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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 DECEMBER 31, 1997
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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 as the registrant was required to file such reports and has
been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in the registrant's definitive proxy statement incorporated by
reference in Part III of this Form 10-K.
At February 27, 1998, 201,074,069 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
$5.0 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1998 definitive proxy statement are
incorporated by reference into Part III.
The financial statements required by Rule 3.09 of Regulation S-X of the
registrant's significant investee, Globalstar, L.P., are incorporated by
reference herein from the Annual Report on Form 10-K filed by Globalstar
Telecommunications Limited and Globalstar, L.P.
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PART I
ITEM 1. BUSINESS
THE COMPANY
Loral Space & Communications Ltd. and subsidiaries ("Loral" or the
"Company") is one of the world's leading satellite communications companies,
with substantial interests in the design, manufacture and operation of
geosynchronous ("GEO") and low-earth-orbit ("LEO") satellite systems. Loral also
provides a broad array of satellite-based services. Since its formation in 1996,
Loral has assembled the building blocks essential to the creation of a seamless,
global networking capability for the information age.
Through a series of acquisitions commencing in August 1996 and concluding
in June 1997, Loral implemented its strategic decision to increase its ownership
in Space Systems/Loral, Inc. ("SS/L") to 100%. SS/L, one of the world's leading
satellite manufacturers, draws on a 40-year heritage, with more than 630 years
of cumulative on-orbit experience, and provides Loral with visibility into
emerging and new satellite-based technologies and applications.
In addition to SS/L's satellite manufacturing business, through a series of
strategic acquisitions, Loral has established itself as one of the world's
leading providers of satellite-based services. In March 1997, Loral acquired
Skynet Satellite Services ("Skynet"), a leading domestic satellite service
provider, from AT&T for $462.1 million in cash. Skynet owns and operates the
Telstar satellite network, which provides coverage over the continental United
States, Hawaii, Alaska, Puerto Rico and the U.S. Virgin Islands. With the launch
of additional Telstar satellites, Skynet intends to become a worldwide satellite
communications service provider.
In December 1997, a joint venture in which Loral holds a 65% economic
interest, completed the acquisition from the Mexican government of a 75%
interest in Satelites Mexicanos, S.A. de C.V. ("SatMex"). SatMex, which owns and
operates three geosynchronous communications satellites, is the dominant
satellite communications company currently providing services in Mexico and
intends to expand its services to become a leading provider of satellite
services throughout Latin America.
Most recently, on March 20, 1998, Loral acquired Orion Network Systems,
Inc. ("Orion"). Orion, a rapidly growing provider of satellite-based
communications services, focuses primarily on three businesses -- private
communications network services, Internet services and video distribution and
other satellite transmission services. Orion currently owns and operates one GEO
satellite and is constructing two additional GEO satellites to be launched in
the fourth quarter of 1998 and the second quarter of 1999. The footprints of
these satellites will, in the aggregate, cover over 85% of the world's
population.
In addition, Loral is developing CyberStar, a proposed worldwide high-speed
broadband data communications system. CyberStar plans to offer business and home
users worldwide a variety of low-cost, interactive multimedia communications
services via high speed digital signals. Initially, CyberStar intends to offer
service in the United States using leased capacity on Skynet's Telstar 5
satellite, and plans in the future to migrate its service to a worldwide system
of three GEO satellites.
Loral manages and currently owns, directly and indirectly, approximately
40% (38% on a fully diluted basis) of Globalstar, L.P. ("Globalstar").
Globalstar will operate a worldwide, LEO satellite-based digital
telecommunications system (the "Globalstar System(TM)") that is scheduled to
commence service in early 1999. 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. Loral,
together with partners, will act as the Globalstar service provider in Canada,
Mexico and Brazil.
In February 1998, Loral announced a strategic partnership with Alcatel
Alsthom of France to jointly build and operate Europe*Star, a multiple
geostationary satellite system that will provide broadcast and
telecommunications services to Europe, Southeast Asia, the Middle East, South
Africa and India. Europe*Star will become part of the Skynet global alliance
which intends to offer an integrated, worldwide portfolio of satellite capacity,
under the Skynet brand name.
Loral is pursuing additional satellite-based communications service
opportunities throughout the world. For instance, in August 1997, SS/L
established a joint venture with Mabuhay Philippines Satellite Corporation to
provide satellite-based services to the Philippines. Loral owns approximately
12% of CD Radio, Inc., a company that will provide digital audio radio service
to automobiles by satellite.
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Loral's strategy is to capitalize on its innovative capabilities, market
position and advanced technologies to offer value-added satellite-based services
as part of the evolving worldwide communications networks and, where
appropriate, to form strategic alliances with major telecommunications service
providers and equipment manufacturers to enhance and expand its satellite
communications service opportunities.
The following table presents a brief description of the orbital slots that
the Company and its affiliates are authorized to use. All satellite systems are
subject to international frequency coordination requirements and must obtain
appropriate authority ("landing rights") to provide service in a given
territory.
ORBITAL FREQUENCY/
SATELLITE LOCATION TRANSPONDERS COVERAGE AREA
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Loral Skynet(1) Telstar 303(2) 120 degreesW.L. 18 C-band (36 North America
MHz)
Telstar 4 89 degreesW.L. 24 C-band (36 North America
MHz) 16 Ku-band
(54 MHz)
Telstar 5(3) 97 degreesW.L. 24 C-band (36 North America
MHz), 28 Ku-band
(24 x 27 MHz, 4 x
54 MHz)
Telstar 6 93 degreesW.L. C- and Ku-band North America
Telstar 7 129 degreesW.L. C- and Ku-band North America,
including Alaska
Telstar 8 77 degreesW.L. C- and Ku-band North America
Telstar 9 69 degreesW.L. C- and Ku-band North America
SatMex Morelos II 116.8 degreesW.L. C-band (12 x 36 Mexico Domestic
MHz, 6 x 72 MHz),
Ku-band (4 x 108
MHz)
SatMex 5(4) 116.8 degreesW.L. C-band (24 x 36 Americas
MHz), Ku-band (24
x 36 MHz)
Solidaridad 1 109.2 degreesW.L. C-band (12 x 36 Mexico & Portions of
MHz, 6 x 72 MHz), Latin America
Ku-band (16 x 54
MHz)
Solidaridad 2 113.0 degreesW.L. C-band (12 x 36 Mexico & Portions of
MHz,6 x 72 MHz), Latin America
Ku-band (16 x 54
MHz)
Loral Orion(5) Orion 1 37.5 degreesW.L. Ku-band (28 x 54 Europe, SE Canada,
MHz, 6x36 MHz) U.S., East of the
Rockies and parts of
Mexico.
Orion 2(6) 12 degreesW.L. Ku-band Eastern U.S., SE
Canada, Europe, CIS,
Middle East, North
Africa and Latin
America, S. Africa
Orion 3 139 degreesE.L. C- and Ku-band China, Japan, Korea,
India, Hawaii, SE
Asia, Australia, New
Zealand, Eastern
Russia, Oceana
47 degreesW.L. Ku-band Americas, Europe &
Africa
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ORBITAL FREQUENCY/
SATELLITE LOCATION TRANSPONDERS COVERAGE AREA
------------------- ------------------ ----------------- --------------------
135 degreesW.L.(6) Ku-band North America,
Hawaii, Puerto Rico,
U.S. Virgin Islands
144 degreesE.L. C- and Ku band China, Japan, Korea,
India, Hawaii, SE
Asia, Australia, New
Zealand, Eastern
Russia, Oceana
89 degreesW.L. Ka-band Americas
78 degreesE.L. Ka-band Russia, India,
China, Europe,
Africa, CIS,
Australia, Asia
81 degreesW.L. Ka-band Americas
126.5 degreesE.L. Ka-band Asia, Russia,
Australia, Oceana
CyberStar
115 degreesW.L. Ka-band (spot North America
beams)
93 degreesW.L. Ka-band (spot North and South
beams) America(7)
105.5 degreesE.L. Ka-band (spot Asia-Pacific
beams)
Globalstar(8)
56 satellites, LEO 1610-1621.35 MHz, Global
2483.5-2500 MHz,
feeder links in
C-band
R/L DBS
61.5 degreesW.L. 11-Odd numbered Eastern United
DBS channels 1-21 States
166 degreesW.L. 11-Odd numbered Western United
DBS channels 1-21 States
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(1) In addition to the orbital slots listed in the table above, Loral has
applications pending at 77 degreesW.L. for use of the Extended C/Ku-band
frequencies, at 81 degreesW.L. for use of Ku/Extended Ku-band frequencies
and at 135 degreesW.L., 115 degreesW.L., 95 degreesW.L. and 58 degreesW.L.
for use of the V-band frequency. In addition, Loral has International
Telecommunication Union filings at 3.5 degreesE.L., 11 degreesE.L., 30
degreesE.L., 80 degreesE.L., 105.5 degreesE.L. and 135 degreesE.L. for use
of the V-band frequency.
(2) Currently operating in inclined orbit beyond its designed life. Subject to
FCC approval, can be expected to continue to generate modest revenues for
approximately one year.
(3) This satellite is licensed pursuant to a grant of special temporary
authority that expires May 18, 1998. Prior to that date, Loral anticipates
that the FCC will grant a permanent authorization or extend the temporary
authority.
(4) SatMex 5 is under construction and is scheduled for launch in the fourth
quarter of 1998 to replace Morelos II.
(5) In addition to the orbital slots listed in the table above, Loral Orion has
applications pending at 126 degreesE.L. for use of the Ku/Extended Ku/C and
Extended C-band frequencies and at 139 degreesE.L., 15 degreesW.L. and 67
degreesW.L. for use of the Ka-band frequency.
(6) These satellites are conditionally licensed by the FCC, subject to an
appropriate showing of Loral's financial capability to construct, launch and
operate the satellites.
(7) The FCC license does not describe a particular coverage area.
(8) In addition to the constellation in the table above, Globalstar has
applications pending for an 80 satellite LEO system using the V-band
frequency and for a second generation Globalstar system comprised of 64 LEO
satellites and four GEO satellites (at 80 degreesW.L., 10 degreesE.L., 100
degreesE.L. and 170 degreesE.L.) using the 2 GHz frequency.
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Loral was formed to effectuate the distribution (the "Distribution") of the
space and telecommunications businesses of Loral Corporation ("Old Loral") to
shareholders of Old Loral in connection with the merger (the "Merger") of Old
Loral into a subsidiary of Lockheed Martin Corporation ("Lockheed Martin"). The
Distribution was made on April 23, 1996.
SPACE SYSTEMS/LORAL
SS/L is a worldwide leader in the design, manufacture and integration of
telecommunications, weather and direct broadcast satellites with 40 years of
experience. As one of the premier providers of satellites and other space
systems, SS/L competes principally on the basis of technical excellence, a long
record of reliable performance, competitive pricing and on-orbit delivery
packages. The Company believes that SS/L's advanced manufacturing and testing
facilities and long-term customer relationships have enabled SS/L to compete
effectively in the commercial space systems marketplace.
SS/L is the leading supplier of satellites to Intelsat, an international
consortium of 135 member nations and the world's largest operator of commercial
communications satellites. Other significant customers include CD Radio,
Chinasat, Globalstar, MCI, PanAmSat, Loral Skynet and TCI. SS/L has a broad
range of technical capabilities in spacecraft design, as well as all critical
spacecraft subsystems, and maintains a completely integrated complex of
satellite manufacturing, assembly, integration and testing facilities. The
satellites built by SS/L have accumulated more than 630 years of service in
space.
SS/L has a history of technical innovation that includes the first
three-axis stabilized satellites, bipropellant propulsion systems for commercial
satellites that permit significant increases in the satellites' payload and
extend the satellites' on-orbit lifetime, rechargeable nickel-hydrogen batteries
with a life span of 10 years or more, the use of advanced composites to
significantly enhance satellite performance at lighter weights and the first
communications satellite with more than ten kilowatts of power. SS/L also
created the first multi-mission geostationary satellite and was the first U.S.
company to exchange space technology with Russia's space industry, obtaining
exclusive rights outside the former Eastern bloc to an electric propulsion
subsystem that is five times as efficient as bipropellant propulsion systems.
Since 1990, SS/L has shortened delivery schedules significantly, increased
spacecraft reliability and increased spacecraft power.
In March and June 1997, Loral acquired the remaining 49% of the common
stock of SS/L held by four international aerospace and communications companies
(the "Alliance Partners") for $374 million paid in cash and Loral securities.
SS/L and three of the Alliance Partners have agreed generally to 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 has enhanced 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. For
example, through the alliance, SS/L has been able to supply satellite payloads
in support of Aerospatiale's prime contract under the Eutelsat, Thaicom and
Sirius programs.
TECHNICAL CAPABILITIES
Active research and development projects are underway for both
communications and payload equipment and supporting bus elements. Highlights of
the payload program include the development of active microwave components,
which are among the lightest and most compact in the industry, and high power
handling state-of-the-art multiplexers and antennas that can be customized for
various customer requirements within a year of satellite delivery. Investments
in state-of-the-art computer-aided design and modeling tools have enabled SS/L
to eliminate expensive and time-consuming prototyping of most equipment, thereby
further reducing production time.
SS/L's capabilities in spacecraft bus technologies are extensive, including
its efforts in composite structural design, which, with certain exceptions,
allows structural components to be manufactured of light-weight/high-strength
composite materials. SS/L was also the first to employ heat pipes in its bus to
control heat transfer in commercial satellites, thereby providing a more benign
temperature environment and increased reliability. Nickel hydrogen batteries,
when combined with SS/L's patented thermal management
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system, provide one of the most efficient space batteries ever produced. A new
technology currently being developed by SS/L could result in the doubling of
such efficiency within the next three years. A new telemetry and command system
employing serial interfaces was introduced in 1997.
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 allowable costs incurred and receives a fee
consisting of a base amount that is fixed at the inception of the contract (the
base amount may be zero) and an award amount that is based on the customer's
subjective evaluation of the contractor's performance 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.
SKYNET
Skynet's customers lease transponder capacity to distribute network
television programming to local affiliate stations, collect live video feeds for
the reporting of news and sporting events and to offer direct-to-home
subscription and pay-per-view television programming, distance learning and
educational television, as well as business services such as VSAT networks, data
distribution for information services and other business television services.
Skynet's customers include, among others, the ABC and Fox television
networks. As a result, local affiliates of these networks have antennas pointed
at Skynet's satellites. This configuration creates a "neighborhood" attractive
to other users requiring similar distribution channels, giving Skynet a
competitive advantage in serving both television networks and television
programming syndicates. Other Skynet customers include third party resellers,
such as sports syndicators, who contract with major television programmers and
distance learning providers.
Skynet currently has two high-powered satellites in orbit. Telstar 4, which
was placed in service in November 1995, is equipped with 24 C-band and 24
Ku-band transponders and provides coverage over the continental United States,
Hawaii, Alaska, Puerto Rico and the U.S. Virgin Islands. The 52-transponder
Telstar 5, built by SS/L, was successfully launched in May 1997 and placed into
service on July 1, 1997. Telstar 5 provides coverage over the continental United
States, Puerto Rico, the Caribbean and into Canada and Latin America. In
addition, Telstar 303, which has exceeded its 10-year design life, is now in
inclined orbit and generates modest revenues from customers that have tracking
antennas or do not require continuously-available service.
Skynet plans to construct, launch and operate four additional high powered
C/Ku band satellites. The addition of these satellites will substantially
increase Skynet's capacity within the United States and will extend its coverage
area to Canada and Mexico, subject to obtaining rights from regulatory
authorities in those countries. Telstar 6, which is being built by SS/L, will
have 24 C-band and 28 Ku-band transponders and is scheduled to be launched and
placed into service in the second half of 1998. Telstar 7, which is also under
construction by SS/L, will have 24 C-band and 32 Ku-band transponders and is
scheduled for launch in the first quarter of 1999. Telstar 8, which is expected
to have 24 C-band and 32 Ku-band transponders, and
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Telstar 9, which is expected to have 24 C-band and 28 Ku-band transponders, are
currently scheduled for delivery and launch in 2001 and 2000, respectively.
In addition to providing transponder capacity in the domestic U.S. market,
Skynet plans to offer satellite services worldwide. Skynet is coordinating the
formation of a global alliance among Skynet, SatMex, Orion and Europe*Star. This
alliance will offer an integrated, worldwide portfolio of satellite capacity
under the Skynet brand name and will employ, among other things, a complementary
marketing strategy to provide customers with "one stop shopping" for local,
regional and global satellite services.
SATMEX
In connection with the privatization by the Federal Government of Mexico
(the "Mexican Government") of its fixed satellite services business, Loral and
Telefonica Autrey, S.A. de C.V. ("Telefonica Autrey") formed a joint venture,
Firmamento Mexicano, S. de R.L. de C.V. ("Holdings"). On November 17, 1997,
Holdings acquired 75% of the outstanding capital stock of SatMex for $646.8
million. The purchase price was financed by a Loral equity contribution of $94.6
million, a Telefonica Autrey equity contribution of $50.9 million and debt
issued by Holdings. As part of the acquisition, Holdings issued a $125.1 million
seven year obligation bearing interest at 6.03% to the Mexican Government (the
"Government Obligation") in consideration for the assumption by SatMex of the
debt incurred by Holdings in connection with the acquisition. The debt of SatMex
and Holdings is non-recourse to Loral and Telefonica Autrey. However, Loral and
Telefonica Autrey have agreed to maintain assets in a collateral trust in an
amount equal to the value of the Government Obligation through December 30, 2000
and, thereafter, in an amount equal to 1.2 times the value of the Government
Obligation until maturity. Loral has a 65% economic interest in Holdings and a
49% indirect economic interest in SatMex. SatMex is the dominant provider of
fixed satellite services in Mexico and provides broadcasting and
telecommunications capacity to approximately 180 customers.
SatMex provides satellite transmission capacity to broadcasting customers
for network and cable television programming, direct-to-home television service
and on-site transmission of live news reports, sporting events and other video
feeds. SatMex also provides satellite transmission capacity to
telecommunications service providers for public telephone networks in Mexico and
elsewhere and corporate customers for their private business networks with data,
voice and corporate video applications. SatMex has landing rights to provide
broadcasting and telecommunications transmission capacity in 15 nations in the
region, including the United States. SatMex's broadcasting customers include
Televisa, MVS Mutivision and Television Azteca, and its telecommunications
services customers include Telmex, Bancomer, Pemex, Cemex and the Mexican
subsidiaries of Ford and Chrysler.
SatMex believes that it has one of the largest aggregate satellite
capacities dedicated primarily to the Latin American region, with 132 36 MHz
transponder-equivalents currently in operation. SatMex's three satellites
(Solidaridad 1, Solidaridad 2 and Morelos II) are in geostationary orbit at
109.2 WL, 113.0 WL and 116.8 WL, respectively, with aggregate footprints
covering Mexico, the southern and eastern United States, Central America, the
Caribbean and most of South America. SatMex holds 20-year concession titles to
operate in these three orbital locations at certain C- and Ku-band frequencies
expiring October 22, 2017. The concession titles are renewable thereafter,
subject to certain conditions, for an additional 20-year term without additional
payment. In addition, SatMex operates two satellite control centers.
SatMex has contracts for the construction and launch of SatMex 5, the
replacement for Morelos II, which is scheduled to launch in the fourth quarter
of 1998. SatMex 5 has been designed to increase SatMex's total capacity to 144
36 MHz transponder-equivalents, with a substantial increase in power and an
extension of SatMex's footprint to include substantially all of the continental
United States and the Caribbean, as well as all of Latin America, other than
certain remote regions of Brazil.
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ORION
On March 20, 1998, Loral acquired Orion in exchange for Loral common stock.
Loral issued 17.9 million shares of its common stock and assumed existing Orion
options and warrants to purchase 1.9 million shares of Loral common stock
representing an aggregate purchase price of $467.0 million.
Orion is a rapidly growing provider of a satellite-based communications
services, focused primarily on private communications network services, Internet
services and video distribution and other satellite transmission services. Orion
provides multinational corporations with private communications networks
designed to carry high-speed data, fax, video teleconferencing, voice and other
specialized services. The Orion satellite's coverage reaches all locations
within its footprint, enabling the delivery of high-speed data to customers in
emerging markets and remote locations which lack the necessary infrastructure to
support these services. Orion also offers high speed Internet access and
transmission services to companies outside the United States seeking to avoid
"last mile" terrestrial connections and to bypass congested regional Internet
network routes. In addition, Orion provides satellite capacity for video
distribution, satellite news gathering and other satellite services primarily to
broadcasters, news organizations and telecommunications service providers. Orion
provides its services directly to customer premises using VSATs.
Orion believes that demand for satellite-based communications services will
continue to grow due to the expansion of businesses beyond the limits of wide
bandwidth terrestrial infrastructure, accelerating demand for high speed data
services, growing demand for Internet and intranet services, especially outside
the United States, increased size and scope of television programming
distribution, worldwide deregulation of telecommunications markets and
continuing technological advancement. Satellites are able to provide reliable,
high bandwidth services anywhere in their coverage areas, and Orion believes
that it is well positioned to satisfy market demand for these services.
Orion commenced operations of Orion 1, a high power Ku-band satellite with
34 Ku-band transponders, in January 1995. Orion 1 provides coverage of 34
European countries, much of the United States and parts of Canada, Mexico and
North Africa. Through arrangements with local ground operators, Orion currently
has the ability to deliver network services to and among points in 27 European
countries, portions of the United States and a limited number of Latin American
countries. As of December 31, 1997, Orion serviced 301 customers through 682
sites in service.
Orion 2, which will be a high power satellite with 30 Ku-band transponders,
will expand Orion's European coverage and extend coverage to portions of the
Commonwealth of Independent States, Latin America and the Middle East. Orion 2
will significantly increase Orion's pan-European capacity, currently the area of
strongest demand for Orion's services. Orion recently commenced selling services
in certain areas of Latin America. Orion 2 is scheduled to be launched in the
second quarter of 1999.
Orion 3, which will be a high power satellite with 33 Ku-band transponders
and 10 C-Band transponders, will cover broad areas of the Asia Pacific region,
including China, Japan, Korea, India, Southeast Asia, Australia, New Zealand,
Eastern Russia and Hawaii. Orion 3's footprint will provide Orion with the
ability to distribute programming from the United States via Hawaii to most of
the Asia Pacific region. Orion has already taken a number of steps to establish
an early market presence in Asia, and has entered into an $89 million lease for
eight of Orion 3's transponders. Orion 3 is scheduled to be launched in the
fourth quarter of 1998.
In the aggregate, the footprints of Orion 1, Orion 2 and Orion 3 will cover
over 85% of the world's population.
CYBERSTAR
Loral is developing CyberStar, a proposed worldwide high-speed broadband
data communications system. CyberStar plans to offer business and home users
worldwide a variety of low-cost, interactive multimedia communications services
via high speed digital signals. Initially, CyberStar intends to offer service in
the United States using leased Ku-band transponder capacity on Skynet's Telstar
5 satellite. CyberStar's
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satellite-based services will include high speed Internet access, data
broadcasting, broadband interconnection, intranet muticasting, real-time
streaming and other data services. CyberStar service, expected to commence in
the second half of 1998, will be delivered to consumers, businesses and private
networks worldwide through a network of local and regional service providers.
In the future, CyberStar intends to offer services through a dedicated
worldwide constellation of three geostationary satellites utilizing the Ka-band.
CyberStar holds FCC licenses to orbital slots covering North and South America,
Asia, Europe and the Middle East.
GLOBALSTAR
The Globalstar System(TM) 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. Globalstar's designated service
providers have agreed to offer Globalstar service and seek to obtain all
necessary local regulatory approvals in more than 100 nations, accounting for
approximately 88% of the world's population.
The Globalstar System's worldwide coverage is designed to enable its
service providers to extend modern telecommunications services to millions of
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
Globalstar System has been designed to provide services at prices comparable to
today's cellular service and substantially lower than the prices announced by
Globalstar's anticipated principal competitors. Globalstar service providers
will set their own retail pricing in their assigned service territories and will
pay Globalstar approximately $0.35 to $0.55 per minute on a wholesale basis.
Globalstar users will make and receive calls through a variety of
Globalstar user terminals, 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.
Dual-mode and tri-mode Globalstar user terminals will provide access to both the
Globalstar System and the subscriber's land-based cellular service. Each
Globalstar user terminal 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.
As of February 27, 1998, each of the elements of the Globalstar
System -- space and ground segments, digital communications technology, user
terminal supply, service provider arrangements and licensing -- is on schedule
to commence commercial operations in early 1999 following the launch of 44
satellites in 1998. The remaining 12 satellites, including eight in-orbit
spares, will be launched in early 1999.
Space Segment. On February 14, 1998, Globalstar launched its first
four satellites. The next four Globalstar satellites, which will be
launched on a Boeing Delta II launch vehicle, are at the Cape Canaveral
launch site and are expected to be launched in late April 1998. In
addition, satellite and major subsystem assembly, integration and testing
necessary for the first launch on an Ukranian Zenit launch vehicle are
underway. Production is proceeding for the remaining satellites to meet
scheduled launch dates. Globalstar's launch providers have signed
definitive agreements for the launch of the Globalstar satellite
constellation, providing a variety of launch options and considerable
launch flexibility. Mission operations preparations and launch vehicle
production and dispenser development are on schedule.
Ground Segment. Globalstar purchased 38 gateways under contracts
totaling approximately $340 million. Globalstar has entered into contracts
and discussions to resell such gateways to its partners and service
providers. The first four Globalstar gateways, which are to be located in
Australia, France, South Korea and the United States, are completed. These
gateways will support Globalstar's data network, monitor the initial launch
and orbital placement of Globalstar's first satellites, and serve as
prototypes for production gateways that will support Globalstar service.
Construction of the remaining 34 gateways is proceeding on schedule for the
initiation of commercial service in 1999. In addition, Globalstar's
satellite operations control center facility has been completed.
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Digital Communications Technology. Qualcomm's CDMA technology has now
been successfully deployed in South Korea, Hong Kong and cities in the
United States supporting terrestrial personal communications services and
digital cellular service, and its CDMA implementation for Globalstar has
been successfully demonstrated in a simulated satellite environment. This
demonstration validated Globalstar's encoding, modulation, control
software, time and frequency distribution and up/down links between
satellites, gateways and handsets.
User Terminal Supply. Qualcomm/Sony and two other manufacturers,
Ericsson and TELITAL, are developing Globalstar's user terminals and
production orders were issued in the fourth quarter of 1997. In December
1997, an order for 40,000 fixed access terminals totaling $84 million was
placed with Ericsson. Globalstar expects to recover this cost through the
resale of these terminals to vendors.
Service Providers. Globalstar and its partners have been seeking
alliances with service providers throughout the world and have entered into
a number of agreements in specific territories. Globalstar believes that
these relationships with in-country service providers will facilitate the
granting of local regulatory approvals -- particularly where the service
provider and the licensing authority are one and the same -- as well as
provide local marketing and technical expertise.
Licensing. In January 1995, the FCC granted authority for the
construction, launch and operation of the Globalstar System and assigned
spectrum for its user links. Later that year, the 1995 World
Radiocommunications Conference ("WRC95") allocated feeder link spectrum on
an international basis for mobile satellite services ("MSS") systems such
as Globalstar, and in November 1996 the FCC authorized Globalstar's feeder
links.
Globalstar's current budgeted expenditures for the cost for the design,
construction and deployment of the Globalstar System, including working capital,
cash interest on borrowings and operating expenses are approximately $2.7
billion. Globalstar has raised or received commitments for approximately $2.6
billion in equity, debt and vendor financing.
In addition, Globalstar has agreed to purchase from SS/L eight additional
spare satellites at a cost of $175 million. Further, in order to accelerate the
deployment of gateways around the world, Globalstar has agreed to finance
approximately $80 million of the cost of up to 32 of the initial 38 gateways.
Globalstar expects to recover this financing upon resale of such gateways to its
partners and service providers.
The Globalstar System has been designed to address the substantial and
growing demand for telecommunications services worldwide, particularly in
developing countries. More than three 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 469 million
in 1988 to 753 million in 1996 and is projected to increase to 1.2 billion by
2002. Nonetheless, during the same period, waiting lists for fixed service have
increased from 30 million to 45 million, resulting in an average waiting time
before installation of approximately one and a half years. Similarly, the
cellular market has grown from four million worldwide subscribers in 1988 to an
estimated 123 million in 1996 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's
population will have access to wireless telephone service principally through
satellite-based systems like the Globalstar System. Globalstar believes that its
addressable market exceeds 30 million people.
The Globalstar System has been designed with attributes which the Company
believes compare favorably to other proposed global MSS systems including:
Globalstar's unique combination of CDMA technology and path diversity through
multiple satellite coverage, which will reduce call interruptions and signal
blockage from obstructions and will use satellite power more efficiently; 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 user terminals; lower average wholesale prices
than other proposed MSS systems and gateways installed in most major countries,
minimizing tail charges (i.e. amounts charged by
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carriers other than the 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.
CUSTOMERS
Sales to foreign customers, primarily Asia, represented 30% of revenues in
1997. Sales to the U.S. government represented 7% of revenues for 1997 and sales
to Globalstar represented 31% of revenues for 1997.
BACKLOG
At December 31, 1997, funded backlog was approximately $1.8 billion
including $188 million of intercompany backlog. Approximately 47% of funded
backlog, excluding intercompany backlog, at December 31, 1997 is expected to be
recognized as revenues in 1998.
RESEARCH AND DEVELOPMENT
For the year ended December 31, 1997, the Company expended approximately
$56.8 million for company sponsored research and development projects.
PATENTS AND PROPRIETARY RIGHTS
SS/L relies, in part, on patents, trade secrets and know-how to develop and
maintain its competitive position. It holds 130 patents in the United States and
213 patents abroad and has applications for 59 patents pending in the United
States and 162 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 1998 and 2016.
In connection with the Globalstar System, Globalstar's design and
development efforts have yielded nine patents issued and 30 patents pending in
the United States, as well as 13 patents issued and 152 patents pending
internationally for various aspects of communications satellite system design
and implementation of CDMA technology relating to the Globalstar System.
Qualcomm has obtained 149 issued patents and 380 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.
There can be no assurance that any of the pending patent applications by
SS/L or Globalstar will be issued. Moreover, because the U.S. patent application
process is confidential, there can be no assurance that third parties, including
competitors of SS/L and Globalstar, do not have patents pending that could
result in issued patents which SS/L or Globalstar would infringe. In such an
event, SS/L or Globalstar could be required to redesign its system or satellite,
as the case may be, or pay royalties to obtain a license, which could increase
cost or delay implementation of the system or construction of the satellite, as
the case may be.
EMPLOYEES
As of December 31, 1997, the Company had approximately 3,300 full-time
employees, some of whom are subject to collective bargaining agreements.
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 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.
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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.
RISKS OF OPERATIONS IN THE SPACE ENVIRONMENT
Satellites operate in a distant, hostile environment. Despite costly high
reliability parts and significant on ground testing to assure reliability for
their designed lives, satellites remain vulnerable to complete or partial
failure or degradation from hazards which include space debris, solar and other
astronomical events, acts of war and component failure. Repair of satellites in
space is not practicable. In addition, a number of factors affect the useful
lives of Globalstar's, Skynet's, SatMex's and Orion's satellites, including the
quality of construction, expected gradual environmental degradation of solar
panels and the durability of component parts. Random failure of satellite
components could result in damage to or loss of a satellite ("cold failures").
The first-generation Globalstar 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 useful life. Globalstar anticipates using funds
from operations to develop a second generation of satellites. If sufficient
funds from operations are not available and Globalstar is unable to obtain
financing for the second-generation constellation, Globalstar will not be able
to deploy a second-generation constellation to replace first-generation
satellites at the end of their useful lives.
In November 1995, an Orion 1 component supporting nine transponders serving
the European portion of Orion 1's footprint experienced an anomaly that resulted
in a service interruption lasting approximately two hours. Full service was
restored using redundant equipment. These transponders generate a majority of
Orion's revenues. Orion believes, based on Orion's own investigations and the
manufacturer's, and based upon advice from Orion's engineering consultant that
because the redundant component is functioning in accordance with specifications
and the performance record of similar components is strong, the anomalous
behavior is unlikely to affect the expected performance of the satellite over
its useful life. There has been no further effect on Orion's ability to service
customers. However, if the currently operating component fails, Orion 1 would
experience a significant loss of usable capacity, resulting in lost service and
a corresponding adverse effect on Orion's results of operations.
In 1994 and 1997 (prior to the acquisition by Loral), Skynet experienced
the loss of its Telstar 402 and Telstar 401 satellites, respectively, resulting
in lost service and a corresponding adverse effect on Skynet's results of
operations.
Certain of SS/L's contracts provide that a portion of the total contract
price is payable in the form of "incentive" payments earned during the life of
the satellite in orbit as its mission is performed. Although SS/L generally
receives the present value of such incentive payments in the event of launch
failure or one caused by customer error, it forfeits such revenues if the loss
is caused by system failure or an error on its part. While insurance against
loss of such payments 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.
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 that exposure. However,
SS/L cannot predict whether, and there can be no assurance that, insurance
against launch failure and loss of incentive payments will continue to be
available on reasonable terms.
LAUNCH RISK AND VEHICLE ACCESS
About 15% of commercial satellite launches have historically resulted in
loss before the payload reaches its planned orbit ("hot failures"). While Loral
ordinarily obtains insurance against loss due to hot failures, such events can
nevertheless disrupt and delay business schedules and cause substantial
uninsured losses above and beyond the insured cost of the lost satellite.
Loral's ability to place satellites in orbit, and SS/L's ability to perform its
on-orbit delivery contracts depend on the availability of launch vehicles and
the requisite insurance. Launch slots are limited, and the launch insurance
market has been subject to considerable fluctuation. Different launch facilities
and vehicles have different success records, but Loral, for business or
scheduling reasons does not always use, or have available to it, the most
successful facilities and vehicles for its
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launches. The cost and availability of launch insurance varies from time to time
so there is no assurance that such insurance will shield every future loss.
Moreover, the availability of launches from the republics of the former Soviet
Union and the People's Republic of China are affected by U.S. government
policies and international agreements. Changes in governmental policies or
political leadership in the United States, Russia, Kazakhstan or China could
affect Loral's ability to launch from these countries.
LEVERAGE
Many of the Loral businesses are capital intensive, requiring high initial
investments in the expectation of future revenues requiring relatively low
marginal costs. At December 31, 1997, Loral's outstanding debt was $435.4
million. In addition, Loral had outstanding at December 31, 1997 Series C
Convertible Redeemable Preferred Stock having a redemption value of $745.5
million, which may be payable at Loral's option in cash, common stock of Loral
or a combination thereof. On November 14, 1997, the Company, through its wholly
owned subsidiary Loral SpaceCom Corporation, entered into an $850 million credit
facility with a group of banks. SS/L will also require continuous investment to
maintain its technological position and the fixed satellite service businesses
are at the beginning of a planned expansion. At December 31, 1997, Loral had a
ratio of earnings to fixed charges of 1.9:1.
Orion has approximately $747.1 million of publicly-traded debt outstanding.
Such debt is non-recourse to Loral.
A significant portion of the SatMex purchase price was financed with debt,
including the Government Obligation. The debt of SatMex and Holdings is
non-recourse to Loral and Telefonica Autrey. However, Loral and Telefonica
Autrey have agreed to maintain assets in a collateral trust in an amount equal
to the value of the Government Obligation through December 30, 2000 and,
thereafter, in an amount equal to 1.2 times the Government Obligation until
maturity. Loral has a 65% economic interest in Holdings and a 49% indirect
economic interest in SatMex.
Globalstar is still in the development stage. At December 31, 1997,
Globalstar had outstanding long-term indebtedness of $1.1 billion. The
outstanding Globalstar debt is non-recourse to Loral.
Loral is subject to substantial financial risks in the face of possible
delays or reductions in revenue realization, unforeseen capital requirements or
unanticipated expenses attributable to the factors described in this document.
Such risks could result not only in adverse financial results due to ongoing
debt service charges, but also in the necessity for additional financing which
could result in increased debt and debt service costs, potential dilution of
equity interests resulting from issuances of debt or equity, rights to
distributions senior to those of the holders of Loral common stock, and
covenants restricting distributions to holders of Loral common stock.
OBSOLESCENCE DUE TO RAPID TECHNOLOGICAL CHANGE
In common with all high technology enterprises, Loral's businesses are
subject to obsolescence due to new technological developments. The rapid pace of
technological change exposes Loral to risk of loss due to the deployment of
superior technologies by competitors. Loral is also dependent upon technologies
developed by third parties to implement key aspects of its strategy to integrate
its satellite systems with terrestrial networks. SS/L, Skynet, SatMex, Orion and
Globalstar, in particular, are susceptible to such risks. As land-based
telecommunications services expand, demand for certain types of satellite-based
services may be reduced. New technology used by competitors could render Skynet,
Globalstar, SatMex or Orion less competitive by satisfying consumer demand in
alternative ways or through the use of incompatible telecommunications
standards. In addition, SS/L's success depends on its ability to introduce
innovative new products and services on a cost-effective and timely basis.
THE GLOBALSTAR SYSTEM
The Globalstar System will consist of 56 satellites (including eight
in-orbit spares) in low earth orbit together with ground facilities in numerous
remote and sometimes primitive regions. Its operating facilities
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will be in more than 100 countries, many of which are based on emerging
economies, eventually connecting hundreds of thousands of mobile and fixed
telephone handsets. While Loral believes that each component of the Globalstar
System, and the Globalstar System as a whole, is capable of performing as
designed, no such complex, dispersed space/earth communications network has ever
been operated commercially. Until the Globalstar System has operated as a whole
in its actual space/earth environment, there can be no assurance that losses due
to delays, failures and unforeseen additional costs will not occur. Globalstar's
financial objectives are, in part, based on estimates as to the potential market
for Globalstar System services and the price that users will be willing and able
to pay, which cannot be practically validated until commercial operations have
begun. There can be no assurance that such economic assumptions are justified.
Globalstar is scheduled to begin commercial operations in early 1999.
Successful commencement of operations will require successful implementation of
each of the elements of the Globalstar System -- space and ground segments,
digital communications technology, user terminal supply, service provider
arrangements and licensing. Globalstar launched four satellites on February 14,
1998 and expects to launch an additional 40 satellites during 1998 and 12
satellites, including eight in-orbit spares, in early 1999. However, there can
be no assurance that schedule delays will not occur.
Loral's equity in net loss attributable to its interest in Globalstar for
the year ended December 31, 1997 was $42.5 million as compared to $18.1 million
for the nine months ended December 31, 1996. Globalstar is expending significant
funds for the construction, testing and deployment of the Globalstar System and
such losses are expected to continue through commencement of revenue generating
service operations.
COMPETITION
Each of Loral's businesses is subject to intense competition from entities,
including several of the world's largest corporations, as well as governments
and quasi-governmental organizations, which are larger and which may bring
greater financial and operating resources to bear in competing as to marketing,
regulation and technology. Loral competes for customers and for local regulatory
approval in jurisdictions in which both Loral and a competing party may wish to
operate. In addition, Loral competes for allocation of scarce frequency
assignments and geosynchronous orbital slots. Competition comes not only from
entities carrying on the same activities as Loral, but from others using
alternative technologies such as terrestrial telecommunications and cable
television, which themselves are constantly pursuing advanced technologies in
order to enhance their competitive positions. In addition, as Loral expands into
international markets, it will have to compete with international operators
including Intelsat and PanAmSat. To the extent that these entities offer
products and services which are more sophisticated, efficient or reliable than
those of Loral, there could be a material adverse effect on the financial
condition or results of operations of Loral.
COMPETITIVE BIDDING
SS/L generally obtains its contracts through 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 result in profitability
for SS/L. SS/L has in the past submitted bids which would result in minimal or
no profit due to a high level of non-recurring engineering costs. Such contracts
are generally bid with the expectation of more profitable follow-on contracts as
to which there is generally no advance assurance. To the extent that actual
costs exceed the projected costs on which bids or contract prices were based,
SS/L's profitability could be adversely affected.
REGULATION
Loral's activities, particularly the Globalstar System, Skynet, SatMex and
Orion, are subject to licensing and regulation by authorities in more than 100
jurisdictions, including the United States, the International Telecommunications
Union ("ITU") and the Commission of the European Union. Regulated activity
includes the occupation of orbital positions ("orbital slots"), the pricing and
quality of services, the use of frequency bands, competitive behavior, the
export of space-related products and services (which frequently require licenses
from the Department of State or the Department of Commerce), and other matters
essential
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to conduct of the business. The regulatory authorities, depending on the
location, often have broad discretion over such activities, including frequently
the power to modify, withdraw or impose charges or conditions upon, or delay the
grant of, the rights required for the conduct of the business. In particular, in
determining whether to grant Loral authorization, the FCC must evaluate whether
certain FCC standards and financial qualification requirements are met. Many of
the licenses Loral holds or has applied for have been contested by third
parties, including competitors, which increase the risk of regulatory decisions
adverse to Loral. In particular, two of Loral's Ka-band orbital slots for
CyberStar are in positions that are subject to prior claims of parties from
other countries. While regulation is an expected incident of international
telecommunications business, and Loral expects to obtain the rights and licenses
which it requires under satisfactory conditions, the broad reach of the
Globalstar System, the expansion of Skynet's operations beyond the domestic U.S.
market, the expansion of SatMex's Latin American presence, the proposed launch
and operation of Orion 2 and Orion 3 and the development of other satellite
services businesses, by becoming subject to such a large number of diverse
regulatory regimes and political systems, entail unusual risks of unforeseen
costs, delays and other burdens on planned performance. In addition, as part of
the regulatory process for orbital slot allocation of its satellites, Loral is
required to engage in frequency coordination with other satellite operators.
Although the Loral Group has in the past been able to coordinate its existing
satellites, there can be no assurance that satisfactory coordination will be
achieved in the future for any of Loral's satellites.
Orion has begun construction of Orion 2 and Orion 3 before completion of
the required consultation with Intelsat and Eutelsat, receipt of final authority
from the FCC (in the case of Orion 2) and completion of the ITU coordination
process. Failure to obtain one or more necessary approvals on time would have an
adverse effect on Orion's business or results of operations.
POTENTIAL CONFLICTS OF INTEREST; LACK OF FULL CONTROL
Loral has financed the development and acquisition of certain of its assets
which it does not own completely through complex financial and governance
arrangements.
Loral is the managing general partner of Globalstar, but its governance
rights are limited by rights of other partners and fiduciary duties that could
result in Globalstar actions that are not in Loral's own best interests. In
accordance with Mexican law, voting control of SatMex must be held by Mexican
nationals. While Loral's investment will be protected by contractual rights and
it is anticipated that SatMex will be managed in close coordination with the
activities of Skynet, there can be no assurance that SatMex will be managed as
it would be if it were a controlled subsidiary of Loral.
Conflicts of interest may arise as a result of such arrangements and
because some of Loral's businesses may compete with one another and are or may
become customers of SS/L.
Both Skynet and Orion own or are building satellites whose footprints
overlap with those of SatMex's present and proposed satellites and will
therefore compete directly with SatMex for customers in some of its markets.
Although Skynet and Orion will adopt a marketing policy which will provide for
cross-selling of capacity with SatMex and a process for allocating opportunities
between the companies, situations may arise where SatMex and Loral will have a
conflict. This conflict will become particularly acute if there is an oversupply
of capacity in their markets.
Partners and affiliates of Globalstar, including companies affiliated with
Loral, will be among Globalstar's service provider customers and may therefore
have conflicts with Globalstar and/or Loral as to service provider agreements.
RISKS OF CONDUCTING INTERNATIONAL BUSINESS
Operations in numerous countries outside the United States carry
substantial managerial, operational, legal and political uncertainties apart
from the technical risks of initiating a previously untried telecommunications
system. Such operations are subject to changes in government regulations and
telecommunications standards, tariffs or taxes and other trade barriers. In
addition, Loral's agreements relating to local operations may be enforceable
only in foreign jurisdictions so that it may be difficult for Loral to enforce
its rights. Also,
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limited availability of U.S. currency in local markets may prevent a service
provider from making payments in U.S. dollars and exchange rate fluctuations may
adversely affect Globalstar's, SatMex's and Orion's revenues. In connection with
delayed payment in 1997 by two Asian customers for three satellites, SS/L
stopped work, reduced backlog by $291 million, which will reduce future sales,
and recorded a charge of $23 million. If the current programs for these three
satellites are not restarted, the satellites will be sold to other customers.
YEAR 2000 ISSUE
The Company is evaluating the potential effect of the year 2000 on its
information processing systems. It is not known at this time what modifications,
if any, will be required. All costs associated with any modification will be
expensed as incurred.
RELIANCE ON KEY PERSONNEL
The success of Loral is partially dependent upon the ability of Loral to
attract and retain highly qualified personnel. Except for Mr. Bernard L.
Schwartz, Loral's Chairman and Chief Executive Officer, none of the officers of
Loral has an employment contract with Loral nor does Loral expect to maintain
"key man" life insurance. The loss of any of these individuals and the
subsequent effect on business relationships could have an adverse effect on the
business or results of operations of Loral.
DEPENDENCE ON SS/L
Currently, SS/L generates a significant portion of Loral's revenue and
operating income. Loral intends to capitalize on SS/L's capabilities, market
position and advanced technologies to identify and develop additional
space-based communications services opportunities. There can be no assurance
that current or future satellite-based ventures entered into by Loral will
result in revenues or operating income that will materially reduce its
dependence on SS/L.
SS/L has historically derived a large portion of its total revenues from a
limited number of customers, and its revenues and operating results may be
adversely affected in the event completed or canceled contracts are not promptly
replaced.
The financial results of long-term fixed-price contracts are recognized
using the cost-to-cost percentage of completion method. Loral's statement of
operations reflects revisions in revenue and profit estimates in the period in
which the conditions that require the revision become known and can be
estimated. Adjustments for profits and losses may therefore have a material
effect on results for the period in question. The risks inherent in long-term,
fixed-price contracts include the forecasting of 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.
In 1997, two in-orbit satellites built by SS/L experienced solar array
circuit failures. One of the customers has asserted that, in light of the
failures and uncertainty as to further failures, it has not accepted the
satellite. Loral believes that the customer was contractually required to accept
the satellite at completion of in-orbit testing and that risk of loss has passed
to the customer. In addition, another customer has requested that SS/L structure
an arrangement whereby a satellite under construction would be sold to another
customer. Management believes that these matters will not have a material
adverse effect on the financial condition or results of operations of Loral.
ITEM 2. PROPERTIES
The Company maintains office space, manufacturing and telemetry, tracking
and control facilities primarily in the United States. SS/L's research,
production and testing facilities are carried on in SS/L-owned facilities
covering approximately 562,000 square feet on 29.4 acres in Palo Alto,
California. In addition, SS/L leases 772,000 square feet of space from various
third parties. Skynet owns two telemetry, tracking and control stations located
in Hawley, Pennsylvania and Three Peaks, California and leases 26,000 square
feet of office space. Orion leases approximately 50,000 square feet for office
space and its satellite operations center. Management believes that the
facilities are sufficient to allow the Company to conduct its operations.
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ITEM 3. LEGAL PROCEEDINGS
CCD Lawsuits. On September 12, 1991, Loral Fairchild Corp. ("Loral
Fairchild"), a subsidiary of Old 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. The trial judge,
however, in an order dated July 12, 1996, reversed the jury verdict. Loral
Fairchild has appealed the court's decision. Loral Fairchild's claims against
other defendants remain pending, but if the court's decision is affirmed on
appeal, a substantial portion, but not all, of the damage claims against the
other defendants would be adversely affected. Matsushita has been granted a
declaratory judgment that it has a valid and enforceable license under the CCD
patents. In addition, a trial on Matsushita's claim against Loral Fairchild for
tortious interference was conducted during July 1996, and a verdict was rendered
in favor of Loral Fairchild.
Environmental Regulation. Operations at SS/L, Skynet, Orion, and
Globalstar 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
and its subsidiaries or Globalstar.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
(a) MARKET PRICE AND DIVIDEND INFORMATION
The Company's common stock is traded on the NYSE under the symbol LOR. The
following table sets forth, for each of the periods indicated, the reported high
and low sales prices per share of the Company's common stock as reported on the
NYSE:
HIGH LOW
---- ---
YEAR ENDING DECEMBER 31, 1997
Quarter ended March 31, 1997........................... $19 1/2 $14 1/8
Quarter ended June 30, 1997............................ 17 1/2 13
Quarter ended September 30, 1997....................... 21 14 1/16
Quarter ended December 31, 1997........................ 24 1/4 19
HIGH LOW
---- ---
PERIOD ENDING DECEMBER 31, 1996
Quarter ended June 30, 1996............................ $18 1/2 $10 1/2
Quarter ended September 30, 1996....................... 16 5/8 11 1/8
Quarter ended December 31, 1996........................ 19 5/8 15 1/4
The Company does not currently anticipate paying any dividends or
distributions on its common stock or the Series A Convertible Preferred Stock.
As required, Loral is currently paying dividends on its 6% Series C Convertible
Redeemable Preferred Stock. The credit facility maintained by the Company's
wholly owned subsidiary, Loral SpaceCom Corporation ("Loral SpaceCom") restricts
the ability of Loral SpaceCom to transfer cash or pay dividends to its parent
(see Note 7 to Loral's consolidated financial statements).
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At February 27, 1998, there were approximately 6,800 holders of record of
the Company's common stock.
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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 financial
information as of and for the three years in the period ended March 31, 1996,
represents the space and communications operations of Old Loral.
LORAL SPACE & COMMUNICATIONS LTD.
(In thousands except per share data)
YEARS ENDED MARCH 31,(1)
YEAR ENDED NINE MONTHS ENDED -----------------------------
DECEMBER 31, 1997(1) DECEMBER 31, 1996(1) 1996 1995 1994
-------------------- -------------------- -------- -------- -------
STATEMENT OF OPERATIONS DATA:
Revenues..................... $1,312,591
Management fee from
affiliate.................. $ 5,088 $ 5,608 $ 3,169 $ 2,981
Operating income (loss)...... 13,552 (12,201) 2,587 (33) 398
Equity in net income (loss)
of affiliates(1)(2)........ (47,273) (4,709) (8,628) (8,988) 1,174
Net income (loss)............ 40,004 8,877 (13,785) (7,873) (3,694)
Preferred dividends and
accretion(3)............... (26,315)
Net income (loss) applicable
to common shareholders..... 13,689 8,877 (13,785) (7,873) (3,694)
Earnings (loss) per share --
basic and diluted.......... .06 .04 (.08) N/A N/A
CASH FLOW DATA:
Used in operating
activities................. $ 230,248 $ 3,003 $ 1,319 $ 8,439 $ 587
Used in investing
activities................. 1,022,772 1,962 115,031 92,055 25,288
Provided by (used in) equity
transactions............... (18,097) 602,413 116,362 100,494 25,875
Provided by financing
transactions............... 316,912 583,292
Dividends paid per common
share...................... N/A N/A N/A
DECEMBER 31, MARCH 31,
----------------------- ------------------------------
1997 1996 1996 1995 1994
---------- ---------- -------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 226,547 $1,180,752 $ 12 $ -- $ --
Total assets............................. 3,004,936 1,699,326 354,396 251,819 163,479
Convertible preferreds(3)................ 583,292
Debt..................................... 435,398
Non-current liabilities.................. 179,482 26,834
Shareholders' equity(4)/Invested
equity................................. 1,973,245 1,070,069 354,396 251,819 159,198
- ---------------
(1) In 1997, Loral increased its ownership in SS/L to 100% and, accordingly, the
1997 financial information includes the results of SS/L. In prior years SS/L
was accounted for under the equity method of accounting. On March 14, 1997
Loral acquired Skynet from AT&T; Loral's financial information includes the
results of Skynet from that date. Financial information as of and for the
three years in the period ended March 31, 1996, represents the space and
communications operations of Old Loral. The results of operations for the
three years in the period ended March 31, 1996 include allocations and
estimates of certain expenses of Loral based upon estimates of actual
services performed by Old Loral on behalf of Loral. Interest expense was
allocated to Loral based on Old Loral's historical weighted average interest
rate applied to the average investment in affiliates.
(2) The Company's affiliates are Globalstar and SatMex since November 17, 1997.
Loral sold its interest in K&F Industries, Inc. in 1997.
(3) Convertible preferreds were exchanged for 6% Series C Preferred Stock and
were reclassified to shareholders' equity in 1997 upon approval by the
Company's shareholders.
(4) As of December 31, 1997, the book value per share of the Series A Preferred
Stock and the common stock (which the Company is required to disclose herein
in accordance with applicable Bermuda law) was $4.98 and $4.97,
respectively. Book value per share represents the quotient obtained by
dividing shareholders' equity, reduced by the Series C Preferred Stock
redemption value, by the number of outstanding shares of common stock,
giving effect to the conversion of the Series A Preferred Stock, plus, in
the case of such preferred stock, the $.01 liquidation preference thereof.
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SPACE SYSTEMS/LORAL, INC.
(In thousands)
YEARS ENDED MARCH 31,
NINE MONTHS ENDED --------------------------------
DECEMBER 31, 1996 1996 1995 1994
------------------ ---------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $1,017,653 $1,121,619 $633,717 $596,267
Gross profit.................................. 64,157 34,406 27,785 24,964
Net income.................................... 31,025 12,367 5,554 3,591
MARCH 31,
--------------------------------
DECEMBER 31, 1996 1996 1995 1994
----------------- ---------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents..................... $ 19,181 $126,863 $ 52,222 $ 26,578
Total assets.................................. 1,059,064 908,677 766,475 743,016
Long-term debt................................ 127,586 65,052 34,040 92,249
Shareholders' equity.......................... 478,893 447,868 435,501 429,947
GLOBALSTAR, L.P.
(In thousands, except per partnership interest amounts)
YEAR ENDED DECEMBER 31, 1994
--------------------------------
CUMULATIVE PRE-CAPITAL
MARCH 23, 1994 MARCH 23 SUBSCRIPTION PERIOD(1)
(COMMENCEMENT YEARS ENDED (COMMENCEMENT ---------------------------
OF OPERATIONS) TO DECEMBER 31, OF OPERATIONS) TO JANUARY 1 TO YEAR ENDED
DECEMBER 31, ------------------------------- DECEMBER 31, MARCH 22, DECEMBER 31,
1997 1997 1996 1995 1994 1994 1993
----------------- ------- --------- --------- ----------------- ------------ ------------
STATEMENT OF OPERATIONS
DATA:
Revenues................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operating loss.......... 257,349 88,071 61,025 80,226 28,027 6,872 11,510
Net loss applicable to
ordinary partnership
interests............. 255,238 88,788 71,969 68,237 26,244 6,872 11,510
Net loss per weighted
average ordinary
partnership interest
outstanding........... 1.74 1.53 1.50 0.73
Cash distributions per
ordinary partnership
interest-basic and
diluted...............
OTHER DATA:
Deficiency of earnings
to cover fixed
charges(2)............ 184,683 81,869 N/A N/A
CASH FLOW DATA:
Used in operating
activities............ 210,304 97,128 51,756 38,368 23,052
Used in investing
activities............ 1,301,049 591,025 591,025 280,345 50,549
Provided by partners'
capital
transactions.......... 883,495 132,990 284,714 318,630 147,161
Provided by (used in)
other financing
activities............ 1,092,012 998,137 95,750 (1,875)
DECEMBER 31,
----------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents........................... $ 464,154 $ 21,180 $ 71,602 $ 73,560
Total assets........................................ 2,149,053 942,913 505,391 151,271
Vendor financing liability.......................... 197,723 130,694 42,219
Debt................................................ 1,099,531 96,000
Redeemable preferred partnership interests.......... 303,089 302,037
Ordinary partners' capital.......................... 380,828 315,186 386,838 112,944
- ---------------
(1) Reflects certain costs incurred by Loral and Qualcomm prior to March 23,
1994, which were reimbursed by Globalstar through a capital subscription
credit or agreement for repayment in connection with the $275.0 million
capital subscription and commencement of Globalstar's operations on March
23, 1994.
(2) The ratio of earnings to fixed charges is not meaningful as Globalstar is in
the development stage and, accordingly, has incurred operating losses.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Results of
Operations and Financial Condition of the Company, Globalstar, SatMex and Orion,
and elsewhere in this Annual Report, 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. and its subsidiaries (the "Company" or
"Loral") is one of the world's leading satellite companies, with substantial
activities in both satellite manufacturing and satellite-based communications
services. Space Systems/Loral, Inc. ("SS/L") is a leading designer and
manufacturer of space systems. Loral Skynet ("Skynet"), acquired on March 14,
1997, is a leading provider of satellite communications services in the United
States. Skynet owns and operates the Telstar satellite network and is expanding
its business internationally. On November 17, 1997, a joint venture including
Loral and another partner acquired 75% of SatMex, a satellite services provider
to Mexico and South America. Loral also manages and is the largest equity owner
of Globalstar, L.P. ("Globalstar"), a global, mobile satellite telephony system
scheduled for service initiation in early 1999. Loral is pursuing additional
satellite-based communications service opportunities, including CyberStar, a
proposed worldwide high-speed broadband data services system initially using
leased Ku-band transponder capacity on Skynet's Telstar 5 satellite. In
addition, on March 20, 1998, Loral acquired Orion Network Systems, Inc.
("Orion"), a corporate data networking and satellite services company with
operations in the United States and Europe that will be expanded to Asia/
Pacific and South America in 1998 and the first half of 1999, respectively.
Loral was formed to effectuate the distribution of Loral Corporation's
("Old Loral") space and telecommunications businesses (the "Distribution") to
shareholders of Old Loral pursuant to a merger agreement (the "Merger") dated
January 7, 1996 between Old Loral and Lockheed Martin Corporation ("Lockheed
Martin"). Loral operates on a December 31 fiscal year-end. The space and
communications operations of Old Loral operated under a March 31 year-end.
RESULTS OF OPERATIONS
In 1997, Loral accelerated its transformation from a company with extensive
equity investments to a major satellite manufacturer and provider of satellite
services by making a number of acquisitions that significantly affected its
results of operations.
In February 1997, Loral agreed to acquire the remaining 49% of the common
stock of SS/L held by four international aerospace and communications companies
(the "Alliance Partners") for $374 million paid in cash and Loral securities
(see Note 3 to Loral's consolidated financial statements). On March 14, 1997,
Loral acquired Skynet from AT&T for $462.1 million in cash.
The acquisition of Skynet and the remaining equity interest in SS/L have
been accounted for as purchases. Loral's consolidated financial statements for
the year ended December 31, 1997, reflect the results of operations of SS/L from
January 1, 1997, the elimination of the minority interest of the SS/L equity not
owned by Loral during the period and the results of operations of Skynet from
March 14, 1997. Prior to January 1, 1997, SS/L was accounted for using the
equity method of accounting.
In 1997, Loral increased its ownership of Globalstar by exercising existing
warrants and rights to acquire 1,312,696 Globalstar ordinary partnership
interests for $34.8 million in cash and by acquiring 2,748,372 Globalstar
ordinary partnership interests from other Globalstar partners for $97.5 million
in cash, 1,255,684 shares of Loral common stock and a deferred purchase price of
$24.8 million. At December 31, 1997, Loral had a 40.1% interest in Globalstar's
ordinary partnership interests.
In connection with the privatization by the Mexican Government of its fixed
satellite services business, Loral and Telefonica Autrey formed a joint venture,
Firmamento Mexicano, S. de R.L. de C.V. ("Holdings"). On November 17, 1997,
Holdings acquired 75% of the outstanding capital stock of SatMex for $646.8
million. The purchase price was financed by a Loral equity contribution of $94.6
million, a Telefonica Autrey equity contribution of $50.9 million and debt
issued by Holdings. As part of the acquisition, Holdings issued a
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$125.1 million seven year Government Obligation bearing interest at 6.03% to the
Mexican Government in consideration for the assumption by SatMex of the debt
incurred by Holdings in connection with the acquisition. The debt of SatMex and
Holdings is non-recourse to Loral and Telefonica Autrey. However, Loral and
Telefonica Autrey have agreed to maintain assets in a collateral trust in an
amount equal to the value of the Government Obligation though December 30, 2000
and, thereafter, in an amount equal to 1.2 times the value of the Government
Obligation until maturity. Loral has a 65% economic interest in Holdings and a
49% indirect economic interest in SatMex. Loral accounts for SatMex using the
equity method. The consolidated financial statements reflect the equity in net
loss of SatMex for the period November 17 to December 31, 1997.
On March 20, 1998, Loral acquired all of the outstanding stock, as defined,
of Orion in exchange for Loral common stock. Loral issued 17.9 million shares of
its common stock and assumed existing Orion options and warrants to purchase 1.9
million shares of Loral common stock representing an aggregate purchase price of
$467.0 million. Loral will include Orion's results from the date of acquisition
using the purchase method of accounting. Orion is a provider of satellite-based
communications services, focused primarily on private communications network
services, Internet services and video distribution and other satellite
transmission services. Orion provides multinational corporations with private
communications networks designed to carry high speed data, fax, video
teleconferencing, voice and other specialized services. Orion currently has one
satellite in orbit and two satellites under construction. The cost of the two
additional satellites under construction is fully funded. At December 31, 1997,
Orion had unrestricted cash and cash equivalents of $70.0 million, restricted
cash to be used for the satellites under construction and interest payments of
$356.9 million and debt of $747.1 million which is expected to remain
outstanding after the transaction. Orion's outstanding debt is non-recourse to
Loral.
Taxation: Loral is subject to U.S. Federal, state and local income
taxation at regular corporate rates on any income that is effectively connected
with the conduct of a U.S. trade or business. When such income is deemed removed
from the U.S. business, it is subject to an additional 30% "branch profits" tax.
Loral expects that a significant portion of its income will be from foreign
sources and will not be effectively connected with a U.S. trade or business;
some portion of this income, however, will be subject to taxation by certain
foreign countries.
The Company's U.S. subsidiaries are subject to U.S. taxes on their
worldwide income. In addition, a 30% U.S. withholding tax will be imposed on
dividends and interest paid by such subsidiaries to Loral Space & Communications
Ltd.
Comparison of Results of the Year Ended December 31, 1997
and the Nine Months Ended December 31, 1996
Revenues for the year ended December 31, 1997 totaled $1.5 billion before
elimination of intercompany sales of $200.1 million. SS/L's sales were $1.4
billion before elimination of intercompany eliminations of $199.3 million.
SS/L's commercial sales were $1.1 billion, including sales to Globalstar of
$408.1 million, and sales to the U.S. government were $90.5 million. Skynet's
sales were $69.3 million from date of acquisition to December 31, 1997. Revenue
for the nine months ended December 31, 1996, represented management fees earned
from SS/L of $5.1 million.
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Earnings before interest, taxes, depreciation and amortization
("EBITDA")(1) for 1997 is as follows (in millions):
SS/L........................................................ $99.7
Skynet -- from March 14, 1997............................... 42.0
Corporate expenses and intercompany eliminations............ (33.2)
------
EBITDA before development costs............................. 108.5
SatMex(2)................................................... 5.1
------
Adjusted EBITDA before development costs(3)................. $113.6
======
- ---------------
(1) EBITDA should not be construed as an alternative to net income, as an
indicator of a company's operating performance, as cash flow from operations
or as a measure of a company's liquidity.
(2) Represents Loral's proportionate share of SatMex's EBITDA from November 17,
1997.
(3) Development costs for CyberStar were $32.2 million and Loral's proportionate
share of Globalstar's development costs was $33.3 million.
EBITDA before development costs was $108.5 million in 1997. CyberStar
development costs were $32.2 million and depreciation and amortization was $62.7
million, resulting in operating income for 1997 of $13.6 million. The nine
months ended December 31, 1996, reflected an operating loss of $12.2 million
primarily due to corporate expenses of $17.3 million.
In connection with delayed payment in 1997 by two Asian customers for three
satellites, SS/L stopped work, reduced backlog by $291 million, which will
reduce future sales, and recorded a charge of $23 million. If the current
programs for these three satellites are not restarted, the satellites will be
sold to other customers.
Interest income of $49.1 million for the year ended December 31, 1997
represents $42.6 million of interest earned on the investment of available cash
during the year and interest on the GTL Convertible Preferred Equivalent
Obligations ("GTL Convertible Preferreds") held by Loral (See Note 6 to Loral's
consolidated financial statements), and $6.5 million of interest earned on
orbital incentive payments. Interest income for the nine months ended December
31, 1996 of $34.7 million reflects the investment of available cash during the
period and interest on the GTL Convertible Preferreds.
Interest expense of $15.2 million, net of capitalized interest of $22.6
million, for 1997, reflects the assumption of SS/L's debt, borrowings under the
Credit Agreement (see Note 7 to Loral's consolidated financial statements) and
interest on Loral's outstanding Convertible Preferred Equivalent Obligations
("CPEOs") until June 5, 1997, when the CPEOs were exchanged for Loral 6% Series
C Convertible Redeemable Preferred Stock ("Series C Preferred Stock"). Preferred
dividends in 1997 of $26.3 million result from the exchange of the Company's
CPEOs for Series C Preferred Stock. Interest expense for the nine months ended
December 31, 1996 of $6.0 million reflects interest on the CPEOs for one
quarter.
The results of operations for 1997, reflect the gain on sale of K&F stock
of $79.6 million, net of expenses.
The Company's effective income tax rate for 1997 was 27.5%. The current
year effective rate is lower than the statutory U.S. Federal income tax rate
because, as a Bermuda company, a substantial portion of the Company's income is
foreign source income not subject to Federal taxation.
The minority interest expense in 1997 reflects the reduction of SS/L's
income attributed to the Alliance Partners.
The equity in net loss of affiliates for 1997 of $47.3 million reflects
increased development costs at Globalstar as well as an increased ownership
percentage by Loral in Globalstar. In addition, in connection with Loral's
investment in SatMex in 1997, Loral recorded its share of SatMex's losses of
$6.4 million. The equity in net loss of affiliates for the nine months ended
December 31, 1996 reflects the Company's share of Globalstar losses of $18.1
million offset by the Company's share of SS/L's income of $13.4 million. In
1997, the Company discontinued using the equity method for SS/L and fully
consolidated SS/L's results of operations.
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As a result of the above, net income applicable to common stockholders for
1997 was $13.7 million, or $0.06 per diluted share, compared to $8.9 million, or
$0.04 per diluted share, for the nine months ended December 31, 1996. Diluted
weighted average shares were 243.6 million for 1997 and 229.4 million for the
nine months ended December 31, 1996.
Comparison of Results for the Nine Months Ended December 31, 1996 and 1995
For the nine months ended December 31, 1996, the consolidated financial
statements include the accounts of Loral Space & Communications Ltd. and its
subsidiaries. As such, the following discussion compares these results of
operations with the unaudited nine months ended December 31, 1995. Old Loral
operated under a March 31 year-end.
The results of operations for the periods through March 31, 1996, include
allocations and estimates of certain expenses of Loral based upon estimates of
actual services performed by Old Loral on behalf of Loral. The amount of
corporate office expenses for such periods has been estimated based primarily on
the allocation methodology prescribed by government regulations pertaining to
government contractors, which management of Loral believes is a reasonable
allocation method.
For the periods through March 31, 1996, interest was allocated to Loral
based upon Old Loral's historical weighted average debt cost applied to the
average investment in affiliates, which management of Loral believes to be a
reasonable allocation method. Interest related to Old Loral's investment in
Globalstar has been capitalized because Globalstar has not commenced its
principal operations.
The results of operations reflect net income of $8.9 million for the nine
months ended December 31, 1996 as compared with a loss of $15.3 million for the
same period in the prior year. This change is primarily attributable to interest
earned during 1996 on the investment of available cash balances as compared with
interest expense allocated from Old Loral during 1995. Total interest income,
net for the nine months ended December 31, 1996 was $28.7 million.
Management fees earned from SS/L of $5.1 million for the nine months ended
December 31, 1996 represent an increase of $1.2 million over the nine months
ended December 31, 1995. The management fees are based on SS/L sales which
increased $250 million, or 32%, to $1.0 billion.
Costs and expenses increased to $17.3 million for the nine months ended
December 31, 1996 from $2.3 million for the nine months ended December 31, 1995.
The primary reason for this increase is that 1996 expenses reflect the Company's
operation of its satellite and telecommunications businesses on a stand-alone
basis.
Equity in net loss of affiliates decreased to $4.7 million for the nine
months ended December 31, 1996 from $11.4 million for the comparable period in
the prior year. This improvement is primarily due to increased net income of
SS/L, partially offset by the loss of tax benefit for Globalstar losses
following Loral's formation in Bermuda.
The Company's effective income tax rate for the nine months ended December
31, 1996 was 17.7% compared with (35.0)% for the prior period. The current
period effective rate is lower than the statutory U.S. Federal income tax rate
because, as a Bermuda Company, a substantial portion of the Company's income is
foreign source income not subject to federal taxation.
SUMMARY RESULTS OF OPERATIONS OF AFFILIATES
GLOBALSTAR
Globalstar is a development stage partnership and has not commenced
commercial service operations. The net loss applicable to ordinary partnership
interests for the year ended December 31, 1997 was $88.8 million as compared to
$56.6 million for the nine months ended December 31, 1996. The increase in the
net loss is a result of increased marketing, general and administrative expenses
of $10.7 million and an increase in development costs of $31.7 million as a
result of increased activity in the development of Globalstar's user terminals,
offset by an increase in interest income of $15.6 million as a result of higher
average cash balances
23
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outstanding. Globalstar is expending significant funds for the construction,
testing and deployment of the Globalstar System and expects such losses to
continue through commencement of revenue generating service operations.
SATMEX
For the period November 17, 1997 to December 31, 1997, SatMex had revenues,
EBITDA, operating income and a net loss of $12.5 million, $10.5 million, $4.8
million and $13.1 million, respectively (unaudited). The net loss is primarily
attributed to interest expense of $16.2 million on debt issued to finance the
acquisition, which includes a charge for $8.9 million of fees associated with a
bridge loan. SatMex expects such losses to continue through 1999 until funds
from operations reduce outstanding debt.
LIQUIDITY AND CAPITAL RESOURCES
Loral intends to capitalize on its innovative capabilities, market position
and advanced technologies to offer value-added satellite-based services as part
of the evolving worldwide communications networks and, where appropriate, to
form strategic alliances with major telecommunications service providers and
equipment manufacturers to enhance and expand its satellite-based communications
service opportunities. In order to pursue such opportunities, Loral may seek
funds from strategic partners and other investors, through incurrence of debt or
the issuance of additional equity.
At December 31, 1997, Loral had $226.5 million of cash and cash
equivalents. Loral intends to utilize its existing capital base and access to
the capital markets to construct and operate additional satellites, make
additional investments in Globalstar and Globalstar service provider
opportunities and invest in additional satellite communications service
opportunities.
On November 14, 1997, the Company, through its wholly owned subsidiary
Loral SpaceCom Corporation, entered into a $850 million credit facility with a
group of banks (see Note 7 to Loral's consolidated financial statements). The
facility consists of a $500 million revolving credit facility, a $275 million
term loan and a $75 million letter of credit facility. The facility replaced
SS/L's existing credit facility. The facility is secured by the stock of Loral
SpaceCom Corporation and SS/L and contains various covenants including an
interest coverage ratio, debt to capitalization ratios and restrictions on cash
transfers to its parent. At December 31, 1997, there was $435.4 million
outstanding under this agreement and other similar credit agreements with SS/L.
Skynet: Skynet currently has two high-powered satellites operating in
orbit. Loral intends to expand Skynet's business to become a worldwide satellite
service provider through the construction of additional satellites and has four
satellites under construction by SS/L. Loral anticipates that a portion of the
funds required for construction of these additional satellites will be provided
through additional borrowings or the issuance of additional equity.
Globalstar: On February 14, 1998, Globalstar launched its first four
satellites. Globalstar expects to begin commercial service in early 1999
following the launch of 44 satellites during 1998. The remaining 12 satellites,
including eight in-orbit spares, will be launched in the first half of 1999.
Globalstar's current budgeted expenditures for the design, construction and
deployment of the Globalstar System, including working capital, cash interest on
borrowings and operating expenses is approximately $2.7 billion. As of December
31, 1997, Globalstar had raised or received commitments for approximately $2.6
billion.
In addition, Globalstar has agreed to purchase from SS/L eight additional
spare satellites at a cost estimated at $175 million. Further, in order to
accelerate the deployment of gateways around the world Globalstar has agreed to
finance approximately $80 million of the cost of up to 32 of the initial 38
gateways. Globalstar expects to recover this financing upon resale of such
gateways to its partners and service providers.
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SS/L is the prime contractor for the design and construction of
Globalstar's satellites. In connection therewith, SS/L and its subcontractors
have committed $353 million of vendor financing to Globalstar, of which $121
million of such vendor financing is effectively borne by the subcontractors.
Commitments and Contingencies: In connection with the Merger between Old
Loral and Lockheed Martin, Lockheed Martin assumed approximately $206 million of
the guarantee under the Globalstar Credit Agreement. The balance of $44 million
of the guarantee was assumed by various Globalstar partners, including $11.7
million by SS/L. Loral has agreed to indemnify Lockheed Martin for its
liability, if any, in excess of $150 million under its guarantee of the
Globalstar Credit Agreement. Globalstar is currently financed without recourse
to Loral other than the indemnification described above.
In 1997, two in-orbit satellites built by SS/L experienced solar array
circuit failures. One of the customers has asserted that, in light of the
failures and uncertainty as to further failures, it has not accepted the
satellite. Loral believes that the customer was contractually required to accept
the satellite at completion of in-orbit testing and that risk of loss has passed
to the customer. In addition, another customer has requested that SS/L structure
an arrangement whereby a satellite under construction would be sold to another
customer. Management believes that these matters will not have a material
adverse effect on the financial condition or results of operations of Loral.
Cash Used and Provided. Cash used in operating activities for the year
ended December 31, 1997 was $230.2 million, primarily due to an increase in
satellite contracts in process and inventories of $152.8 million, a decrease in
customer advances of $57.8 million due to the progress on commercial satellite
contracts and an increase in deposits of $107.7 million, offset by funds
generated by earnings before depreciation and amortization, taxes, gain on sale
of K&F stock, minority interest and equity in net loss of affiliates of $110.2
million. Cash used in operating activities for the nine months ended December
31, 1996, was $3.0 million, primarily due to increases in other current assets,
offset by funds generated from earnings before depreciation, taxes and equity in
net loss of affiliates of $17.5 million.
Cash used in investing activities for the year ended December 31, 1997 was
$1.0 billion primarily due to the purchase of Skynet and the SS/L equity
interests (see Note 3 to Loral's consolidated financial statements); the
purchase of equity interests in Globalstar and SatMex (see Note 6 to Loral's
consolidated financial statements); capital expenditures of $255.3 million
primarily for the construction of the Telstar satellites by SS/L for Skynet and
facility expansion and renovation at SS/L; and other assets of $63.5 million,
offset by the proceeds from the sale of K&F stock. Cash used in investing
activities for the nine months ended December 31, 1996 was $2.0 million due
primarily to the purchase of $2.5 million principal amount of GTL Convertible
Preferred Equivalent Obligations in April 1996 and the purchase of SS/L equity
interests, offset by the sale of certain fixed assets.
Net cash provided by financing activities for the year ended December 31,
1997 and December 31, 1996 was $298.8 million and $1.2 billion, respectively,
primarily as a result of borrowings under credit facilities in 1997 and the net
proceeds from the Distribution and the net proceeds from the issuance of the
CPEOs in 1996.
YEAR 2000 ISSUE
The Company is evaluating the potential effect of the year 2000 on its
information processing systems. It is not known at this time what modifications,
if any, will be required. All costs associated with any modification will be
expensed as incurred.
ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"), and in February 1998, issued statement No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of
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general purpose financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. SFAS 131 establishes
annual and interim reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic areas and major
customers. SFAS 132 expands and standardizes the disclosure requirements for
pensions and other postretirement benefits. The Company is required to adopt
SFAS 130, SFAS 131 and SFAS 132 in 1998, and the Company's consolidated
financial statements will reflect the appropriate disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has limited involvement with derivative financial instruments
and does not use such instruments for trading purposes. The derivative financial
instruments are used to manage foreign currency exchange risk.
At December 31, 1997, the Company had foreign currency exchange contracts
(forwards and swaps) with several banks to purchase and sell foreign currencies,
primarily Japanese yen, aggregating $175.1 million. Such contracts were
designated as hedges of certain foreign contracts and subcontracts to be
performed by SS/L through May 2006. The fair value of these contracts, based on
quoted market prices, was $139.0 million at December 31, 1997. At December 31,
1997, deferred gains on forward contracts to sell foreign currencies, primarily
yen, were $26.6 million and deferred losses on forward contracts to purchase
foreign currencies, primarily yen, were $9.5 million.
The Company is exposed to credit-related losses in the event of
nonperformance by counter parties to these financial instruments, but does not
expect any counter party to fail to meet its obligation.
The maturity of foreign currency exchange contracts held at December 31,
1997 is consistent with the contractual or expected timing of the transactions
being hedged, principally receipt of customer payments under long-term contracts
and payments to vendors under subcontracts. These foreign exchange contracts
mature as follows (in thousands):
TO PURCHASE TO SELL
------------------ ------------------
AT AT AT AT
YEARS CONTRACT MARKET CONTRACT MARKET
TO MATURITY RATE RATE RATE RATE
----------- -------- ------- -------- -------
1.............................................. $68,582 $59,937 $ 20,711 $14,766
2 to 5......................................... 5,804 4,939 65,276 48,975
6 to 10........................................ 14,750 10,385
------- ------- -------- -------
$74,386 $64,876 $100,737 $74,126
======= ======= ======== =======
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules on
pages 28 and 29.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
26
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
Information required for this item is set forth in the Company's 1998
definitive proxy statement which is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
---- --- --------
Bernard L.
Schwartz........... 72 Chairman of the Board of Directors and Chief Executive
Officer since January 1996. Prior to that, Chairman and
Chief Executive Officer of Old Loral since 1972.
Gregory J. Clark..... 55 President and Chief Operating Officer since January 1998.
Prior to that, President of News Technology Group, a
division of News Corporation, since September 1994. Prior to
that, Director of Science and Technology of IBM in Australia
since 1988.
Michael P.