
Canada, Brazil and Mexico. The Company, together with QUALCOMM Incorporated
("Qualcomm"), also has the exclusive right to provide in-flight phone service
using Globalstar in the United States.
The Company also intends to pursue additional satellite-based
communications services opportunities, including (i) CyberStar, a proposed
high-speed satellite-delivered communications system designed to provide users
with communications services such as desktop video-conferencing, high-data rate
computer networking and data transmission; (ii) domestic and international
direct broadcast services; and (iii) telecommunications satellites for voice
telephony, video teleconferencing, transmission to television networks and cable
head-ends and remote news and sports feeds.
The Distribution of approximately 183.6 million shares of Loral SpaceCom
common stock was made on April 23, 1996 (the "Distribution Date"). In connection
with the Distribution, Lockheed Martin contributed $612 million in cash to the
Company. Of the amount contributed, $344 million represented the purchase of a
20% fully-diluted equity interest in the Company in the form of Loral SpaceCom
Series A Convertible Preferred Stock. Such stock is subject to certain voting
limitations, restrictions on transfer and standstill provisions. The Company has
invested its $612 million in marketable securities pending investment in the
Company's satellite telecommunications programs and opportunities. The Company
also holds $102.5 million principal amount of Globalstar Telecommunications
Limited's ("GTL") 6 1/2% Convertible Preferred Equivalent Obligations and a
minority non-controlling equity investment in K&F Industries, Inc. ("K&F").
GLOBALSTAR
Globalstar is building and preparing to launch and operate a worldwide,
low-earth orbit ("LEO") satellite-based digital telecommunications system (the
"Globalstar(TM) System"). The Globalstar System is designed to enable local
service providers to offer low-cost, high quality wireless voice telephony and
data services in virtually every populated area of the world. The Globalstar
System's worldwide coverage is designed to enable its service providers to
extend modern telecommunications services to people who currently lack basic
telephone service and to enhance wireless telecommunications in areas
underserved or not served by existing or future cellular systems, providing a
telecommunications solution in parts of the world where the build-out of
terrestrial systems cannot be economically justified.
The Company owns, directly and indirectly, 33.7% of Globalstar's
outstanding equity and has overall management responsibility for the design,
construction, deployment and operation of the Globalstar System. A
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portion of the Company's interest in Globalstar is held through GTL, a Bermuda
company traded on the Nasdaq National Market.
Globalstar users will make and receive calls through a variety of
Globalstar phones, including hand-held and vehicle-mounted units similar to
today's cellular telephones, fixed telephones similar either to phone booths or
ordinary wireline telephones, and data terminals and facsimile machines
(collectively, the "Globalstar Phones"). Dual-mode Globalstar Phones will
provide access to both the Globalstar System and the subscriber's land-based
cellular service. Each Globalstar Phone will communicate through one or more
satellites to a local Globalstar service provider's interconnection point (known
as a gateway) which will, in turn, connect into existing telecommunications
networks.
Globalstar is on schedule to begin launching satellites in the second half
of 1997, to commence commercial operations in the second half of 1998 (the
"In-Service Date") and to have its full constellation of 48 satellites, plus
eight in-orbit spare satellites, launched by the end of 1998 (the "Full
Constellation Date"). Significant regulatory and licensing milestones have been
achieved for the Globalstar System, including allocation of required frequencies
by the Federal Communications Commission ("FCC") and the 1995 World
Radiocommunication Conference ("WRC '95"). To date, Globalstar has raised or
received commitments for approximately $1.4 billion in equity, debt and vendor
financing, representing over 75% of the total external financing expected to be
required to complete the system and to achieve worldwide operations. Globalstar
intends to raise the balance of its external financing needs in the capital
markets and may also seek financing support from its strategic partners.
Full satellite critical design review has been successfully completed,
manufacturing of long-lead-time components of the Globalstar satellites has
commenced, engineering models are under construction and the non-recurring
design phase of the satellite contract is close to completion. Definitive
agreements have been reached with three launch providers for the launch of the
full Globalstar satellite constellation. These agreements provide for a variety
of launch options, giving Globalstar considerable launch flexibility.
Internationally, Globalstar's partners have been seeking alliances in their
assigned territories with service providers and have entered into such
agreements in certain territories. Globalstar believes these relationships with
in-country service providers may facilitate the granting of local regulatory
approval for operation of the Globalstar System and provide local marketing and
technical expertise.
The Globalstar System has been designed to address the substantial and
growing demand for telecommunications services worldwide, particularly in
developing countries. More than 3 billion people today live without residential
telephone service, many of them in rural areas where the cost of installing
wireline service is prohibitively high. Moreover, even where telephone
infrastructure is available in developing countries, outdated equipment often
leads to unreliable local service and limited international access. The number
of worldwide fixed phone lines has increased from 473 million to 647 million
since 1988 and is projected to increase to one billion by 2002. Nonetheless,
since 1988, waiting lists for fixed service have increased from 36 million to 46
million, resulting in an average waiting time before installation of
approximately one and a half years. Similarly, the cellular market has grown
from 4 million worldwide subscribers in 1988 to an estimated 87 million in 1995
and is projected to increase to 334 million by 2001. At that time, it is
projected that only 40% of the world's population will live in areas with
cellular coverage. The remaining 60% of the world population will have access to
wireless telephone service principally through satellite-based systems like the
Globalstar System. Globalstar's business plan requires penetration of only a
small fraction of these potential markets to achieve its objectives.
The Globalstar System has been designed with attributes which the Company
believes compare favorably to other proposed global mobile satellite service
systems including: (i) Globalstar's unique combination of code division multiple
access ("CDMA") technology and path diversity through multiple satellite
coverage will reduce call interruptions and signal blockage from obstructions
and will use satellite power more efficiently; (ii) a proven space segment
design without complex intersatellite links or on-board call processing and a
ground segment with flexible, low-cost gateways and competitively priced
Globalstar Phones; (iii) lower average wholesale prices than other proposed
mobile satellite service ("MSS") systems; and (iv) gateways installed in most
major countries, minimizing tail charges (i.e. amounts charged by carriers other
than the
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Globalstar service provider for connecting a Globalstar call through its
network), resulting in low costs for domestic and regional calls, which will
account for the vast majority of Globalstar's anticipated usage.
Globalstar is a development stage company and has no operating history. It
has incurred net losses from inception and expects such losses to continue until
commercial service operations have commenced. Globalstar will require
expenditures of significant funds for development, construction, testing and
deployment before commercialization. Globalstar does not expect to commence
operations before 1998 or to achieve positive cash flow before 1999. There can
be no assurance that Globalstar will achieve its objectives by the target dates.
In March and April, 1996, GTL sold a total of $310,000,000 of its 6 1/2%
Convertible Preferred Equivalent Obligations due 2006 in a Rule 144A offering,
of which the Company purchased $102,500,000 principal amount. These securities
are convertible into GTL common stock at any time after 60 days from the date of
original issuance and prior to maturity at $65.00 per share. GTL utilized the
proceeds of this offering to purchase Redeemable Preferred Partnership Interests
in Globalstar, the terms of which are generally similar to those of the
securities issued in the offering, and Globalstar will use such proceeds for the
design, construction and deployment of the Globalstar System. On June 21, 1996,
GTL filed a registration statement on Form S-3 to register its 6 1/2%
Convertible Preferred Equivalent Obligations and the shares of GTL common stock
issuable upon the conversion thereof.
THE GLOBALSTAR SYSTEM
The Globalstar System is comprised of the Space Segment, consisting of 48
satellites and eight in-orbit spare satellites, and the Ground Segment
consisting of two Satellite Operations Control Centers ("SOCCs") and two Ground
Operations Control Centers ("GOCCs"), Globalstar gateways in each region served,
and mobile and fixed Globalstar Phones. Globalstar will own and operate the
satellite constellation, the SOCCs and the GOCCs, as well as one gateway; the
remaining elements of the system will be owned by Globalstar's service providers
and their subscribers. The descriptions of the Globalstar System are based upon
current design and are subject to modification in light of future technical and
regulatory developments.
Globalstar's most important service will be voice telephony service, which
Globalstar expects to offer through telephone booth-like installations and other
fixed telephones located in areas without any landline or cellular telephone
coverage, and through hand-held and vehicle-mounted units, similar to existing
cellular telephones. Globalstar is also expected to offer paging, facsimile and
messaging services and position location capabilities, which may be integrated
with its voice services or marketed separately, as well as environmental and
asset monitoring from remote locations and other forms of data transmission.
VOICE SERVICES
The majority of the world's population does not have ready access to any of
the basic telephone services that are available to most residents of developed
nations. Public installations of one or more Globalstar Phones, configured as
telephone booths, powered by local generators or solar panels and connected to a
directional antenna aimed at the satellites overhead, would be important
resources for remote villages currently lacking basic telephone service.
Government officials, among other individuals, as well as commercial enterprises
in remote areas such as mining and logging operations, are expected to utilize
fixed Globalstar Phones which will operate like landline telephones, but will be
connected to a directional Globalstar antenna. Directional antennae also provide
for more efficient use of the system's capacity.
In certain regions, land-based cellular systems cannot be justified
economically because of their population density or geographic characteristics.
As a satellite-based system with worldwide coverage, Globalstar can efficiently
offer both hand-held and vehicle-mounted mobile service in these areas through
its single-mode mobile Globalstar Phones. These units are expected to be similar
in size, function and cost to today's full-featured cellular telephones. Unlike
any cellular telephone in existence today, however, these units are designed to
have the ability to operate (both for making and receiving calls) in virtually
every inhabited area of the world where Globalstar service is authorized.
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The Globalstar mobile telephone will be equipped with an omnidirectional
antenna, similar to a cellular telephone antenna. Each mobile telephone is
designed to communicate with all satellites in view and will have the built-in
signal processing intelligence to constantly seek out and select the strongest
signal transmitted from overhead, combining the signals received to ensure
maximum service quality. Further, Globalstar Phones will automatically vary
their power output as necessary to maintain call quality and connectivity.
Current cellular system subscribers who need a mobile telephone that also
works when they travel to areas without compatible cellular coverage (or that
have no cellular coverage at all) will be offered Globalstar service through
dual-mode handsets and vehicle-mounted units. A dual-mode telephone will also
permit the user to access Globalstar service when cellular access is temporarily
blocked by interference, terrain or over-capacity. Like Globalstar's single-mode
mobile telephones, dual-mode telephones are designed to enable the user to make
and receive calls through a unique access number anywhere in the world where
service is authorized.
Dual-mode Globalstar Phones can be programmed by the service provider to
automatically utilize the chosen land-based cellular service whenever it is
available and to otherwise process the call through Globalstar; they can also be
programmed for manual selection between Globalstar and the land-based cellular
system. Dual-mode Globalstar Phones are being developed for the most
widely-based conventional cellular modulation. The dual-mode pairs are expected
to include: Globalstar/CDMA, Globalstar/Advanced Mobile Phone Systems (AMPS) and
Globalstar/Global System for Mobile Communications (GSM).
Based on terrestrial simulations of the Globalstar System, Globalstar
expects that its digital voice services will have a clarity and quality better
than those of analog land-based cellular systems currently in use. Moreover, the
system has been designed to minimize call interruptions ("dropped calls")
resulting from movements on the part of the user or the satellites. Nonetheless,
obstacles such as buildings, trees or mountainous terrain may degrade service
quality, as they would in the case of terrestrial cellular systems, and service
may not be available in the core of high-rise buildings. Globalstar is expected
to offer the full range of voice services provided by modern land-based
telephone networks, including options such as call forwarding, conferencing,
call waiting, call transfer and reverse charging (collect calls). Globalstar's
voice services will be digital in nature and therefore difficult for
unauthorized listeners to intercept and decode and as a result will be more
secure than those offered by analog systems such as existing cellular
telephones.
By planning for volume production and utilizing commercially available
off-the-shelf components where possible, Globalstar expects that its Globalstar
Phones will be priced comparably to current state-of-the-art digital cellular
telephones. Qualcomm has agreed to design and manufacture a number of versions
of Globalstar Phones. It has recently granted a license to Orbitel Mobile
Communications Ltd., an affiliate of L.M. Ericsson, to manufacture Globalstar
Phones and has also agreed to license at commercially reasonable royalty rates
at least two other qualified Globalstar Phone manufacturers.
OTHER SERVICES
Messaging and Paging Services. In addition to supporting voice services,
the Globalstar System is also expected to function as a worldwide paging and
alphanumeric messaging service. Hand-held or vehicle-mounted Globalstar Phones
are currently being designed with a built-in paging and messaging feature that
allows the user to receive a page or a short alphanumeric message while the unit
is in a very-low-power "quiet listening only" mode. Separate Globalstar
messaging and paging units may also be developed by Globalstar or by third party
vendors. The Globalstar System can readily support these functions without
taxing system resources since, as compared with voice services, messages and
pages have a relatively low data content and do not require instantaneous,
two-way transmission.
Remote Monitoring. Globalstar data terminals integrated with automatic
sensing equipment of various kinds can provide a continuous stream of valuable
information concerning natural events such as weather conditions, seismic shifts
and forest fires, as well as the condition of remote assets, such as oil and gas
pipelines and electric utility transmission lines.
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Facsimile and Other Data Services. The Globalstar System is expected to
support fax traffic, as well as transmissions of digital computer data.
Position Location. Frequent, accurate readings of position location for
large numbers of vehicles is critical information for the efficient management
of fleets of trucks and railcars. Qualcomm's OmniTRACS system, which relays
position location information to a central location and offers messaging
capabilities, will be offered to Globalstar service providers to address this
need.
GLOBALSTAR SYSTEM CAPACITY
The estimated capacity of the Globalstar System is anticipated to be in the
range of approximately 800 million to 1 billion call minutes per month assuming
equal fixed and mobile usage. However, Globalstar's total effective system
capacity will depend on a number of variables. The number of call minutes per
month the system can support will depend primarily on (i) the total bandwidth
available to CDMA MSS systems, (ii) the number of systems sharing that
bandwidth, (iii) the total number of subscribers, (iv) the type of Globalstar
Phones (fixed or mobile) they use and (v) the level of average system
availability required. Capacity will also depend upon a number of other
variables, including (i) the peak hour system utilization pattern, (ii) average
call length and (iii) the distribution of Globalstar Phones in use over the
surface of the Earth.
COMPETITION
Competition in the telecommunications industry is intense, fueled by rapid
and continuous technological advances and alliances between industry
participants seeking to implement such advances on an international scale.
Although no present participant is currently providing the same global personal
telecommunications service to be provided by Globalstar, it is anticipated that
one or more additional competing MSS systems will be launched and that the
success, or anticipated success, of Globalstar and its direct competitors could
attract other entrants. Although not anticipated, if any of Globalstar's
competitors succeed in marketing and deploying their systems substantially
earlier than Globalstar, Globalstar's ability to compete in areas served by such
competitors may be adversely affected.
Globalstar's most direct competitors are: the two other FCC-licensed MSS
applicants, Motorola, Inc.'s ("Motorola") Iridium system and TRW, Inc.'s ("TRW")
Odyssey system; and I-CO Global Communication's ICO system. ICO was not an
applicant or a licensee before the FCC, and is seeking to operate in a different
frequency band not available for use by MSS systems. A number of other
satellite-based telecommunications systems have been proposed using
geosynchronous satellites. Because some of these proposed systems involve
relatively simple ground control requirements and are expected to deploy no more
than two satellites, they may succeed in deploying and marketing their systems
before Globalstar. In addition, coordination of standards among regional
geostationary systems could enable these systems to provide worldwide service to
their subscriber base, thereby increasing the competition to Globalstar.
It is expected that as land-based telecommunications service expands to
regions currently not served by wireline or cellular services, demand for
Globalstar service in those regions may be reduced. If such systems are
constructed at a more rapid rate than that anticipated by Globalstar, the demand
for Globalstar service may be reduced at rates higher than those assumed by
Globalstar. Globalstar may also face competition in the future from companies
using new technologies and new satellite systems. New technology could render
Globalstar obsolete or less competitive by satisfying consumer demand in
alternative ways, or through the introduction of incompatible telecommunications
standards. A number of these new technologies, even if they are not ultimately
successful, could have an adverse effect on Globalstar as a result of their
initial marketing efforts.
REGULATION
United States FCC Regulation. On January 31, 1995, the FCC authorized the
construction, launch and operation of the Globalstar System and assigned bands
of the radio frequency spectrum for the user links (the "FCC License"). This
license is currently held by L/Q Licensee, Inc. ("L/Q Licensee"), a subsidiary
of the Company which has agreed to use the FCC License exclusively for the
benefit of Globalstar. The FCC is the
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United States agency with jurisdiction over commercial uses of the radio
spectrum. All commercial MSS systems such as Globalstar must obtain an
authorization from the FCC to construct and launch their satellites and to
operate the satellites to provide MSS services in assigned spectrum segments in
the United States. The FCC may also adopt from time to time rules applicable to
MSS systems, which may impose constraints on the operation of Globalstar
satellites, subscriber terminals and/or gateway earth stations.
The Globalstar System requires regulatory authorization for two pairs of
frequencies: user links (from the user to the satellites, and vice versa) and
feeder links (from the gateways to the satellites, and vice versa). The FCC
License grants authority to construct, launch and operate the Globalstar System
with user links in the 1 and 2 GHz bands, consistent with the United States band
plan for MSS Above 1 GHz Systems. At the time it granted the FCC License in
January of 1995, the FCC deferred action on feeder link assignments until after
the WRC '95 (which, in October of that year, allocated such frequencies
internationally), but granted authority to construct the system at Globalstar's
own risk using the feeder link bands originally requested. L/Q Licensee has
applied to the FCC for feeder links in the 5 GHz and 7 GHz bands, consistent
with the international allocation for non-geostationery MSS feeder links adopted
at WRC '95, and has filed a request for an appropriate modification of its
interim construction authority.
The authorization granted by the FCC to LQP for Globalstar requires that
construction, launch and operation of the system must be accomplished in
accordance with the technical specifications set forth in the Globalstar FCC
application, as amended, and consistent with the FCC's rules unless specifically
waived. During the process of constructing the Globalstar System, there may be
certain modifications to the design set forth in the application on file with
the FCC which may require filing an application to modify the authorization,
such as the application for feeder link assignments. There can be no assurance
that the FCC will grant these requests or do so in a timely manner. Denial of
such requests or delay in grant of such requests could adversely affect the
performance of the Globalstar System or result in schedule delays or cost
increases. In addition, use and operation of Globalstar's feeder and user links
are subject to FCC regulations regarding interference protection and
coordination with other systems which may have an adverse effect on the
usefuless of such frequencies.
LQP's MSS application was one of six considered concurrently by the FCC. On
January 31, 1995, Motorola and TRW also were granted FCC licenses for MSS above
1 GHz systems. The applications of three other applicants were deferred and
these three applicants were given until January 1996 to establish that they are
financially qualified to receive an MSS license. In January 1996, at the request
of two of the deferred applicants, the FCC granted an extension of the deadline
for demonstrating financial qualification.
The FCC License only authorizes the construction, launch and operation of
the Globalstar System's satellite constellation. Separate authorizations must be
obtained from the FCC for operation of gateways and Globalstar Phones in the
United States. Globalstar's authorized service provider, AirTouch Communications
("AirTouch"), Globalstar's service provider in the United States, will apply for
the required regulatory authorizations for gateways and Globalstar Phones, and
the manufacturer will apply for equipment authorization for Globalstar Phones.
Failure to obtain, or delay in obtaining, such licenses would adversely affect
the implementation of the Globalstar System. Similar procedures are expected to
apply internationally.
Globalstar proposes to operate on an international basis, but the FCC
License only authorizes construction and launch of the system for operation in
the United States. Even though the Globalstar System is licensed to operate in
the United States by the FCC, in order to provide MSS service in other
countries, Globalstar or its service providers must obtain the required
regulatory authorizations in those countries. There can be no assurance that the
required regulatory authorizations will be obtained in any other country in
which Globalstar proposes to operate, or that they will be obtained in a timely
manner, or that, if granted, they will authorize MSS service on the same terms
as the U.S. license. Failure or delay in obtaining licenses for the Globalstar
System in other countries or grant of licenses on substantially different terms
and conditions would have an adverse effect on Globalstar.
In May 1996, the FCC initiated a notice-and-comment rulemaking to adopt
rules governing procedures to authorize service in the United States by
satellite systems licensed by foreign countries. If a foreign satellite
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system were authorized to operate in the United States on frequencies assigned
to Globalstar, additional coordination obligations may be required.
In its order (the "Order") adopting rules and policies for MSS above 1 GHz,
the FCC stated that an MSS above 1 GHz license would impose implementation
milestones on licensed systems. If these milestones are not met, the FCC has
stated that the license would be deemed null and void. Globalstar's current
estimated implementation schedule falls within the milestones adopted by the
FCC. Moreover, the milestone schedule will not become effective until Globalstar
is granted an unconditional authorization which includes an assignment of feeder
link frequencies. Delays in construction, launch or commencing operations of the
Globalstar System could result in loss of the FCC License. The FCC License will
be effective for 10 years from the date on which the licensee certifies to the
FCC that its initial satellite has been successfully placed into orbit and that
the operations of that satellite conform to the terms and conditions of its MSS
license. While a licensee may apply to replace its MSS license to continue
operations beyond the initial 10-year license term, there can be no assurance
that, if applied for, such a replacement license would be granted.
The rules and policies adopted for MSS above 1 GHz in the Order have been
challenged in a judicial appeal and were the subject of petitions for
reconsideration at the FCC. On February 15, 1996, the FCC released an order
resolving petitions for reconsideration of the Order. Three petitions seeking
further reconsideration or clarification of the Order have been filed. Judicial
appeals regarding the FCC's decision on the petitions for reconsideration may
also be filed. In the event that the FCC were to be judicially required to
reconsider its licensing procedures as a result of the pending judicial appeal,
or an appeal of the orders on reconsideration, there is a risk that the FCC
would reprocess the MSS applicants and adopt a different licensing procedure.
Under these circumstances, there can be no assurance that the FCC would not use
an auction procedure to award licenses. If the FCC were to use an auction
procedure, there can be no assurance that Globalstar or its affiliates would be
willing or able to outbid other applicants to obtain a license for the spectrum
needed to operate the Globalstar System. In addition, even if Globalstar or its
affiliates were successful in obtaining an MSS license in the spectrum auction,
the increased cost and expenses incurred in bidding for the license would
adversely affect Globalstar.
Applicable statutes and regulations permit a judicial appeal of the grant
of the FCC License in order to seek reversal of the FCC's decision to grant the
license. Petitions for reconsideration and an application for review of the
order granting the FCC License were filed and have been denied. A judicial
appeal of the order resolving these petitions and application is possible. There
can be no assurance that such appeals will not be filed, or, if filed, that such
appeals will not be granted. Furthermore, there can be no assurance that if such
appeals are filed, the court will take timely action. If such an appeal were
successful, there can be no assurance that on remand the FCC would not decide to
deny the application for the Globalstar System, or that on remand the FCC would
take action on the application in a timely manner.
UNITED STATES INTERNATIONAL TRAFFIC IN ARMS REGULATIONS
The United States International Traffic in Arms Regulations under the
United States Arms Export Control Act authorize the President of the United
States to control the export and import of articles and services that can be
used in the production of arms. Among other things, these regulations limit the
ability to export certain articles and related technical data to certain
nations. The scope of these regulations is very broad and extends to certain
spacecraft, including certain satellites. Certain information involved in the
performance of Globalstar's operations will fall within the scope of these
regulations. As a result, Globalstar may have to restrict access to that
information.
EXPORT REGULATION
From time to time, Globalstar requires import licenses and general
destination export licenses to receive and deliver components of the Globalstar
System.
The United States Department of Commerce has imposed restrictions on
certain transfer of technology, including rocket technology, to China and
certain republics of the former Soviet Union. Because Globalstar's launch
strategy contemplates using Chinese and Ukrainian launch providers with launch
sites located in China
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and Kazakhstan, special export licenses are required to be obtained by SS/L in
connection with these launches.
While Globalstar and SS/L have received informal confirmations from various
governmental officials that all necessary permits should be forthcoming, and
Globalstar has no reason to believe such permits will not be obtained, there can
be no assurance that such export licenses will be granted, or, once granted,
that the United States will not impose additional restrictions or trade
sanctions against China or republics of the former Soviet Union in the future
that would adversely affect the planned launches of the Globalstar satellite
constellation.
The Export Administration Act and the regulations thereunder control the
export and re-export of United States-origin technology and commodities capable
of both civilian and military applications (so-called "dual use" items). These
regulations may prohibit or limit export and re-export of certain
telecommunications equipment and related technology which are not affected by
the International Traffic in Arms Regulations by requiring a license from the
Department of Commerce before controlled items may be exported or re-exported to
certain destinations. Although these regulations should not affect Globalstar's
ability to deploy the satellite constellation, the export or re-export of
Globalstar Phones, as well as gateways and related equipment and technical data,
may be subject to these regulations, if such equipment is manufactured in the
United States and then exported or re-exported. These regulations may also
affect the export, from one country outside the United States to another, of
United States-origin technical data or the direct products of such technical
data. As a result, Globalstar may not be able to ensure the unrestricted
availability of such equipment or technical data to certain customers and
suppliers. The Company does not believe that these regulations will have a
material adverse effect on Globalstar's operations.
INTERNATIONAL COORDINATION
The Globalstar System proposes to operate in frequencies which were
allocated on an international basis for MSS user links at World Administrative
Radio Conference '92 and for MSS feeder links at WRC '95. Globalstar is required
to engage in international coordination procedures with other proposed MSS
systems under the aegis of the International Telecommunications Union (the
"ITU").
Because Globalstar's proposed feeder link bands are allocated on an
international basis for low-earth orbit ("LEO") MSS feeder links, foreign LEO
MSS systems may also seek to use these bands for MSS feeder links. ICO has filed
with the ITU its plans to use the same feeder link spectrum as Globalstar.
Globalstar will be required to coordinate the use of its feeder links with ICO
and any other foreign system which has similar plans. Both a Russian and a
Brazilian low-earth orbit MSS system have filed with the ITU their intention to
use the same feeder link spectrum as Globalstar. There can be no assurance that
such coordination will not adversely affect the use of these bands by
Globalstar.
Pursuant to the Intelsat and Inmarsat treaties, international satellite
operators are required to demonstrate that they will not cause economic or
technical harm to Inmarsat or Intelsat and to coordinate with Intelsat and
Inmarsat under obligations imposed on United States satellite systems by
international treaties. Globalstar will engage in technical coordination of its
feeder downlinks with Intelsat, which uses the same frequency band for an
uplink. Globalstar believes that the proposed provision of competitive MSS
service by ICO, in which Inmarsat is a significant investor, may effectively
eliminate the requirement to demonstrate lack of economic harm. Globalstar
expects such coordination to be successful.
EUROPEAN UNION
European Union competition law proscribes agreements that have the effect
of appreciably restricting or distorting competition in the European Union.
Globalstar has received an inquiry from the Commission of the European Union
requesting information regarding its activities. A violation of European Union
competition law could subject Globalstar to fines or enforcement actions that
could result in expenses to Globalstar, delay the commencement of Globalstar
service in western Europe, and/or depending on the circumstances, adversely
affect Globalstar's contractual rights vis-a-vis its European strategic
partners. In addition, the Commission has proposed legislation at the European
Union level which, if adopted, would give the Commission broad regulatory
authority over "satellite PCS" systems such as Globalstar. The Commission's
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investigation and proposed legislation are in their preliminary stages, and the
Company is unable to predict what effect, if any, the results of such
investigation or proposed legislation may have on Globalstar's operations.
REGULATION OF SERVICE PROVIDERS
In order to operate gateway earth stations, including the user uplink
frequency, the Globalstar service provider in each country will be required to
obtain a license from that country's telecommunications authority. In addition,
the Globalstar service provider will need to enter into appropriate
interconnection and financial settlement agreements with local and interexchange
telecommunications providers. Globalstar intends to use in-country service
providers to facilitate the obtaining of such licenses and agreements.
Although many countries have moved to privatize the provision of
telecommunications service and to permit competition in the provision of such
service, some countries continue to require that all telecommunications service
be provided by a government-owned entity. While service providers have been
selected, in part, based upon their perceived qualifications to obtain the
requisite local approvals, there can be no assurance that they will be
successful in doing so. If a service provider does not obtain a license,
Globalstar will have the right to substitute another service provider to attempt
to obtain such a license, but if no service provider in a territory is
successful in obtaining the requisite local authorization, Globalstar service
will not be available in such territory. In that event, depending upon
geographical and market considerations, Globalstar may or may not have the
ability to redirect the system capacity that such territories would have
otherwise used to serve territories in which service is authorized.
SPACE SYSTEMS/LORAL, INC.
SS/L is a worldwide leader in the design, manufacture and systems
integration of telecommunications, weather and direct broadcast satellites. The
Company believes that SS/L's technical expertise, advanced manufacturing and
testing facilities and long-term customer relationships have enabled SS/L to
compete effectively in the commercial space systems marketplace. The Company has
a 32.7% beneficial equity interest in SS/L, and receives a management fee from
SS/L ranging from 0.5% to 1% of revenue, as defined. See "Item 13 -- Certain
Relationships and Related Transactions."
SPACE SYSTEMS ALLIANCE
In 1991, SS/L entered into a strategic alliance with three major European
space systems manufacturers: Aerospatiale Societe Nationale Industrielle
("Aerospatiale"), Alcatel Espace ("Alcatel") and Finmeccanica S.p.A.
("Finmeccanica") (the "Alliance Partners"). In 1992, Daimler-Benz Aerospace AG
("DASA") joined the Alliance Partners. The Alliance Partners hold an aggregate
of 49% of the common stock of SS/L. With certain exceptions, SS/L and the
Alliance Partners have agreed generally to bid and operate as a team on
satellite programs worldwide, to coordinate research and development activities
and to share technological resources. SS/L believes that this strategic alliance
enhances its technological and manufacturing capabilities and marketing
resources, and affords it access to international government and commercial
customers more effectively than its U.S.-based competitors.
PROGRAMS
Some of SS/L's current programs include:
Telecommunications
Telstar. This new generation telecommunications satellite to be built for
AT&T will provide service to the United States, the Caribbean, Mexico and
Southern Canada.
Apstar-IIR. SS/L is building a telecommunications satellite for a
consortium comprised of Chinese state-owned companies and commercial firms based
in Taiwan, Thailand, Macau and Singapore, that will provide regional and
international telecommunications services to the Asia-Pacific region. Once
operational, the Apstar-IIR will provide regional voice, video and data
services.
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Mabuhay. SS/L is currently under contract with the Mabuhay Philippines
Satellite Corp. to build the Mabuhay satellite, a telecommunications satellite
that will provide commercial telephone, broadcasting and data services in the
Philippines and the South China region.
PAS-7 and PAS-8. SS/L has entered into an agreement with PanAmSat for the
PAS-7 and PAS-8 spacecraft which will be used for various applications as part
of PanAmSat's basic constellation.
Direct Broadcast Satellites (DBS)
SS/L is currently building DBS satellites for MCI/News Corp. and Tempo
Satellite, Inc. to serve the U.S. markets and for PanAmSat to serve the Central
and South American markets.
Globalstar
SS/L is the prime contractor for the design and manufacture of Globalstar's
56-satellite low-earth orbit constellation.
Weather and Environment
GOES Weather Satellites. SS/L is the prime contractor for NOAA's next
generation of advanced weather and environmental GOES satellites. These
satellites will provide 24-hour monitoring and measurement of dynamic weather
events in real time. The first satellite in the five-member series, GOES-8, was
launched in April 1994 and the second, GOES-9 in May 1995.
MTSAT. In February 1995, Japan's Ministry of Transport awarded a contract
for the Multifunctional Transport Satellite (MTSAT) to SS/L. This advanced
geostationary satellite will provide enhancement of communication and position
information to Japan's air traffic capability. MTSAT will also provide weather
observation and meteorological data transmission for the region. In addition to
its advanced imaging capability, MTSAT is a complete data collection and
dissemination system. MTSAT will broadcast processed data and imagery to users
through the Asia-Pacific region, including airports, weather forecasting
agencies and ships at sea.
International Space Station Alpha
SS/L has contracted with the Rocketdyne Division of Rockwell International
to develop flight equipment for International Space Station Alpha's on-board
electrical power systems. The program includes the design, development and
production of nickel-hydrogen batteries, power control and power conditioning
electronics equipment, and consolidated procurement of electronic parts for the
entire power system.
Payload Subcontracts
SS/L has leveraged its alliance relationship with Aerospatiale to enter the
payload business in support of Aerospatiale's prime contracts from the Eutelsat,
Thaicom and Sirius programs.
SS/L has been a subcontrator to NASA, supporting lunar, Mars and deep space
programs. Teamed with Aerospatiale, SS/L provided the payload and subsystems for
the Arab Satellite Organization ("Arabsat") regional communications and
television broadcast system. SS/L also provides components as a subcontractor to
other space systems manufacturers for defense and other applications.
CUSTOMERS
Sales to the U.S. government represented 10%, 23% and 23% of revenues from
contracts for the years ended March 31, 1996, 1995 and 1994, respectively. Sales
to foreign customers, primarily in Asia, represented 27%, 15% and 31% of
revenues from contracts for the years ended March 31, 1996, 1995 and 1994,
respectively. In 1996, two commercial customers represented 30% and 13% of
revenues from contracts. In 1995, four commercial customers represented 23%,
20%, 15% and 13% of revenues from contracts. Two commercial customers
represented 35% and 29% of revenues from contracts in 1994.
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COMPETITION
Competition in the commercial satellite industry is intense. Among SS/L's
significant competitors are Hughes Electronics Corporation ("Hughes"), Lockheed
Martin, Matra Marconi and TRW, many of which have significantly greater
financial, manufacturing, marketing and technical resources than those of SS/L.
To the extent these companies offer products and services that are more
sophisticated, cost-effective, efficient or reliable than those now offered or
to be offered by SS/L, they could have a material adverse effect on SS/L.
Further, SS/L's telecommunications satellites face competition from alternative
technologies, including fiber optics cable technology, which could reduce demand
for the services of SS/L's customers and thus for SS/L's telecommunications
products.
SATELLITE CONTRACTS
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. Risk of loss due to
increased cost, therefore, is borne by SS/L. Under fixed-price contracts
requiring work with lead times in excess of six months prior to delivery, SS/L
may receive progress payments, generally in an amount equal to between 80% and
95% of monthly costs, or it may receive milestone payments upon the occurrence
of certain program achievements. Under a cost-plus-award-fee contract, the
contractor recovers its actual 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 in terms of the criteria stated in
the contract.
Many of SS/L's contracts and subcontracts provide that such contracts and
subcontracts may be terminated at will by the customer or the prime contractor,
respectively. In the event of a termination at will, SS/L is normally entitled
to recognize the purchase price for delivered items, reimbursement for allowable
costs for work in process and an allowance for profit thereon or adjustment for
loss if completion of performance would have resulted in a loss. While SS/L has
not experienced material contract terminations in the past, no assurance can be
given that such terminations will not occur in the future.
REGULATION
SS/L's business activities are regulated by various agencies and
departments of the U.S. government. Operation of commercial communications
satellites requires licenses from the FCC and frequently requires the approval
of international regulatory authorities as well. Private land remote sensing
satellites require a license from the Department of Commerce. Exports of
space-related products, services and technical information frequently require
licenses from the Department of State or the Department of Commerce. There is no
assurance that SS/L will be able to obtain necessary licenses or regulatory
approvals. The inability of SS/L to secure any necessary licenses or approvals
could have a material adverse effect on its business. In addition, certain of
the products or components produced or used by SS/L may become subject to
limitations on production or deployment as a result of international agreements
or treaties to which the United States is, or may become, a party.
In addition, since the Alliance Partners are owned and controlled by
foreign entities, two of which are foreign governments, SS/L is subject to
compliance with certain regulations and to government oversight to which it
would not be subject if its stockholders were all U.S. citizens. SS/L has
established certain procedures to comply with various defense related
regulations, to negate the risks of foreign control, ownership and influence, to
ensure that it will be able to maintain the security clearances necessary for
continued work on classified programs and to protect classified information and
export-controlled technical data. Specifically, SS/L and the Alliance Partners
have entered into a memorandum of agreement with the DOD with respect to
security matters. Pursuant to such agreement, certain protections have been
established to control the actions of SS/L and the Alliance Partners, including,
among others: (a) policies and practices by SS/L to safeguard classified
information and export-controlled technical data; (b) exclusion of the Alliance
Partners and their agents and representatives from access to classified
information and export-controlled technical data entrusted
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to SS/L, except as may be permitted by law; and (c) establishment of a permanent
Government Security Committee, composed of seven resident United States citizens
who hold (or will obtain) personnel security clearances, which reviews and
monitors the adequacy and implementation of SS/L's security procedures to ensure
that it maintains policies, practices and procedures adequate to safeguard the
classified information and export-controlled technical data entrusted to it.
The memorandum of agreement provides that the Government Security Committee
will hold periodic meetings and report annually to the DIS Cognizant Security
Office as to the operation of SS/L's security procedures. In addition, the
Government Security Committee is charged with monitoring compliance with the
International Traffic in Arms Regulations and the Export Administration
Regulations. The memorandum of agreement also contemplates that SS/L and the
Alliance Partners will create, with the approval of the Department of Defense,
formal arrangements to ensure proper record keeping by SS/L and monitoring by
the Government Security Committee with regard to visits between SS/L personnel
and personnel of the Alliance Partners, who are not directors, officers,
employees or resident contractors of SS/L, at a cleared facility or dealing with
the disclosure of classified information or export-controlled technical data.
The nominees of the Company on SS/L's Board of Directors have the sole
responsibility for the supervision, implementation and performance of: (a)
classified work by SS/L under all contracts and agreements with the U.S.
government, (b) research programs by SS/L for the U.S. government to the extent
that any classified information is utilized or produced therefrom, (c)
resolutions of SS/L's Board of Directors under the Defense Industrial Security
Program to exclude non-U.S. persons and the Alliance Partners and their
representatives from access to classified data and export-controlled technical
data in the custody of SS/L and (d) all other United States national security
policy matters and matters affecting the safeguarding of classified information.
All of SS/L's major programs and proposed ventures are commercial rather
than military or intelligence related, so that classified work is not a material
part of SS/L's business.
RESEARCH AND DEVELOPMENT
SS/L's internally-funded research and development expenditures were
approximately $11.2 million, $9.5 million and $6.7 million, respectively, for
the fiscal years ended March 31, 1996, 1995 and 1994.
BACKLOG
As of March 31, 1996 and 1995, SS/L's funded backlog was approximately $1.2
billion. Backlog consists of aggregate contract values for firm product orders,
excluding the portion previously included in operating revenues on the basis of
percentage of completion accounting and priced options not awarded.
Approximately $902 million of total backlog as of March 31, 1996 is currently
scheduled to be performed within the next 12 months.
EXPORT SALES
Export sales, principally to Asia, were $301 million, $98 million and $186
million for the years ended March 31, 1996, 1995 and 1994, respectively.
RAW MATERIALS
SS/L generally obtains the raw materials required for use in satellite
construction, such as aluminum, graphite, resins and epoxies, from distributors
of such materials and occasionally directly from suppliers. SS/L is not
dependent on any one source for supply of such materials and has not in the
past, and does not expect in the future to have, difficulty in obtaining such
materials.
K&F INDUSTRIES, INC.
K&F, through its wholly owned subsidiary, Aircraft Braking Systems
Corporation, is one of the world's leading manufacturers of aircraft wheels,
brakes and anti-skid systems for commercial transport, general
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aviation and military aircraft. K&F sells its products to virtually all major
airframe manufacturers and most commercial airlines and to the United States and
certain foreign governments. In addition, K&F through its wholly owned
subsidiary, Engineered Fabrics Corporation ("Engineered Fabrics"), is one of the
leading worldwide manufacturer of aircraft fuel tanks, supplying approximately
90% of the worldwide general aviation and commercial transport market and nearly
one-half of the domestic military market. Engineered Fabrics also manufactures
and sells iceguards and specialty coated fabrics used for storage, shipping,
environmental and rescue applications for commercial and military uses. Some of
K&F's customers include American Airlines, Delta Air Lines, Alitalia, Lufthansa,
Swissair, Northwest Airlines, United Airlines and USAir. Its products are also
used in a number of military aircraft, including the F-14, F-16, F-18 and the
C-130. Backlog at March 31, 1996 and 1995 amounted to approximately $150.5
million and $151.4 million, respectively. Backlog consists of firm orders for
K&F's products which have not been shipped. Approximately 84% of total backlog
at March 31, 1996 is expected to be shipped during the fiscal year ended March
31, 1997, with the balance expected to be shipped over the subsequent two-year
period.
PATENTS AND PROPRIETARY RIGHTS
In connection with the Globalstar System, Globalstar's and SS/L's design
and development efforts have yielded five patents issued and 22 patents pending
in the United States, as well as one patent issued and 91 patents pending
internationally for various aspects of communication satellite system design and
implementation of CDMA technology relating to the Globalstar System. Qualcomm
has obtained 42 issued patents and 179 patents pending in the United States
applicable to Qualcomm's implementation of CDMA. The issued patents cover, among
other things, Globalstar's process of combining signals received from multiple
satellites to improve the signal received and minimize call fading.
SS/L relies, in part, on patents, trade secrets and know-how to develop and
maintain its competitive position. It holds 119 patents in the U.S. and 123
patents abroad and has applications for 39 patents pending in the U.S. and 122
patents pending abroad. SS/L holds patents 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 1996 and 2015.
There can be no assurance that any of the pending patent applications by
Globalstar or SS/L will be issued. Moreover, because the U.S. patent application
process is confidential, there can be no assurance that third parties, including
competitors of Globalstar and SS/L, do not have patents pending that could
result in issued patents which Globalstar or SS/L would infringe.
PERSONNEL
As of May 31, 1996, the Company had approximately 50 full-time employees,
none of whom is subject to any collective bargaining agreement. The Company's
management considers its relations with its employees to be good.
As of March 31, 1996, Globalstar had approximately 100 full-time employees,
none of whom is subject to any collective bargaining agreement. Globalstar's
management considers its relations with its employees to be good.
As of March 31, 1996, SS/L had approximately 2,400 full-time employees none
of whom is subject to any collective bargaining agreement. SS/L's management
considers its relations with its employees to be good.
CERTAIN FACTORS THAT MAY EFFECT 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, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but are
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not limited to, various filings made by the Company with the Securities and
Exchange Commission, press releases or oral statements made by or with the
approval of an authorized executive officer of the Company. Actual results could
differ materially from those projected or suggested in any forward-looking
statements as a result of a wide variety of factors and conditions, including,
but not limited to, the factors summarized below. These factors and other
factors and conditions have been described in the section of the Company's
Information Statement, dated April 12, 1996, entitled, "Risk Factors" and other
documents the Company files from time to time with the Securities and Exchange
Commission including the Company's annual reports on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K, and the shareholder is
specifically referred to these documents with regard to the factors and
conditions that may affect future results.
COMPANY
Conflicts of Interest. Shareholders and partners of the Operating
Affiliates, and shareholders of the Company are principal suppliers to,
subcontractors for, and customers of or service providers for the Operating
Affiliates. In addition, SS/L is the prime contractor for Globalstar's satellite
constellation and SS/L and its subcontractors have provided vendor financing to
Globalstar in connection therewith. As a result, conflicts of interest may arise
with respect to such contracts and arrangements. The Globalstar partnership
agreement and the SS/L stockholders agreement provide for certain procedures
relating to the approval of agreements entered into by Globalstar and its
partners, and by SS/L and its stockholders.
Limited Control over Operating Affiliates. While the Company manages the
Operating Affiliates, the Globalstar partnership agreement and the SS/L
stockholders agreement limit the ability of the Company to take certain actions
without the approval of, in the case of Globalstar, at least one Independent
Representative (as defined) to the General Partners' Committee (as defined) or,
in the case of SS/L, at least two and in some cases all, of the directors
appointed by the Alliance Partners. As a result, the Company may be unable to
cause the Operating Affiliates to take actions which the Company might deem to
be in its best interests.
Additional Financing Requirements. Although the Company commenced
operations with $612 million in cash, the financing requirements of all of the
various opportunities it is currently considering, if funded solely by the
Company, when combined with the obligations that the Company may incur to fund
certain SS/L stockholders puts, may exceed such amount. The extent of such total
capital requirements cannot be quantified at this time since many of these
opportunities are at an early stage of consideration. The financial requirements
to satisfy any SS/L stockholder puts if validly exercised will depend upon the
fair market value of SS/L and the decision of such stockholders regarding the
exercise of their put rights. In order to fully fund all such projects and to
provide for any such contingencies, the Company may need to issue debt or equity
securities or engage in other financing activities, which may include offerings
of debt or equity securities by its Operating Affiliates. Any such issuance of
equity securities by the Operating Affiliates may result in a dilution of the
Company's equity interest to the extent the Company does not participate
therein. There can be no assurance that such financing will be available on
favorable terms or on a timely basis, if at all. A shortfall in meeting such
capital needs would prevent completion of some or all of the projects currently
being pursued by the Company.
Future FCC Proceedings. The Company has several applications to construct
and operate satellite systems pending before the FCC, including its application
for CyberStar. There can be no assurance that any of these licenses will be
granted. Several competing FCC applicants have filed objections to the financial
qualification of Loral in these proceedings, arguing that the current assets of
Loral were inadequate to satisfy the FCC financial requirements with respect to
all systems, including Globalstar, for which Loral had submitted applications.
The Company, which succeeded Loral as the applicant under these applications
before the FCC, has current assets substantially less than those of Loral. There
can be no assurance that challenges to the Company's financial qualifications
may not adversely affect or delay the Company's ability to be granted additional
FCC licenses, thus limiting a portion of the Company's future opportunities.
Certain Antitakeover Provisions. The Company's classified Board of
Directors, voting provisions with respect to certain business combinations and
the Company's rights plan, may have the effect of making more difficult or
discouraging an acquisition of the Company deemed undesirable by the Board.
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Reliance on Key Personnel. The success of the Company's business will be
partially dependent upon the ability of the Company to attract and retain highly
qualified technical and management personnel. Except for Mr. Bernard L.
Schwartz, the Company's Chairman and Chief Executive Officer, none of the
Company's officers has an employment contract with the Company nor does the
Company expect to maintain "key man" insurance with respect to any such
individuals. The loss of any of these individuals and the subsequent effect on
business relationships could have a material adverse effect on the Company's
business.
Rights of Shareholders under Bermuda Law. The Company is incorporated
under the laws of the Islands of Bermuda. Principles of law relating to such
matters as the validity of corporate procedures, the fiduciary duties of the
Company's management, directors and controlling shareholders, and the rights of
its shareholders, are governed by Bermuda law and the Company's Memorandum of
Association and Bye-Laws. Such principles of law may differ from those that
would apply if the Company were incorporated in a jurisdiction in the United
States. In addition, there is uncertainty as to whether the courts of Bermuda
would enforce (i) judgments of United States courts obtained against the Company
or its officers and directors resident in foreign countries predicated upon the
civil liability provisions of the securities laws of the United States or (ii)
in original actions brought in Bermuda, liabilities against the Company or such
persons predicated upon the securities laws of the United States or any state.
Tax Considerations. Special U.S. tax rules apply to U.S. taxpayers who own
stock in a "passive foreign investment company" (a "PFIC"). Although the Company
believes that it will not be a PFIC because it expects through Globalstar, SS/L
and other businesses to earn sufficient active business income and to hold
sufficient active business assets to avoid PFIC status, there is a risk that it
may be a PFIC. In such an event, a U.S. shareholder would be subject at his
election either to (i) a current tax on undistributed earnings or (ii) a tax
deferral charge on certain distributions and on gains from a sale of shares of
the Common Stock (taxed as ordinary income).
Investment Company Act Considerations. The Company believes that it is not
an investment company within the meaning of the Investment Company Act of 1940,
as amended (the "Investment Company Act") and intends to conduct its business in
such a manner as to avoid becoming an investment company. Any determination that
the Company were an investment company would have a material adverse effect on
the tax status of the Company and its contractual relationships with its
affiliates.
GLOBALSTAR
Development Stage Company; Expectation of Continued Losses; Negative Cash
Flow. Globalstar is a development stage company and has no operating history.
It has incurred net losses from inception and expects such losses to continue
until commercial service operations have commenced. Globalstar will require
expenditures of significant funds for development, construction, testing and
deployment before commercialization. Globalstar does not expect to commence
operations before 1998 or to achieve positive cash flow before 1999. There can
be no assurance that Globalstar will achieve its objectives by the targeted
dates.
Additional Financing Requirements. Globalstar expects to require total
capital of approximately $2.2 billion for capital expenditures, development and
operating costs of the system through 1998. Globalstar has raised approximately
$1.4 billion through March 31, 1996, representing over 75% of the total external
financing requirement. Globalstar believes that its current capital base is
sufficient to fund its requirements into the first quarter of 1997. Additional
funds of $828 million to complete the Globalstar System are expected to be
obtained from a combination of sources including over $400 million from
projected service provider payments, projected net service revenues from initial
operations and anticipated payments from the sale of gateways and Globalstar
Phones. There can be no assurance that additional funds required to complete the
Globalstar System from external or internal sources will be available at
favorable terms or on a timely basis, if at all. Globalstar is presently
evaluating a plan to purchase long-lead-time component parts for possible use in
constructing 6 to 12 additional satellites. The current estimated additional
cost for these components is approximately $75 to $120 million, depending upon
the quantity purchased. The plan has two purposes: (i) to enable Globalstar to
have on-orbit at least 38 to 44 satellites during 1999, even in the event of
launch failures of up to two launches of 12 satellites each, and (ii) to provide
ground spares that would be readily available to replenish the satellite
constellation in the event of satellite attrition during the first generation or
if there are opportunities for increasing capacity. If Globalstar were to
experience a launch failure, the long-lead-time
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components would be used to build replacement satellites and the cost associated
with the construction and launch of such satellites would be reimbursed through
insurance.
Sources of Possible Delay and Increased Cost. There may be problems,
delays, and expenses encountered by Globalstar, many of which may be beyond
Globalstar's control. These may include, but are not limited to, problems
related to technical development of the system, testing, regulatory compliance,
manufacturing and assembly, the competitive and regulatory environment in which
Globalstar will operate, marketing problems and costs and expenses that may
exceed current estimates. Delay in the timely design, construction, deployment,
commercial operation and achievement of positive cash flow of the Globalstar
System could result from a variety of causes, including delays associated with
the regulatory process in various jurisdictions, delay in the integration of the
Globalstar System into the land-based network, changes in the technical
specifications of the Globalstar System due to regulatory developments or
otherwise, delays encountered in the construction, integration or testing of the
Globalstar System by Globalstar vendors, delayed or unsuccessful launches,
delays in financing, insufficient or ineffective service provider marketing
efforts, slower-than-anticipated consumer acceptance of Globalstar service and
other events beyond Globalstar's control. Substantial delays in any of the
foregoing matters would delay Globalstar's achievement of profitable operations.
Worldwide Regulatory Approvals Required to Operate. The operations of the
Globalstar System are and will continue to be subject to United States and
foreign regulation. In order to operate in the United States and on an
international basis, the Globalstar System must be authorized to provide MSS in
each of the jurisdictions in which its service providers intend to operate. Even
though the Globalstar System has been authorized by the FCC to launch and
operate for the purpose of providing MSS in the United States, there can be no
assurance that the further regulatory approvals required for worldwide
operations will be obtained, or that they will be obtained in a timely manner or
in the form necessary to implement Globalstar's proposed operations.
Satellite Launch Risks; Limited Life of Satellites. Satellite launches are
subject to significant risks, including damage to or loss of the satellites
("hot failures"). Historically, launch failure ("hot failure") rates on low
earth orbit and geostationary satellite launches have been approximately 10%.
However, launch failure rates may vary depending on the particular launch
vehicle. Globalstar currently anticipates launching satellites in groups of
either four satellites or 12 satellites in each launch. Satellite launches of
more than eight commercial satellites have not been attempted before. There is
no assurance that Globalstar satellite launches will be successful or that its
launch failure rate will not exceed the industry average.
A number of factors will affect the useful lives of Globalstar's
satellites. Random failure of satellite components could result in partial or
total failure of a satellite ("cold failure"). The first-generation satellite
constellation (including spares) is designed to operate at full performance for
a minimum of 7 1/2 years, after which performance is expected to gradually
decline. However, there can be no assurance of the constellation's specific
longevity. Globalstar's operating results would be adversely affected in the
event the useful life of the satellites is significantly shorter than 7 1/2
years.
Limited Insurance. Globalstar will obtain insurance against launch failure
which would cover the cost of relaunch and the replacement cost of lost
satellites in the event of hot failures for 56 satellites in its constellation.
However, Globalstar may self-insure for hot failures for up to 12 such
satellites. Globalstar's contract with SS/L provides for the construction and
launch of eight spare satellites to minimize the effect of any launch or orbital
failures. Globalstar currently does not intend to purchase insurance to cover
any cold failures that may occur once the satellites have been successfully
deployed from the launch vehicle. There can be no assurance that additional
satellites and launches will not be required. In such an event, in addition to
the replacement costs incurred by Globalstar, the date for commencement of full
commercial operations may be delayed.
Substantial Leverage. Globalstar has entered into an agreement with a bank
syndicate for a $250 million credit facility expiring on December 15, 2000 (the
"Globalstar Credit Agreement"). Globalstar also
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expects to utilize $310 million of committed vendor financing provided by SS/L
and its subcontractors. In March and April, 1996, Globalstar received net
proceeds of $300 million from the offering of GTL 6 1/2% Convertible Preferred
Equivalent Obligations due March 1, 2006. Significant additional debt is
expected to be incurred in the future. As a result, Globalstar will be highly
leveraged. Globalstar will be dependent on its cash flow from operations to
service this debt. Any significant delay in the commencement of operations will
adversely affect Globalstar's ability to service its debt obligations. The
Globalstar Credit Agreement and other debt financing that Globalstar may incur
in the future may restrict or limit Globalstar's ability to make payments,
including distributions to its partners, including the Company, incurring
additional indebtedness and entering into certain other transactions. There can
be no assurance that Globalstar's leverage and such restrictions will not
materially and adversely affect Globalstar's ability to finance its future
operations or capital needs or to engage in other business activities.
Competition. Competition in the telecommunications industry is intense,
fueled by rapid and continuous technological advances and alliances between
industry participants on an international scale. Although no present industry
participant is currently providing the same global personal telecommunications
service expected to be provided by Globalstar, it is anticipated that one or
more additional competing MSS systems will be launched and that the success, or
anticipated success, of Globalstar and its competitors could attract other
entrants. If any of Globalstar's competitors succeed in marketing and deploying
their systems substantially earlier than Globalstar, Globalstar's ability to
compete in areas served by such competitors may be adversely affected. A number
of satellite-based telecommunications systems have also been proposed, using
geostationary satellites, or, in one case, a mid-earth orbit system.
Some of these potential competitors have financial, personnel and other
resources substantially greater than those of Globalstar. Many of these
competitors are raising capital and may compete with Globalstar for service
providers and financing. Technological advances and a continuing trend toward
strategic alliances in the telecommunications industry could give rise to
significant new competitors. There can be no assurance that some of these
competitors will not provide a more efficient or less expensive service.
However, Globalstar believes that based upon the public FCC filings of the other
MSS applicants, Globalstar will be a low-cost provider.
Satellite-based telecommunications systems are characterized by high
up-front costs and relatively low marginal costs of providing service. Several
systems are being presently proposed, and, while the proponents of these systems
foresee substantial demand for the services they will provide, the actual level
of demand will not become known until such systems are constructed, launched and
begin operations. If the capacity of Globalstar and any competing systems
exceeds demand, price competition could be particularly intense.
Compliance with European Union Competition Laws. European Union
competition law proscribes agreements that have the effect of appreciably
restricting or distorting competition in the European Union. Globalstar has
received an inquiry from the Commission of the European Union requesting
information regarding its activities. A violation of European Union law could
subject Globalstar to fines or enforcement actions that could result in expenses
to Globalstar, delay the commencement of Globalstar service in western Europe,
and/or depending on the circumstances, adversely affect Globalstar's contractual
rights vis-a-vis its European strategic partners. In addition, the Commission
has proposed legislation at the European Union level which, if adopted, would
give the Commission broad regulatory authority over "satellite PCS" systems such
as Globalstar. The Commission's investigation and proposed legislation are in
their preliminary stages, and the Company is unable to predict what effect, if
any, the results of such investigation or proposed legislation may have on
Globalstar's operations.
Future Operating Risks. Globalstar's ability to succeed after commencement
of operations will depend upon numerous factors, including the cooperation,
operational and marketing efficiency, competitiveness, finances and regulatory
status of Globalstar's service providers, who are the parties responsible for
obtaining all necessary local regulatory approval for, and the marketing and
distribution of, Globalstar service. Subscriber acceptance of the Globalstar
System, which is dependent upon price, demand for service and the availability
of alternatives, will also have a direct impact on Globalstar's operations and
cash flow. Because Globalstar's largest potential markets are in developing
countries, Globalstar and its service providers may face market, inflation,
interest rate and currency fluctuation, government policy, expropriation and
other economic, political
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or diplomatic conditions that are significantly more volatile than those
commonly experienced in the United States and other industrialized countries.
Globalstar may also incur risks related to currency fluctuations as a result of
operations in such countries. Pricing risks, whether arising from the recent
downward pricing trend in the telecommunications industry or the limitations on
Globalstar's ability to increase its pricing to service providers, may result in
a material adverse effect on Globalstar's business.
Risk of Accelerated Build-Out and Competing Technological Advances. It is
expected that as land-based telecommunications services expand to regions
currently underserved or not served by wireline or cellular services, demand for
Globalstar service in those regions may be reduced. If such systems are
constructed at a more rapid rate than that anticipated by Globalstar, the demand
for Globalstar service may be reduced at rates higher than those assumed in
Globalstar's market analysis. Globalstar may also face competition in the future
from companies using new technologies and new satellite systems. New technology
could render Globalstar obsolete or less competitive by satisfying consumer
demand in alternative ways or through the introduction of incompatible
telecommunications standards. A number of these new technologies, even if they
are not ultimately successful, could have an adverse effect on Globalstar as a
result of their initial marketing efforts. Globalstar's business would be
adversely affected if competitors begin operations or existing or new
telecommunications service providers penetrate Globalstar's target markets
before completion of the Globalstar System.
SS/L
Dependence on Limited Number of Customers and Programs. The Company
historically has derived a large portion of its total revenues from a limited
number of customers. Sales to the U.S. government represented 10%, 23% and 23%
of revenues from contracts for the years ended March 31, 1996, 1995 and 1994,
respectively. Sales to foreign customers, primarily in Asia, represented 27%,
15% and 31% of revenues from contracts for the years ended March 31, 1996, 1995
and 1994, respectively. In 1996, two commercial customers represented 30% and
13% of revenues from contracts. In 1995, four commercial customers represented
23%, 20%, 15% and 13% of revenues from contracts. Two commercial customers
represented 35% and 29% of revenues from contracts in 1994.
Although SS/L is currently pursuing a significant number of new programs,
there can be no assurance that SS/L will be successful in capturing any of these
new programs to replace the revenue lost by the completion of its current
programs. Certain of SS/L's customers prefer to alternate satellite
manufacturers they employ in order to reduce dependence on any single
manufacturer. This may have an adverse effect on SS/L's ability to obtain future
program awards from its current customers.
Competition. Competition in the commercial satellite industry is intense.
Among SS/L's significant competitors are Hughes, Lockheed Martin, Matra Marconi
and TRW. Some of SS/L's competitors have significantly greater financial,
manufacturing, marketing and technical resources than those of SS/L. To the
extent these companies offer products and services that are more sophisticated,
cost-effective, efficient or reliable than those now offered or to be offered by
SS/L, they could have a material adverse effect on SS/L. Further, SS/L's
telecommunications satellites face competition from alternative technologies,
including fiber optic cable technology, which could reduce demand for the
services of SS/L's customers and thus for SS/L's telecommunications products.
Risk of Loss of Revenues Due to Satellite Malfunction or Launch
Failure. Certain of SS/L's contracts provide that up to one-quarter of the
total contract price is payable in the form of orbital payments, earned during
the life of the satellite in orbit as its mission is performed. Although SS/L
generally receives the present value of orbital payments in the event of launch
failure or a failure caused by an operator error by the customer, it forfeits
orbital revenues in the event of a loss caused by system failure or an error on
its part. While insurance against loss of orbital revenues has been available in
the past, its cost and availability are subject to substantial fluctuations. In
addition, SS/L is prohibited under agreements with certain of its customers from
insuring its orbital incentives. Moreover, certain of SS/L's contracts call for
on-orbit delivery, allocating launch risk to SS/L. It is SS/L's intention to
obtain insurance for this exposure. However, SS/L cannot predict whether, and
there can be no assurance that, insurance against launch failure and loss of
orbital revenues will continue to be available on commercially reasonable terms.
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Regulation. The ability of SS/L and its customers to pursue their business
activities is regulated by various agencies and departments of the U.S.
government. Operation of commercial communications satellites requires licenses
from the FCC and frequently requires the approval of foreign regulatory
authorities as well. Private land remote sensing satellites require a license
from the Department of Commerce. Exports of space-related products, services and
technical information frequently require licenses from the Department of State
or the Department of Commerce. There is no assurance that SS/L or its customers
will be able to obtain necessary licenses or regulatory approvals. The inability
of SS/L or its customers to secure any necessary licenses or approvals could
have a material adverse effect on its business.
SS/L and the Alliance Partners have entered into a memorandum of agreement
with the U.S. Department of Defense ("DOD") with respect to security matters. In
addition, because the Alliance Partners are foreign entities, two of which are
owned and controlled by foreign governments, SS/L is subject to certain
regulations and to U.S. government oversight to which it would not be subject if
substantially all of its stockholders were United States citizens.
Dependence on Subcontractors and Alliance Partners. SS/L depends on other
companies, including its Alliance Partners, for the development and manufacture
of various products that are material to its business. The failure of a
subcontractor to perform at expected levels could under certain circumstances
have a material adverse effect on SS/L's profitability and its ability to win
future program awards.
Dependence on Long-Term Fixed-Price Contracts. The financial results of
long-term fixed-price contracts are recognized using the cost-to-cost
percentage-of-completion method. Revisions in revenue and profit estimates are
reflected in the period in which the conditions that require the revision become
known and are estimable. Adjustments for profits or losses may therefore have a
material effect on results for the quarter in question. The risks inherent in
long-term fixed-price contracts include the forecasting costs and schedules,
contract revenues related to contract performance (including revenues from
orbital payments) and the potential for component obsolescence in connection
with long-term procurements.
Competitive Bidding. SS/L generally obtains its contracts through the
process of competitive bidding. There can be no assurance that SS/L will
continue to be successful in having its bids accepted or, if accepted, that
awarded contracts will generate sufficient revenues to result in profitability
for SS/L. SS/L has in the past submitted bids which would result in minimal or
no profitability due to a high level of non-recurring engineering costs. Such
contracts are generally bid with the expectation of more profitable follow-on
satellite contracts as to which there is generally no contractual assurance in
advance. To the extent that actual costs exceed the projected costs on which
bids or contract prices were based, SS/L's profitability could be materially
adversely affected.
Launch Vehicle Access. SS/L's ability to perform its on-orbit delivery
contracts depends on the timely availability of appropriate launch vehicles and
the availability of the requisite launch insurance. In the past, launch slots
have been in limited supply, and the launch insurance market has been subject to
considerable fluctuation. Moreover, the availability and pricing of launch
vehicles from the former Soviet Union and the People's Republic of China are
effected by U.S. government policies and international agreements. To the extent
appropriate launch services and insurance become unavailable or prohibitively
expensive, SS/L's business would be materially adversely affected.
Technological Developments. The nature of the commercial satellite
industry is such that, with each new generation of satellites, satellite
manufacturers are expected to offer substantial improvements and innovations at
lower effective cost. SS/L's success therefore depends on its ability to design,
manufacture and introduce innovative new products and services on a
cost-effective and timely basis. There can be no assurance that SS/L will be
able to continue to achieve the technological advances necessary to remain
competitive or that its products will not be subject to technological
obsolescence.
ITEM 2. PROPERTIES
The Company sub-leases office space from Lockheed Martin at 600 Third
Avenue, New York, New York 10016 sufficient to allow it to carry on its
operations.
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Globalstar currently leases approximately 56,000 square feet of office
space in San Jose, California from a subsidiary of Lockheed Martin.
SS/L's research production and testing facilities are carried on in
SS/L-owned facilities covering approximately 28.4 acres in Palo Alto,
California. In addition, SS/L leases 371,000 square feet of space from various
third parties.
ITEM 3. LEGAL PROCEEDINGS
CCD Lawsuits. On September 12, 1991, Loral Fairchild Corp. ("Loral
Fairchild"), a subsidiary of Loral, filed suit (the "CCD Lawsuit") against a
number of companies including Sony Corporation ("Sony"), Matsushita Electronics
Corporation ("Matsushita") and NEC Corp. ("NEC") 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. After a trial on
certain equitable defenses, the case will be certified for interlocutory appeal
and, thereafter, a jury trial will be held on the issue of damages. Loral
Fairchild's claims against other defendants remain pending. 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 is expected to begin on July 22, 1996.
Lockheed Martin has agreed in connection with the Merger to grant to the
Company the right to all proceeds or awards resulting from the CCD Lawsuit as
well as complete and exclusive control and management thereof. The Company has
agreed to pay all fees and expenses relating to the CCD Lawsuit and to indemnify
Lockheed Martin and Loral from any losses relating thereto.
None of the Operating Affiliates is a party to any pending legal
proceedings material to its financial condition or results of operation.
Environmental Regulation. Manufacturing operations managed by corporations
in which the Company has an interest 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 or its Operating Affiliates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 listed on the NYSE under the symbol LOR and
began trading on April 15, 1996 on a when-issued basis.
The Company does not currently anticipate paying any dividends or
distributions prior to the time that Globalstar commences operations and
achieves positive cash flow. To date, neither Globalstar nor SS/L has paid any
dividends or distributions since their respective dates of inception. Globalstar
intends to distribute to its partners its net cash received from operations,
less amounts required to repay outstanding indebtedness, pay
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distributions on its Redeemable Preferred Partnership Interests, satisfy other
liabilities and fund capital expenditures. The Globalstar Credit Agreement and
the SS/L credit facility impose restrictions on Globalstar's and SS/L's
respective ability to pay distributions or dividends to its partners and
stockholders, including to the Company.
(B) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At May 31, 1996, there were approximately 5,950 holders of record of the
Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from, and should be
read in conjunction with, the related financial statements. Historical
information for Loral Space & Communications Ltd. represents the space and
communications operations of Loral Corporation.
LORAL SPACE & COMMUNICATIONS LTD.
(IN THOUSANDS)
AS OF AND FOR THE YEARS ENDED MARCH 31,
-----------------------------------------------------------------
ACTUAL
PRO FORMA ----------------------------------------------------
1996(1) 1996 1995 1994 1993 1992
---------- -------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Management fee from affiliate.... $ 5,608 $ 5,608 $ 3,169 $ 2,981 $ 2,576 $ 1,953
Equity in net income (loss) of
affiliates(2).................. (16,936) (8,628) (8,988) 1,174 663 (1,319)
Loss before cumulative effect of
accounting change(3)........... (32,349) (13,785) (7,873) (3,694) (5,242) (4,992)
Net loss......................... (32,349) (13,785) (7,873) (3,694) (12,001) (4,992)
BALANCE SHEET DATA:
Cash and cash equivalents........ $ 612,286 $ -- $ -- $ -- $ -- $ --
Investment in Globalstar(2)...... 197,646 195,221 110,970 25,288 -- --
Investment in SS/L............... 144,051 144,051 140,007 138,191 137,017 133,669
Total assets..................... 1,001,638 354,384 251,819 163,479 137,017 133,669
Long-term debt................... -- -- -- -- -- --
Invested equity.................. -- 354,384 251,819 159,198 137,017 133,669
Shareholders' equity............. 988,638
- ---------------
(1) The pro forma information includes certain adjustments to the historical
information of the space and communications operations of Loral Corporation
reflecting the Merger (see Note 1 to Loral Space & Communications Ltd.
Balance Sheet).
(2) Globalstar commenced operations on March 23, 1994.
(3) Before the effect of adopting Statement of Financial Accounting Standards
No. 106 "Accounting for Postretirement Benefits Other than Pensions," in
fiscal 1993 net of related income taxes.
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SELECTED FINANCIAL DATA (CONTINUED)
GLOBALSTAR, L.P.
(A DEVELOPMENT STAGE LIMITED PARTNERSHIP)
(IN THOUSANDS)
THREE MONTHS CUMULATIVE
ENDED MARCH 23 MARCH 23, 1994
MARCH 31, (COMMENCEMENT (COMMENCEMENT
----------------- YEAR ENDED OF OPERATIONS) TO OF OPERATIONS) TO
1996 1995 DECEMBER 31, 1995 DECEMBER 31, 1994 MARCH 31, 1996
------- ------- ----------------- ----------------- -----------------
STATEMENT OF OPERATIONS DATA:
Revenues....................... $ -- $ -- $ -- $ -- $ --
Operating expenses............. 15,401 19,395 80,226 28,027 123,654
Interest income................ 1,449 2,159 11,989 1,783 15,221
Net loss....................... 13,952 17,236 68,237 26,244 108,433
Preferred distribution and
related increase on
redeemable preferred
partnership interests........ 1,424 -- -- -- 1,424
Net loss applicable to ordinary
partnership interests........ 15,376 17,236 68,237 26,244 109,857
DECEMBER 31,
MARCH 31, ---------------------
1996 1995 1994
--------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 247,108 $ 71,602 $ 73,560
Working capital............................................ 206,786 17,687 35,423
Globalstar System Under Construction....................... 508,822 400,257 71,996
Total assets............................................... 791,674 505,391 151,271
Vendor financing liability................................. 61,584 42,219 --
Partners' capital.......................................... 662,886 386,838 112,944
SPACE SYSTEMS/LORAL, INC.
(IN THOUSANDS)
AS OF AND FOR THE YEARS ENDED MARCH 31,
------------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues................................... $1,121,619 $633,717 $596,267 $517,242 $390,583
Gross profit............................... 34,406 27,785 24,964 19,855 14,851
Income (loss) before cumulative effect of
change in accounting(1).................. 12,367 5,554 3,591 2,594 (2,586)
Net income (loss).......................... 12,367 5,554 3,591 (18,076) (2,586)
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 126,863 $ 52,222 $ 26,578 $ 10,121 $ 8,420
Total assets............................... 908,677 766,475 743,016 640,499 579,647
Long-term debt............................. 65,052 34,040 92,249 73,000 141,000
Shareholders' equity....................... 447,868 435,501 429,947 426,356 327,765
- ---------------
(1) Before the effect of adopting Statement of Financial Accounting Standards
No. 106 "Accounting for Postretirement Benefits Other than Pensions" in
fiscal 1993 net of related income taxes.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company, Globalstar and SS/L, and
elsewhere in this Form 10-K, are forward-looking statements that involve risks
and uncertainties, many of which may be beyond the companies' control. The
actual results that the companies achieve may differ materially from any
forward-looking projections due to such risks and uncertainties.
LORAL SPACE & COMMUNICATIONS LTD.
Loral SpaceCom manages and is the largest equity owner of both Globalstar
and SS/L. The Company will also act as a Globalstar service provider in Canada,
Brazil and Mexico, and is evaluating additional satellite-based service
opportunities. Loral SpaceCom was formed to effectuate the distribution of
Loral's space and telecommunications businesses to shareholders of Loral and
holders of options to purchase Loral common stock pursuant to a merger agreement
(the "Merger") dated January 7, 1996 between Loral and Lockheed Martin. The
Distribution of approximately 183.6 million shares of Loral SpaceCom common
stock was made on April 23, 1996. In connection with the Distribution, Lockheed
Martin contributed $612 million in cash to the Company. Of the amount
contributed, $344 million represented the purchase of a 20% fully-diluted equity
interest in the Company in the form of Loral SpaceCom Series A Convertible
Preferred Stock. Such stock is subject to certain voting limitations,
restrictions on transfer and standstill provisions.
Loral SpaceCom records its investments in Globalstar and SS/L using the
equity method of accounting. Accordingly, Loral SpaceCom's results of operations
reflects its proportionate share of the results of operations of its affiliates
on an equity accounting basis. References to Loral SpaceCom or the Company prior
to the Distribution refer to the space and communications operations of Loral
Corporation. Included separately are the Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") for Globalstar and SS/L.
The MD&A for Loral SpaceCom should be read in conjunction with the MD&As of
Globalstar and SS/L.
LIQUIDITY AND CAPITAL RESOURCES
Loral SpaceCom commenced operations on April 23, 1996 with $612 million of
unrestricted cash, investments in affiliates totaling $342 million, $13 million
in liabilities and shareholders' equity of $989 million.
Loral SpaceCom intends to utilize its existing capital base and access to
the capital markets to support the financing requirements of the Operating
Affiliates (principally Globalstar) and to finance new business opportunities in
satellite-based communications either directly or through the Operating
Affiliates. It is also anticipated that the Operating Affiliates will directly
access the capital markets to satisfy their own financing requirements, and may
further seek financial support from their strategic partners, including the
Company. Loral SpaceCom's Operating Affiliates are currently financed without
recourse to Loral SpaceCom other than the $56.3 million indemnification provided
to Lockheed Martin in connection with the Globalstar Credit Agreement.
Loral SpaceCom's Operating Affiliates have no history of paying dividends
and are not expected to pay dividends in the near future. The Globalstar Credit
Agreement and the SS/L credit facility impose restrictions on Globalstar's and
SS/L's respective ability to pay distributions or dividends to its partners and
stockholders. In addition, Globalstar does not expect to make distributions
prior to the time it commences full commercial operations. It is anticipated
that Loral SpaceCom will initially fund its operating requirements (principally
consisting of management compensation and corporate overhead expenses) from
interest income generated from the temporary investment of cash balances and the
receipt of SS/L management fees.
As part of its investment in Globalstar, Loral SpaceCom, as a founding
service provider, acquired exclusive service provider rights to Mexico and
Brazil. Further, in June 1995, Loral SpaceCom paid Globalstar an initial $9.8
million for exclusive service provider rights to Canada. Loral SpaceCom, in
joint
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venture with local telephony service providers and international
telecommunications businesses, intends to establish Globalstar service
operations in such territories.
In September 1994, Loral Corporation exchanged its holdings in K&F's
convertible subordinated debentures for cash and common stock representing a
22.5% equity interest in K&F. (See Note 3 to the Loral Corporation -- Space and
Communications Operations Financial Statements, (the "Financial Statements").
K&F is principally engaged in the manufacture of aircraft braking systems for
commercial and military aircraft.
Cash Provided and Used. Cash used in operating activities for the years
ended March 31, 1996, 1995 and 1994 was $1.3 million, $8.4 million and $.6
million, respectively, primarily due to the items discussed in Results of
Operations, below.
Cash used in investing activities for the years ended March 31, 1996, 1995
and 1994 was $115.0 million, $92.1 million and $25.3 million, respectively,
primarily due to investments in Globalstar. Investments in Globalstar totaled
$105.2 million, $103.6 million and $25.3 million in the years ended March 31,
1996, 1995 and 1994 respectively, and include an aggregate of $10.3 million of
capitalized costs, principally interest.
Net cash provided by financing activities for the years ended March 31,
1996, 1995 and 1994 was $116.3 million, $100.5 million and $25.9 million,
respectively, representing the advances from Loral Corporation to fund the
above-mentioned activities.
Investment in Globalstar. At March 31, 1996 Loral SpaceCom's investment in
Globalstar was $195.2 million. (See Note 3 to the Financial Statements.)
Additionally, Loral SpaceCom holds an indirect 1.4% interest in Globalstar
through its ownership of SS/L.
Globalstar is building and preparing to launch and operate a worldwide,
low-earth orbit satellite-based digital telecommunications system. The
Globalstar System has an estimated total cost of $2.2 billion for capital
expenditures, development costs and operating costs through the end of 1998,
when full commercial service is scheduled to commence. Globalstar has raised a
total of $1.4 billion of financing consisting of $480 million of equity, $310
million of vendor financing, a $250 million bank credit facility, commitments
for $33 million of service provider advance payments, net proceeds of $300
million from the sale of GTL 6 1/2% Convertible Preferred Equivalent
Obligations. (See Note 3 to the Financial Statements.) Globalstar estimates that
it will require an additional $414 million to complete its external financing
requirements and that its remaining financing requirement will come from a
combination of sources, including advance payments from service providers,
anticipated payments associated with the sale of Globalstar Phones and gateways,
placements of limited partnership interests with new and existing strategic
investors and from net service revenues from initial operations.
Commencing on the In-Service Date, as defined, Globalstar will allocate to
its managing general partner an amount equal to 2.5% of Globalstar's revenues up
to $500 million plus 3.5% of revenues in excess of $500 million. Loral SpaceCom
and Qualcomm will receive 80% and 20% of such allocation, respectively.
Globalstar has not made any cash distributions to date, and none are anticipated
prior to 1999.
On December 15, 1995, Globalstar entered into a $250 million credit
agreement with a group of banks (the "Globalstar Credit Agreement"). The
Globalstar Credit Agreement provides that Globalstar may select loans at varying
interest rates, including the Eurodollar rate plus 5/8%. Globalstar pays a
commitment fee on the unused portion. The Globalstar Credit Agreement contains
covenants requiring Globalstar to meet certain financial ratios including
minimum net worth of $200 million and limits additional indebtedness and the
payment of cash distributions. The Globalstar Credit Agreement expires on
December 15, 2000.
Following the consummation of the Merger, Lockheed Martin guaranteed $206.3
million of Globalstar's obligation under the Globalstar Credit Agreement, and
SS/L and certain other Globalstar strategic partners guaranteed $11.7 million
and $32 million, respectively, of Globalstar's obligation. In addition, Loral
SpaceCom has agreed to indemnify Lockheed Martin for liability in excess of $150
million under Lockheed Martin's guarantee.
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In connection with such guarantees and indemnity of the Globalstar Credit
Agreement, GTL issued to Loral SpaceCom, Lockheed Martin, SS/L and the other
strategic partners participating in such guarantee or indemnity, warrants (the
"GTL Guarantee Warrants") to purchase 4,185,318 shares of GTL common stock. The
GTL Guarantee Warrants have an exercise price of $26.50, are subject to certain
vesting requirements, expire on April 19, 2003, are not exercisable until six
months after Globalstar commences initial operations unless accelerated at the
sole discretion of the managing general partner of Globalstar and may not be
transferred to third parties prior to such exercise date. In connection with the
issuance of GTL Guarantee Warrants, GTL received (i) warrants to acquire
4,185,318 ordinary partnership interests in Globalstar plus (ii) additional
warrants (the "Additional Warrants") to purchase an additional 1,131,168
ordinary partnership interests, on terms and conditions generally similar to
those of the GTL Guarantee Warrants. In addition, Globalstar has also agreed to
pay to Loral SpaceCom and the other guaranteeing partners a fee equal to 1.5%
per annum of the average quarterly amount outstanding under the Globalstar
Credit Agreement.
Investment in SS/L. The Company currently holds 32.7% of the economic
interest in SS/L. (See Note 3 to the Financial Statements.) SS/L is engaged in
the design, manufacture and systems integration for telecommunications, weather
and direct broadcast television satellites. A subsidiary of Loral SpaceCom is
paid a management fee from SS/L based on SS/L's total adjusted revenues.
SS/L is the prime contractor for the design and construction of
Globalstar's 56 satellites. In connection therewith, SS/L and its subcontractors
have committed $310 million of vendor financing to Globalstar, of which $121
million of such vendor financing is effectively borne by the subcontractors. As
of March 31, 1996, $62 million of such vendor financing has been utilized by
Globalstar.
In 1991 and 1992, Loral Corporation sold 49% of SS/L's equity to four
European companies involved in aerospace, telecommunications and space
communications (the "Alliance Partners"). Under a stockholders agreement, a
change of control of Loral Corporation within the meaning of such agreement
would provide each of the Alliance Partners with the right to (i) put their
equity interests back to SS/L at fair market value, or (ii) purchase a pro rata
share of Loral's equity interest in SS/L for fair market value (subject to
receiving certain authorizations including U.S. government approval). While it
is not certain that the change of control provisions are applicable, the Company
and SS/L are seeking an amendment to the stockholders agreement acknowledging
the transfer of Loral's interests in SS/L to Loral SpaceCom and a waiver of any
applicable put and purchase option rights. In the event that any of SS/L's
Alliance Partners put their interests back to SS/L, Loral SpaceCom will acquire
such interests. The Company does not expect all the Alliance Partners to
exercise their put rights in connection with the Distribution, but, if all such
put rights, if any, were exercised, the Company believes its obligations
pursuant to these rights would be less than $250 million.
Certain partnerships affiliated with Lehman Brothers Inc. (the "Lehman
Partnerships") hold Series S Preferred Stock of a Loral SpaceCom subsidiary.
Each share of Series S Preferred Stock represents a beneficial interest in one
share of common stock of SS/L. As a result of the issuance of the Series S
Preferred Stock, the Lehman Partnerships have no economic interest in the
subsidiary other than with respect to the SS/L operations. If the Lehman
Partnerships continue to hold the Series S Preferred Stock after January 1, 1998
or after a change in control of the Company, they will have the right to request
that the Company purchase their Series S Preferred Stock at fair market value.
In such event, the Company may elect to purchase such Series S Preferred Stock
at fair market value, or if the Company elects not to purchase the stock, the
Lehman Partnerships may require the combined interests of the Company and the
Lehman Partnerships in SS/L to be sold to a third party. (See Notes 3 and 7 to
the Financial Statements.) The Lehman Partnerships have advised the Company that
they do not intend to request that the Company purchase their Series S Preferred
Stock. The Company currently has no intention of selling its interest in SS/L.
Other Business Opportunities. Loral SpaceCom is currently evaluating
several new business initiatives including joint ventures to provide
"direct-to-home" ("DTH") television service in certain regions of the world, a
proposed digital communications service using a high-speed, satellite-delivered
communications system called CyberStar and a proposed hybrid communications
satellite. These ventures are in formative
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stages and there can be no assurance that they will be further developed or
licensed, or that the necessary capital to complete such ventures will be
available.
RESULTS OF OPERATIONS
The results of operations include the proportionate share of net income
(loss) of Globalstar and SS/L using the equity method of accounting. Such
results also include certain allocated costs and expenses representing an
allocation of Loral Corporation corporate office expenses based primarily on the
allocation methodology prescribed by government regulations pertaining to
government contractors. Allocated interest expense has been based on Loral
Corporation's actual weighted average debt rate applied to the average
investment in affiliate balance during the period. Accordingly, such results of
operations are not necessarily representative of all revenues and expenses that
would have occurred had the Space and Communications Operations been an
independent entity. Additionally, such results of operations exclude certain
revenues and expenses anticipated when Loral SpaceCom commences operations such
as interest income from the temporary investment of $612 million of cash
balances and other additional operating expenses.
Future operating results of Loral SpaceCom will be dependent on a number of
factors including the results of operations of the Operating Affiliates, the
level of corporate operating expenses, the utilization of the available cash
balances and the extent of interest income or other investment income. Loral
SpaceCom currently anticipates generating net income during the balance of
calendar year 1996; however, this result may be adversely impacted by the
outcome of these factors.
Taxation. Loral SpaceCom will be subject to U.S. federal, state and local
income taxation at regular corporate rates on any income from sources within the
United States that is effectively connected with the conduct of its U.S. trade
or business. When such income is deemed removed from the U.S. business, it will
be subject to an additional 30 percent "branch profits" tax. While, Loral
SpaceCom expects that most of its income from Globalstar will be from sources
outside the United States, some portion of such foreign source income will be
subject to taxation by certain foreign countries.
Also, any U.S. subsidiary formed to conduct Loral SpaceCom's U.S.
activities will be subject to U.S. taxation at regular corporate rates. In
addition, a 30% U.S. withholding tax will apply to dividends received from K&F,
SS/L, or any other U.S. corporation.
Furthermore, Loral Sp