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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, 1998
COMMISSION FILE NUMBER 1-14180
LORAL SPACE & COMMUNICATIONS LTD.
C/O LORAL SPACECOM CORPORATION
600 THIRD AVENUE
NEW YORK, NEW YORK 10016
TELEPHONE: (212) 697-1105
JURISDICTION OF INCORPORATION: BERMUDA
IRS IDENTIFICATION NUMBER: 13-3867424
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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 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 1999 definitive proxy statement.
At March 5, 1999, 243,900,376 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
$4.3 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1999 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. (together with its subsidiaries, "Loral"
or the "Company") is one of the world's leading satellite communications
companies, with substantial activities in satellite manufacturing and
satellite-based communications services. Loral is developing the building blocks
necessary to create a seamless, global networking capability for the information
age. In 1998, Loral advanced its strategy significantly by acquiring Orion
Network Systems, Inc., increasing its ownership in Globalstar, L.P.
("Globalstar"), forming the Loral Global Alliance, including the formation of
Europe*Star Limited ("Europe*Star"), and organizing and integrating its
businesses to form four distinct operating segments. Loral has increased its
satellite fleet to seven satellites in orbit (including three owned by Satelites
Mexicanos, S.A. de C.V. ("SatMex"), Loral's 49% owned affiliate). Loral will
expand the geographic coverage and capacity of its fixed satellite services by
launching three additional satellites in 1999. Loral's four operating segments
are:
Satellite Manufacturing and Technology. Designing and manufacturing
satellites and other space systems and developing satellite technology for
a broad variety of customers and applications through Space Systems/Loral,
Inc. ("SS/L").
Fixed Satellite Services. Leasing transponder capacity and providing
value added services to customers for a wide variety of applications,
including the distribution of broadcast programming, news gathering,
business television, distance learning and direct-to-home ("DTH") services.
The Company's fixed satellite service ("FSS") assets, managed by Loral
Skynet and marketed under the Loral Global Alliance banner, consist of
seven high-power geosynchronous ("GEO") satellites - three Loral Skynet
Telstar satellites and one satellite of Loral Orion, Inc. ("Orion"), as
well as three SatMex satellites. The two satellites expected to be launched
by the recently formed Europe*Star joint venture with Alcatel, in which
Loral owns a 47% interest, also will be part of the Loral Global Alliance
and form a component of the Company's FSS business segment.
Data Services. Business in development, providing managed
communications networks and Internet and intranet services through Loral
Orion and delivering high-speed broadband data communications through
CyberStar, L.P. ("CyberStar"), using transponder capacity on the Telstar
and Loral Orion fleets. Loral is the managing general partner and owns
approximately 82% of CyberStar.
Global Mobile Telephony. Providing worldwide wireless mobile
telephony and narrow-band data communications through a constellation of
low-earth orbiting ("LEO") satellites (the "Globalstar(]) System") operated
by Globalstar, which is expected to commence service in September 1999.
Loral is the managing general partner and owns approximately 43% of
Globalstar.
Each of Loral's business segments has a well-defined mission designed to
create global networks and exploit the increasing demand for immediate
up-to-date information. 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-based service opportunities. Loral believes that demand for
satellite-based communications services will continue to grow due to
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.
In addition, Loral is pursuing additional satellite-based service
opportunities throughout the world. Loral is a partner in SkyBridge Limited
Partnership ("SkyBridge"), a partnership led by Alcatel, that is building a LEO
satellite system for the delivery of broadband data and multimedia services
worldwide; and Loral, together with partners, will act as the Globalstar service
provider in Canada, Mexico and Brazil.
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The following table presents a brief description of the orbital locations
that the Company and certain of its affiliates are authorized to use. All
satellite systems are subject to international frequency coordination
requirements and must obtain appropriate authority to provide service in a given
territory.
FIXED SATELLITE SERVICES
SATELLITE LOCATION FREQUENCY COVERAGE IN SERVICE
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Loral Skynet Telstar 4 89(o) W.L. C-band, Ku-band North America F
Telstar 5 97(o) W.L. C-band, Ku-band North America F
Telstar 6 93(o) W.L. C-band, Ku-band North America F
Telstar 7 129(o) W.L. C-band, Ku-band North America
Telstar 8 77(o) W.L. C-band, Ku-band North America
Telstar 9 69(o) W.L. C-band, Ku-band North America
Loral Orion Orion 1 37.5(o) W.L. Ku-band Europe, SE Canada, U.S. East of F
the Rockies and parts of Mexico
Orion 2(1) 12(o) W.L. Ku-band Eastern U.S., SE Canada, Europe,
CIS, Middle East, North Africa
and Latin America, S. Africa
Orion 3 139(o) E.L. C-band, Ku-band China, Japan, Korea, India,
Hawaii, Southeast Asia,
Australia, New Zealand, Eastern
Russia and Oceania
Orion A 47(o) W.L. Ku/Ka-band Americas, Europe and Africa
Orion B(1) 135(o) W.L. Ku-band North America, Hawaii, Puerto
Rico, U.S. Virgin Islands
Orion C 144(o) E.L. C-band and Ku-band China, Japan, Korea, India,
Hawaii, Southeast Asia,
Australia, New Zealand, Eastern
Russia and Oceania
SatMex Solidaridad 1 109.2(o) W.L. C-band, Ku-band Mexico and portions of Latin F
America
Solidaridad 2 113.0(o) W.L. C-band, Ku-band Mexico and portions of Latin F
America
SatMex 5 116.8(o) W.L. C-band, Ku-band Americas F
Morelos II(2) 120(o) W.L. C-band, Ku-band North America (inclined
orbit)
Europe*Star 45(o)E.L. Ku-band Europe, SE Asia, Middle East,
South Africa and India
43(o) E.L. Ku-band Europe, SE Asia, Middle East, S.
Africa and India
47.5(o) Ku-band Europe, SE Asia, Middle East, S.
E.L. Africa and India
DATA SERVICES
SATELLITE LOCATION FREQUENCY/TRANSPONDERS COVERAGE IN SERVICE
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CyberStar CyberStar 115(o) W.L. Ka-band (spot beams) North America
CyberStar 93(o) W.L. Ka-band (spot beams) North and South America(3)
CyberStar 105.5(o) E.L. Ka-band (spot beams) Asia-Pacific
Loral Orion Orion Ka 89(o) W.L. Ka-band Americas
Orion Ka 81(o) W.L. Ka-band Americas
Orion Ka 78(o) E.L. Ka-band Russia, India, China, Europe,
Africa, CIS, Australia, Asia
Orion Ka 126.5(o) E.L. Ka-band Asia, Russia, Australia, Oceania
GLOBAL MOBILE TELEPHONY
SATELLITE LOCATION FREQUENCY COVERAGE IN SERVICE
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Globalstar Globalstar 52 satellites, LEO 1610 - 1621.35MHz, Global
2483.5 - 2500MHz, (16 satellites
feeder links in launched)
C-band
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(1) These satellites are conditionally licensed by the Federal Communications
Commission ("FCC"), subject to an appropriate showing of Loral's financial
capability to construct, launch and operate the satellites.
(2) Currently operating in inclined orbit beyond its designed life. This
satellite is authorized to utilize the 120(o) W.L. orbital slot pursuant to
a grant of special temporary authority by the FCC which expires on April 16,
1999. The Company anticipates that prior to that date, the FCC will extend
the grant of special temporary authority for a period not to exceed 180
days. Subject to such continued regulatory approval, Morelos II can be
expected to continue to generate modest revenues for approximately three
years.
(3) The FCC license does not describe a particular coverage area.
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In addition to the orbital slots listed in the table above, Loral has
International Telecommunication Union ("ITU") filings at 3.5(o)E.L., 8(o)E.L.,
10(o)E.L., 11(o)E.L., 30(o)E.L., 81(o)E.L., 105.5(o)E.L., 135(o)E.L., 58(o)W.L.,
95(o)W.L., 115(o)W.L. and 135(o)W.L. for use of the V-band frequency. Loral
Skynet also has ITU filings at 98(o)E.L., 122(o)E.L., 130(o)E.L., 167.45(o)E.L.
and 175(o)W.L. for use of the C- and Ku-band frequencies. R/L DBS Company,
L.L.C., a joint venture in which Loral owns a 50% interest, has 11 odd numbered
DBS channels 1-21 at 61.5(o)W.L.
Loral has applications pending at 77(o)W.L. for use of the Extended
C/Ku-band frequencies and at 135(o)W.L., 115(o)W.L., 95(o)W.L. and 58(o)W.L. for
use of the V-band frequency. Loral Orion has applications pending at 126(o)E.L.
for use of the Ku/Extended Ku/C and Extended C-band frequencies and at
139(o)E.L., 15(o)W.L. and 67(o)W.L. for use of the Ka-band frequency. Globalstar
also 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(o)W.L., 10(o)E.L., 100(o)E.L. and
170(o)E.L.) using the 2 GHz frequency.
In March 1999, the Brazilian telecommunications authority announced that
Loral Skynet do Brasil, which had submitted a bid of $18 million, had won
Brazil's auction for its 63(o)W.L. orbital slot.
SATELLITE MANUFACTURING AND TECHNOLOGY
SS/L is a worldwide leader in the design, manufacture and integration of
satellites and space systems. SS/L draws on its 40-year history, during which
satellites manufactured by SS/L have achieved more than 650 years of cumulative
on-orbit experience. SS/L also provides Loral with visibility into emerging and
new satellite-based technologies and applications. SS/L manufactures satellites
that provide telecommunications, weather forecasting and direct broadcast
services. SS/L is the leading supplier of satellites to Intelsat, an
international consortium of 135 member nations which is currently the world's
largest operator of commercial communications satellites. Other significant
customers include News Corp./EchoStar, TCI, ChinaSat, Globalstar, Loral Skynet,
Loral Orion and CD Radio.
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 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 one of the first
U.S. companies to acquire space technology from Russia's space industry,
obtaining exclusive rights outside the former Eastern bloc to an electric
propulsion subsystem that is five times more efficient than bipropellant
propulsion systems.
SS/L's capabilities in satellite bus technologies are extensive. For
example, it uses lightweight/high-strength composite materials for its
structural components. SS/L was also the first satellite manufacturer to employ
heat pipes to control heat transfer in commercial satellites, thereby providing
a more benign temperature environment and increased reliability. Nickel hydrogen
batteries, when combined with SS/L's patented thermal management system, are
among the most efficient space batteries ever produced. A new technology
currently being developed by SS/L could result in the doubling of the efficiency
of the batteries within the next three years. A new telemetry and command system
employing serial interfaces was introduced in 1997.
Active research and development projects are underway for both
communications and payload equipment and supporting bus elements. SS/L has
commenced development of the 20.20(TM), the first commercial satellite capable
of providing 20 kilowatts of power, which will significantly increase capacity
and service quality.
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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 state-of-the-art multiplexers and antennae that can be customized for
various customer requirements. 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, further reducing production time.
SS/L, Alcatel Space Industries and Finmeccanica S.p.A. have agreed
generally to operate as a team on satellite programs worldwide. SS/L believes
that this strategic alliance has enhanced its technological and manufacturing
capabilities and marketing resources and affords it improved access to
international government and commercial customers.
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. The majority of SS/L's contracts
are fixed-price contracts. Under such contracts, SS/L may receive progress
payments, 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 based on criteria stated in the
contract.
Many of SS/L's contracts and subcontracts may be terminated at will by the
customer or the prime contractor. In the event of a termination at will, SS/L is
normally entitled to recover the purchase price for delivered items,
reimbursement for allowable costs for work in process and an allowance for
profit or an adjustment for loss, depending on whether completion of performance
would have resulted in a profit or loss. No assurance can be given that these
terminations will not occur in the future.
Total revenues for the Company's satellite manufacturing and technology
segment, including intercompany and affiliate sales, were $1.4 billion for each
of the years ended December 31, 1998 and 1997 and $1.0 billion for the nine
months ended December 31, 1996. The segment's intercompany and affiliate sales
were $889 million in 1998, $620 million in 1997 and $281 million in 1996. The
Company's satellite manufacturing and technology segment had EBITDA of $107
million, $100 million and $77 million for the years ended December 31, 1998 and
1997 and the nine months ended December 31, 1996, respectively. Total assets for
the segment were $1.7 billion, $1.5 billion and $1.1 billion as of December 31,
1998, 1997 and 1996, respectively.
As of December 31, 1998 and 1997, funded backlog for the segment was $1.5
billion and $1.4 billion, respectively, including intercompany backlog of $111
million in 1998 and $188 million in 1997. Approximately 70% of the 1998 external
funded backlog is expected to be realized in 1999. Sales to Globalstar
represented in excess of 40% of the Company's consolidated revenues in 1998. In
addition, sales to two other customers represented in excess of 10% of the
Company's consolidated revenues in 1998. For the years ended December 31, 1998
and 1997 and for the nine months ended December 31, 1996, the satellite
manufacturing and technology segment expended $35 million, $24 million and $16
million for research and development projects, respectively.
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FIXED SATELLITE SERVICES
Following its acquisition of the Skynet business from AT&T in March 1997,
Loral has rapidly established itself through a series of subsequent acquisitions
and joint venture transactions, as one of the world's leading providers of fixed
satellite services using GEO satellites, which orbit the Earth at fixed
positions approximately 22,000 miles above the Equator. GEO satellites provide
reliable, high bandwidth services anywhere in their coverage areas and therefore
serve as the backbone for many forms of telecommunications. In the United States
and other developed countries, customers lease transponder capacity primarily
for distribution of network and cable television programming, for DTH video
transmission and for live video feeds from breaking news and sporting events. In
the developing world, a substantial portion of such capacity is dedicated to
long-distance telephone service as well as television services. GEO satellites
are increasingly used throughout the world for international Internet
communications, high-speed data services for businesses through very small
aperture terminals ("VSAT") networks, and for distance learning and educational
television.
Loral Global Alliance
Through the Loral Global Alliance, Loral offers its customers an integrated
portfolio of satellite capacity that provides "one stop shopping" for local,
regional and global GEO satellite services. The alliance members, consisting of
Loral Skynet, Loral Orion, SatMex and Europe*Star, currently have seven
satellites in orbit with a total of 144 C-band and 192 Ku-band 36-MHz
transponder-equivalents. Loral Skynet and Loral Orion expect to launch three
additional satellites in the next six months, which, together with the alliance
members' existing satellites, will provide a total of 178 C-band and 309 Ku-band
36-MHz transponder-equivalents, and will have a footprint covering almost all of
the world's population.
The Loral Global Alliance provides for cross-selling arrangements among the
alliance members' respective sales forces and for cooperative marketing and
promotional activities. The Company believes that such arrangements will enable
the members of the alliance to compete more effectively in sales of
communications satellite services worldwide. In addition, the alliance offers
in-orbit backup capabilities for its members in regions where members' fleets
have overlapping coverage.
Loral Skynet
Loral Skynet's core business is providing satellite capacity to support
distribution of U.S. television network programming. The ABC and Fox television
networks are its major customers. All ABC and Fox stations have their antennae
pointed at Loral Skynet's satellites, creating a configuration known as a
"neighborhood" that is attractive to other users requiring similar distribution
channels. Other Loral Skynet customers include HBO, Disney, Time Warner and
third-party resellers, such as sports syndicators and distance learning
providers.
Loral Skynet currently has three high power GEO satellites in operation.
Telstar 4 was placed in service in November 1995 and has 24 C-band and 24
Ku-band transponders. Telstar 4 provides coverage over the continental United
States, Hawaii, Puerto Rico and the U.S. Virgin Islands. Telstar 5, with 24
C-band and 28 Ku-band transponders, was built by SS/L and was placed into
service on July 1, 1997. Telstar 5 provides coverage over the continental United
States, Hawaii, Puerto Rico, the Caribbean and into Canada and portions of Latin
America. Telstar 4 and Telstar 5 are currently operating at or near full
utilization.
Telstar 6, built by SS/L, was launched in February 1999 and commenced
commercial operations in March 1999. Telstar 6 is a broadcast video and data
communications satellite with 24 C-band and 28 Ku-band transponders. It provides
coverage over the continental United States, Hawaii, Puerto Rico, the Caribbean
and into Canada and portions of Latin America.
Loral Skynet plans to construct, launch and operate three additional high
power C- and Ku-band satellites. Telstar 7, with 24 C-band and 24 Ku-band
transponders, which is being built by SS/L is scheduled for launch in the second
quarter of 1999. In addition, Loral Skynet plans to launch Telstar 8 in 2000 and
Telstar 9 in 2001. The addition of Telstar 6 and these three satellites will
substantially increase Loral Skynet's
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capacity within the United States and will further extend its coverage of Canada
and portions of Latin America, subject to obtaining landing rights from
regulatory authorities in those regions.
Loral Skynet has entered into a strategic alliance with EchoStar
Communications Corporation ("EchoStar") that leverages Loral Skynet's assets and
EchoStar's capabilities to create two interdependent businesses that will share
revenues equally: (i) Skynet Direct, a Loral Skynet-managed value-added
transmission and distribution service marketed to niche market programmers, such
as ethnic and international channels, business television and distance learning
and (ii) Sky Vista, an EchoStar-managed 26-channel DTH service offered to
subscribers in the continental United States and subscribers in Alaska, Hawaii
and U.S. territories and commonwealths in the Caribbean, where EchoStar's basic
DTH service is not available.
Loral Orion
On March 20, 1998, Loral acquired Orion Network Systems, Inc., a rapidly
growing provider of satellite-based communications services. Loral Orion
currently owns one GEO satellite and is constructing two additional GEO
satellites that are expected to be launched in the second and third quarters of
1999. Loral Orion's leasing business currently provides satellite capacity for
video distribution, satellite news gathering and other satellite services
primarily to broadcasters, news organizations and telecommunications service
providers. During the fourth quarter of 1998, Loral completed its integration
plan for Loral Orion and transferred management of Loral Orion's satellite
capacity leasing and satellite operations to Loral Skynet, effective January 1,
1999.
Orion 1, a high power satellite with 34 Ku-band transponders, commenced
operations in January 1995, and provides coverage to 34 European countries, much
of the United States and parts of Canada, Mexico and North Africa. Orion 2,
which will be a high power satellite with 38 Ku-band transponders, will expand
Loral Orion's European coverage and extend coverage to portions of the former
Soviet Union, Latin America, the Middle East and South Africa. Orion 2, which is
being constructed by SS/L, is scheduled to be launched in the third quarter of
1999. Orion 3, which will be a high power satellite with 33 Ku-band transponders
and 10 C-band transponders, with a footprint covering broad areas of the Asia
Pacific region, including China, Japan, Korea, India, Southeast Asia, Australia,
New Zealand, Eastern Russia and Hawaii, is scheduled to be launched in the
second quarter of 1999. Eight Ku-band transponders on Orion 3 have been presold
to Dacom Corporation.
SatMex
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 SatMex. SatMex, which owns and operates three GEO communications satellites,
is currently the dominant satellite communications company providing FSS in
Mexico, and intends to expand its services to become a leading provider of
satellite services throughout Latin America. SatMex provides satellite
transmission capacity to broadcasting customers for network and cable television
programming, DTH service and on-site transmission of live news reports, sporting
events and other video feeds. SatMex also provides satellite transmission
capacity to telecommunications service providers for public telephone networks
in Mexico and elsewhere and to corporate customers for their private business
networks with data, voice and video applications. SatMex has landing rights to
provide broadcasting and telecommunications transmission capacity in 14 nations
in the Latin American region and the United States. SatMex's broadcasting
customers include Televisa, MVS Multivision and Television Azteca, and its
telecommunications services customers include Telmex, Bancomer, Pemex, Cemex and
the Mexican subsidiaries of Ford and DaimlerChrysler.
SatMex's satellites, Solidaridad 1, Solidaridad 2 and SatMex 5, are in
geostationary orbit at 109.2 degrees W.L., 113.0 degrees W.L. and 116.8 degrees
W.L., respectively, and have a total of 144 36-MHz transponder-equivalents
operating in the C and Ku-band, with an aggregate footprint covering
substantially all of the continental United States, the Caribbean as well as all
of Latin America, other than certain regions in Brazil. The Company believes
that this capacity is one of the largest satellite capacities dedicated
primarily to the Latin American region. SatMex holds 20-year concession titles
to operate in these three orbital locations, each of
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which will expire on October 22, 2017. The concession titles are renewable
thereafter, subject to certain conditions, for an additional 20-year term
without additional payment. In addition, SatMex operates two satellite control
centers.
Europe*Star
In December 1998, Loral finalized its strategic partnership with a
subsidiary of Alcatel to jointly build and operate Europe*Star, a multiple
geostationary satellite system to be marketed as part of the Loral Global
Alliance. Europe*Star, in which Loral owns a 47% interest, will provide
broadcast and telecommunications services via two high power all Ku-band
satellites, one of which is currently under construction. Europe*Star will
provide satellite services to Europe, Southeast Asia, the Middle East, South
Africa and India.
Total revenues for the fixed satellite services segment, including
intercompany and affiliate sales, were $254 million and $83 million for the
years ended December 31, 1998 and 1997, respectively. The segment's intercompany
and affiliate sales were $5 million in 1998 and $1 million in 1997. The
Company's fixed satellite services segment had EBITDA of $171 million and $52
million for the years ended December 31, 1998 and 1997 respectively. Total
assets for the segment were $3.4 billion and $1.8 billion as of December 31,
1998 and, 1997, respectively.
As of December 31, 1998 and 1997, funded backlog for the segment was $746
million and $396 million, respectively, including intercompany and affiliate
backlog of $140 million in 1998 and $6 million in 1997. Approximately 30% of the
1998 external funded backlog is expected to be realized in 1999.
DATA SERVICES
In order to align all of Loral's resources and activities in the developing
data services area, CyberStar's broadband business and Loral Orion's Internet
and corporate data networking businesses have been reorganized and in 1999 began
reporting to a group vice president. This alignment allows the business units to
continue to operate independently while taking advantage of the synergies they
share.
Loral Orion provides multinational corporations with managed communications
networks designed to carry high-speed data, fax, video teleconferencing, voice
and other specialized services. The Loral Orion network delivers high-speed data
to customers in emerging markets and remote locations which would otherwise lack
the necessary infrastructure to support these services. Loral Orion also offers
intranet services and provides 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. Loral Orion provides its services directly to customer premises using
VSATs.
As a result of a transaction completed in December 1998, Loral Orion has
access to technology licensed from The Fantastic Corporation that will enable it
to provide broadband infrastructure for multicast delivery of multimedia
products and services to corporations, content developers, broadcasters,
Internet Service Providers ("ISPs") and other enterprises that have time
sensitive and complex data requirements. Loral Orion continues to introduce new
products that capitalize on the strengths its satellites bring to the global
Internet access market. For example, during the fourth quarter of 1998, Loral
Orion introduced its WorldCast Business Edition, which supplies high-bandwidth
satellite capacity to improve businesses' access to the U.S. Internet backbone
from foreign locations. Recently, Loral Orion introduced a new multicast
service, called WorldCast Newsfeed, that will enable ISPs to receive news from
the Internet using Loral satellites, thereby minimizing terrestrial network
costs.
Loral is the managing general partner and principal owner of CyberStar, a
high-speed broadband data communications system. CyberStar leverages satellites,
terrestrial networks and its sophisticated network operations center to deliver
information securely and reliably at speeds of up to 27 Mbps to multiple
locations simultaneously, using an Internet protocol multicasting technique.
CyberStar offers a variety of low-cost, interactive multimedia communications
services in the United States using leased Ku-band transponder capacity on Loral
Skynet's Telstar 5 satellite, and plans in the future to expand its service
worldwide. CyberStar has received licenses from the FCC for three Ka-band
orbital slots. CyberStar's satellite-based
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services include high-speed Internet access, data broadcasting, broadband
interconnection, intranet multicasting, real-time video streaming and other data
services. CyberStar intends to market its services worldwide, initially to
businesses and private networks and subsequently to consumers through a network
of local and regional service providers.
In the fourth quarter of 1998, Cyberstar announced the commercial
availability of its broadband satellite-based business communications service.
One of its first customers, National Cinema Networks, selected CyberStar to
deliver in-theater media to its nationwide cinema network. CyberStar is
conducting pilot programs with other enterprise customers in markets such as
entertainment, finance, real estate, training, insurance and retail.
Total revenues for the Company's data services segment were $40 million for
the year ended December 31, 1998. EBITDA before development costs for the
segment was a loss of $13 million in 1998. Total development and start-up costs
for Cyberstar were $33 million for each of 1998 and 1997. Total assets for the
segment were $153 million and $25 million as of December 31, 1998 and 1997,
respectively.
As of December 31, 1998, funded backlog for the segment was $147 million,
which was all from external sources. Approximately 35% of 1998 external funded
backlog is expected to be realized in 1999.
GLOBAL MOBILE TELEPHONY
Globalstar has begun to launch and is preparing to operate a worldwide, LEO
satellite-based digital telecommunications system. As of March 15, 1999,
Globalstar has launched 16 of the 52 satellites (including four in-orbit spares)
that will complete its full constellation and is scheduled to commence service
in September 1999 with at least 32 satellites. Loral is the managing general
partner of Globalstar, and owned approximately 43% of Globalstar as of December
31, 1998.
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 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.
As of December 31, 1998, each of the elements of the Globalstar
System -- space and ground segments, user terminal supply, service provider
arrangements, licensing and system integration -- was on schedule to permit
Globalstar to commence commercial operations in September 1999 with at least 32
satellites in orbit and to complete its 52-satellite constellation, including
four in-orbit spares, by the end of 1999.
Space Segment. On March 15, 1999, Globalstar successfully launched four
satellites aboard a Soyuz launch vehicle from the Baikonur Cosmodrome in
Kazakhstan, bringing the total satellites in orbit to 16. This launch followed
Globalstar's successful launch on February 8, 1999 of four satellites from the
Baikonur Cosmodrome following the execution of a Technology Safeguard Agreement
among the governments of Russia, Kazakhstan and the United States. Globalstar
had previously launched its first group of four satellites on February 14, 1998
and its second group of four satellites on April 24, 1998. The first 12
Globalstar satellites have reached their final orbital positions and are
currently being used to test basic system functionality, including the system's
inter-satellite hand-off capabilities, and the latest four satellites are
expected to reach their final orbital positions and begin operations testing in
April 1999. As of March 15, 1999, in addition to the 16 satellites in orbit,
Globalstar had eight completed satellites on hand and 28 more in final
integration and test. In September 1998, a malfunction of a Zenit 2 rocket
resulted in the loss of 12 Globalstar satellites shortly after lift-off from the
Baikonur Cosmodrome and resulted in a delay in the program schedule. The cost
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of the launch vehicle and the lost satellites was substantially insured. As a
result of the launch failure, Globalstar implemented its contingency plan, which
provides for a flexible launch strategy that enables it to select among a number
of launch service suppliers in order to improve its ability to commence service
as planned. Globalstar has reserved six Soyuz launches of four satellites each
(two of which have already occurred as of March 15, 1999) six Delta 2 launches
of four satellites each, an Ariane launch of up to six satellites and two Zenit
launches, all in 1999, with options for additional launches in 2000. Production
is proceeding for the remaining satellites to meet scheduled launch dates.
Ground Segment. Globalstar's primary satellite operations control center
and back-up facility, which performed well in support of the Globalstar
launches, are fully-operational and are currently performing command and control
functions for the in-orbit satellites. Qualcomm has completed 38 gateways, of
which eight are already installed in Texas, France, Italy, Canada, Argentina,
China, South Africa and South Korea. The initial gateways helped monitor the
launch and orbital placement of Globalstar's first 16 satellites. Qualcomm has
released an upgraded, commercial version of its gateway operating software,
which is now undergoing testing and evaluation. Globalstar expects these eight
gateways to be fully operational by the commencement of commercial service, and
expects an additional eight gateways to be installed and operational by the end
of 1999. These 16 gateways will cover 61 countries that account for
approximately 58% of Globalstar's business plan.
User Terminals. Ericsson, Qualcomm and Telital are manufacturing
approximately 300,000 handheld and fixed user terminals under contracts
totalling $353 million from Globalstar and its service providers. The first
generation handheld Globalstar phones are expected to weigh about 12 ounces and
be available in attractive designs with dimensions (excluding antenna) of
approximately 6.25" x 2" x 1.75". Globalstar users will be able to access
terrestrial wireless systems, where available, through dual and tri-mode
portable and mobile user terminals. Qualcomm will offer a tri-mode handset that
can access Globalstar, AMPS (the U.S. analog cellular standard) and digital
cellular phones using code division multiple access technology. Ericsson's and
Telital's Globalstar/GSM dual mode phones will feature the GSM interface
familiar to wireless customers in Europe and many other areas of the world.
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 its service provider and the
licensing authority are one and the same -- as well as provide local marketing
and technical expertise. Globalstar's local service providers have already
obtained some or all of the regulatory approvals they will need to provide
service in 32 nations, including China, the United States, Canada, Russia,
Brazil, Indonesia, Saudi Arabia and Ukraine. Due to general economic conditions
in Asia, Hyundai has withdrawn as a Globalstar service provider. Globalstar has
found a replacement in Finland and has identified a replacement in India, but
has been prevented from signing a new service provider agreement for India by
litigation brought by Hyundai's former in-country partner. The injunction
prohibiting such an agreement is currently on appeal. If Globalstar cannot
proceed in a timely manner to engage an adequate replacement service provider
for India, Globalstar will not be able to offer service in that country, and its
results of operations could be adversely affected.
In July 1998, as a result of a transaction in which Loral purchased
Globalstar partnership interests from certain other Globalstar partners, $210.0
million was placed in escrow by such Globalstar partners for the purchase of
Globalstar gateways and handsets.
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 Radiocommunication
Conference allocated feeder link spectrum on an international basis for mobile
satellite service systems such as Globalstar, and in November 1996, the FCC
authorized Globalstar's feeder links. In September 1997, Globalstar applied to
the FCC for authorization to launch and operate satellite systems at 2 GHz and
40 GHz. If these applications are granted (as to which there can be no
assurance), Globalstar would be in a position to expand its capacity
substantially.
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System Integration. Globalstar is using its in-orbit satellites and
installed gateways to perform extensive tests of system functionality to ensure
reliable, high quality service, including simulations of high-traffic
conditions. In tests, the Globalstar System has delivered voice quality
comparable to terrestrial CDMA and landline phones. Multiple satellite coverage
and soft hand-offs of calls have occurred without dropped calls, and the second
generation gateway software is providing both immediate handset connectivity and
a seamless interface with the public telephone networks. To date, none of the
Globalstar satellites has experienced a failure or significant anomaly.
Expenditures and Commitments. Through December 31, 1998, Globalstar
incurred costs of approximately $2.7 billion for the design and construction of
the space and ground segments. Costs incurred during 1998 were approximately
$871 million. Qualcomm is in the process of completing its revision to cost
estimates for its portion of the ground segment. Due to additional scope and
cost growth and based on preliminary information, Globalstar expects the
increase from Qualcomm to be less than 3% of the total project cost. The
Qualcomm estimate is still subject to further review by Globalstar. As of
December 31, 1998, and including the effect of the preliminary Qualcomm
estimate, Globalstar's budgeted expenditures were $3.17 billion for the design,
construction and deployment of the Globalstar System to commence commercial
service and $340 million for budgeted financing costs. In addition to
expenditures for operating costs and debt service, Globalstar anticipates
further expenditures on system software for the improvement of system
functionality and the addition of new features beyond those planned for the
commencement of commercial service. Globalstar expects to achieve positive cash
flow in the third quarter of 2000. Substantial additional financing will be
required if there are delays in the commencement of commercial service and, in
any event, after the commencement of commercial service and before positive cash
flow is achieved. Although Globalstar believes it will be able to obtain these
additional funds, there can be no assurance that such funds will be available on
favorable terms or on a timely basis, if at all.
Globalstar has agreed, subject to its partners' approval, to purchase from
SS/L 12 additional spare satellites for which the cost and payment terms have
not as yet been negotiated. It is anticipated that approximately $100 million
will be expended for these spare satellites by commencement of commercial
service. In addition, in order to accelerate the deployment of gateways around
the world, Globalstar has agreed to help finance approximately $80 million of
the cost of up to 32 of the initial 38 gateways. The contracts for the 38
gateways aggregate approximately $345 million. Ericsson, Qualcomm and Telital
are in the process of manufacturing approximately 300,000 handheld and fixed
user terminals under contracts totaling $353 million from Globalstar and its
service providers. Globalstar has agreed to finance approximately $151 million
of the cost of handheld and fixed user terminals. Globalstar expects to recoup
such costs upon the acceptance by the service providers of the gateways and user
terminals.
In January 1999, GTL, a general partner of Globalstar, completed a private
offering of $350 million of convertible preferred stock (of which Loral
purchased $150 million face amount to maintain its ownership percentage). GTL in
turn used the net proceeds from its offering to purchase convertible preferred
partnership interests of Globalstar. Globalstar in turn will use the proceeds
for the construction and deployment of its system.
As of January 31, 1999, Globalstar has raised or received commitments for
approximately $3.3 billion. Globalstar intends to raise the remaining funds
required, of approximately $600 million, prior to the initiation of commercial
service from a combination of sources, including: high yield debt issuance
(which may include an equity component), bank financing, equity issuance,
financial support from the Globalstar partners, projected service provider
payments and anticipated payments from the sale of gateways and Globalstar
subscriber terminals.
The Company's global mobile telephony segment had development and start-up
costs of $145 million, $87 million and $45 million for the years ended December
31, 1998 and 1997 and for the nine months ended December 31, 1996, respectively.
Total assets for the segment were $2.7 billion, $2.1 billion and $943 million as
of December 31, 1998, 1997 and 1996, respectively.
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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 134 patents in the United States and
253 patents abroad and has applications for 77 patents pending in the United
States and 201 patents pending abroad. SS/L patents include those relating to
communications, station keeping, power control systems, antennae, filters and
oscillators, phase arrays and thermal control as well as assembly and
inspections technology. The SS/L patents that are currently in force expire
between 1999 and 2017.
In connection with the Globalstar System, Globalstar's design and
development efforts have yielded 16 patents issued and 30 patents pending in the
United States, as well as 17 patents issued and 100 patents pending
internationally for various aspects of communications satellite system design
and implementation of CDMA technology relating to the Globalstar System.
Qualcomm has obtained 189 issued patents and 463 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.
In addition, CyberStar, Loral Orion and Loral SpaceCom Corporation have 16,
three and two patents pending in the United States, respectively. Each of
CyberStar and Loral Orion also has one patent pending abroad.
There can be no assurance that any of the pending patent applications by
the Company 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, do not have patents pending that could result in
issued patents which the Company or Globalstar would infringe. In such an event,
the Company 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.
FOREIGN OPERATIONS
Sales to foreign customers, primarily in Europe and Asia, represented 16%
and 30% of the Company's consolidated revenues for the years ended December 31,
1998 and 1997, respectively. As of December 31, 1998, 1997 and 1996, the Company
had substantially all of its long-lived assets located in the United States with
the exception of the in-orbit satellites. See "Certain Factors that May Affect
Future Results -- There are risks in conducting business internationally" for a
discussion of the risks related to operating internationally.
EMPLOYEES
As of December 31, 1998, the Company had approximately 3,900 full-time
employees (including approximately 465 employees of Globalstar and SatMex), some
of whom are subject to collective bargaining agreements.
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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This annual report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
from time to time, 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. 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.
LAUNCH FAILURES HAVE DELAYED SOME OF OUR OPERATIONS IN THE PAST, AND MAY DO SO
AGAIN IN THE FUTURE.
Satellite launches are risky. About 15% of launch attempts end in failure.
We ordinarily insure against launch failures, but at considerable cost. The cost
and the availability of insurance vary depending on market conditions and the
launch vehicle used. Our insurance typically does not cover business
interruption, and so both launch failures and in-orbit satellite failures result
in uninsured losses. Replacement of a lost satellite typically requires up to 18
months from the time a contract is executed until the launch date of the
replacement satellite.
Loral Orion. Orion 3 is currently scheduled to be launched on the second
flight of a Delta 3 rocket in April 1999. A Delta 3 rocket failed in August 1998
on its maiden flight. Although the manufacturer has assured us that the cause of
that failure has been identified and corrected, we can't be certain that the
second flight will succeed.
Loral Skynet. Loral Skynet's Telstar 7 is currently scheduled to be
launched on the maiden flight of an Atlas IIIA. We can't be certain that the
maiden flight will succeed.
Globalstar. As of March 15, 1999, Globalstar needs to launch 16 more
satellites aboard four launch vehicles before commercial operations can begin.
Although Globalstar has contracted for the necessary launch vehicles and
developed contingency plans, launch failures could delay Globalstar's start of
commercial operations. In September 1998, a malfunction of a Zenit 2 rocket
resulted in the loss of 12 Globalstar satellites shortly after lift-off from
Kazakhstan and resulted in a delay in Globalstar's program schedule.
GOVERNMENT POLICIES AND REGULATIONS MAY LIMIT OR DELAY LAUNCHES AND/OR INCREASE
LAUNCH-RELATED COSTS.
We depend on third parties, in the United States and abroad, to launch our
satellites. Foreign launches have been politically sensitive because of the
relationship between launch technology and missile technology. U.S. government
policy has limited, and is likely in the future to limit, launches from the
former Soviet Union and China. For example, the most recent Globalstar launch
from Kazakhstan was delayed when the U.S. government stopped granting
case-by-case approval of launches from that location pending an
intergovernmental agreement covering technology security matters. Changes in
governmental policies, political leadership or legislation in the United States,
Russia, Kazakhstan or China could adversely affect our ability to launch from
these countries or materially increase the costs of doing so.
AFTER LAUNCH, OUR SATELLITES REMAIN VULNERABLE TO IN-ORBIT FAILURE.
Random failure of satellite components may result in damage to or loss of a
satellite before the end of its expected life. Satellites are carefully built
and tested and have certain redundant systems in case of failure. However,
in-orbit failure may result from various causes including:
- component failure;
- loss of power or fuel;
- inability to control positioning of the satellite;
- solar and other astronomical events; and
- space debris.
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Repair of satellites in space is not feasible. Many factors affect the useful
lives of our satellites. These factors include:
- the quality of construction;
- gradual degradation of solar panels; and
- the durability of components.
Although some failures may be covered in part by insurance, they may result
in uninsured losses as well. For example, when Skynet experienced the total loss
of two satellites in 1994 and 1997 while under AT&T's ownership, it suffered a
substantial drop in its profits.
Our geosynchronous satellites generally have an expected life of between 15
to 20 years. Some of the satellites we currently have in-orbit have experienced
operational problems:
- In November 1995, a component on Orion 1 malfunctioned, resulting in a
two-hour service interruption. Full service was restored using a back-up
component. If the back-up component fails, Orion 1 would lose a
significant amount of usable capacity.
- SatMex's Solidaridad 1 satellite has experienced problems and mechanical
difficulties that could shorten its operational life.
GLOBALSTAR SATELLITES HAVE A SHORTER DESIGN LIFE AND GLOBALSTAR MAY NOT BE ABLE
TO REPLACE ITS SATELLITES AT THE END OF THEIR USEFUL LIVES.
Globalstar's satellites have a minimum life-span of seven and a half years.
Globalstar plans to use funds from operations and, possibly, proceeds from
additional financings, to deploy a second generation of satellites to replace
its first generation satellite constellation. However, enough money might not be
available when needed, leaving Globalstar without a second-generation
constellation.
SPACE SYSTEMS/LORAL MAY FORFEIT PAYMENTS FROM CUSTOMERS DUE TO SATELLITE
FAILURES OR LOSSES AFTER LAUNCH, AND THESE LOSSES MAY BE UNINSURED.
Some of SS/L's satellite manufacturing contracts provide that some of the
total price is payable as "incentive" payments earned throughout the life of the
satellite. While insurance against loss of these payments has been available in
the past, the cost and availability of such insurance are subject to wide
fluctuations. In addition, SS/L is sometimes prohibited from insuring orbital
incentive payments. Some of SS/L's contracts call for in-orbit delivery,
transferring the launch risk to SS/L. SS/L generally insures against that
exposure.
SS/L records as revenue the present value of incentive payments as the
costs associated with these incentive payments are incurred. SS/L generally
receives the present value of these incentive payments if there is a launch
failure or a failure is caused by customer error. However, SS/L forfeits these
payments if the loss is caused by satellite failure or as a result of its own
error. For example, in 1998, a satellite built by SS/L experienced problems with
two of its antennae. SS/L currently estimates that this degradation could result
in the loss of about 25% of the incentive payments under that contract. Further
warranty claims by the customer may also be possible.
WE ARE A HOLDING COMPANY WITH SUBSTANTIAL DEBT AND COMMITMENTS AT OUR OPERATING
LEVELS.
We and our subsidiaries and operating affiliates have a significant amount
of outstanding debt and commitments, including:
- As of December 31, 1998, our outstanding consolidated debt, including the
current portion, was $1.6 billion, all of which represents obligations of
our subsidiaries to their creditors. In addition, we issued $350 million
of senior notes in January 1999.
- As of December 31, 1998, our unconsolidated affiliates, SatMex and
Globalstar, had outstanding debt, including the current portion, of $2.0
billion, and Globalstar had vendor financing of $371 million.
- We have a $115 million secured standby bank credit facility, which was
undrawn as of December 31, 1998, supporting a guarantee of a $115 million
term loan.
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- SS/L has guaranteed $11.7 million under Globalstar's $250 million credit
facility. In addition, we have a contingent liability of up to $56
million to Lockheed Martin Corporation pursuant to its guarantee of the
Globalstar credit facility.
- We have agreed to maintain certain assets in a trust to collateralize a
$129.9 million obligation of Servicios Corporativos Satelitales, S.A. de
C.V., in which we have a 65% interest. This obligation has a seven year
term and bears interest at 6.03%
The ability of our subsidiaries and affiliates to pay dividends to us or
otherwise support our obligations is limited by the terms of their debt
instruments. We intend to use our available cash to help pay for the growth and
operation of our businesses. If any of our subsidiaries or affiliates finds
itself faced with an imminent payment default, we might be faced with a choice
between making additional equity investments in a troubled company or accepting
the loss of some or all of our equity investment.
IF OUR BUSINESS PLAN DOES NOT SUCCEED, OUR OPERATIONS MIGHT NOT GENERATE ENOUGH
CASH TO PAY OUR OBLIGATIONS.
For the year ended December 31, 1998, we had a deficiency of earnings to
cover fixed charges of $140 million, before taking into account the $350 million
of notes we issued in January 1999. Our core businesses are capital intensive
and need substantial investment before returns on investment can be realized. We
are subject to substantial financial risks from possible delays or reductions in
revenue, unforeseen capital needs or unforseen expenses. Our ability to meet our
obligations and execute our business plan could depend upon our ability and that
of our operating subsidiaries and affiliates, to raise cash in the capital
markets. We can't be certain that this source of cash would be available in the
future on favorable terms, if at all.
Our ability to satisfy our obligations will depend upon our future
financial performance which is subject to:
- the successful execution of our business plans and those of our
affiliates;
- general economic conditions; and
- financial, business, regulatory and other factors, including
international conditions.
These factors are to some extent beyond our control.
WE CURRENTLY DEPEND HEAVILY ON SS/L FOR A LARGE PORTION OF REVENUE AND OPERATING
INCOME.
Currently, SS/L generates a significant part of our revenue and operating
income. SS/L, in turn, has historically derived a large part of its revenues
from a few customers. As a result, its revenues and operating results would be
hurt if completed or canceled contracts are not promptly replaced with new
orders.
SS/L's accounting for long-term contracts sometimes requires adjustments to
profit and loss based on revised estimates during the performance of the
contract. These adjustments may have a material effect on our results of
operations in the period they are made. The estimates giving rise to these
risks, which are inherent in long-term, fixed-price contracts, include the
forecasting of costs and schedules, contract revenues related to contract
performance, including revenues from orbital incentives, and the potential for
component obsolescence due to procurements long ahead of assembly.
GLOBALSTAR IS A DEVELOPMENT STAGE COMPANY THAT HAS NOT BEGUN COMMERCIAL
OPERATIONS.
Until the Globalstar System is fully deployed and tested, we can't be
certain that it will perform as designed. Even if the system operates as it
should, we can't be certain that the market will develop as we anticipate. The
Globalstar system is still being deployed, and cannot begin commercial
operations until:
- at least 32 satellites are working in orbit;
- the necessary ground equipment and user terminals are in place; and
- the service provider is fully licensed in each country to be served.
The cost of building the Globalstar System has been revised upward from its
original estimates, and further increases are possible.
Barring unexpected adverse developments, Globalstar will need approximately
$600 million more capital before it can begin commercial service in September
1999 as planned. As of December 31, 1998, and including the effect of a
preliminary revision to Qualcomm's cost estimate, Globalstar's budgeted
expenditures were $3.17 billion for the design, construction and deployment of
the Globalstar System to commence
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commercial service and $340 million for budgeted financing costs. More money
will be needed if Globalstar experiences delays in beginning commercial service,
and in any event, after the commencement of commercial service and before
positive cash flow is achieved. Although Globalstar believes it will be able to
obtain the money it needs, we cannot be certain that it will be available on
favorable terms or on a timely basis, if at all.
Globalstar depends on independent service providers to supply the ground
equipment and user terminals and market Globalstar service in each country where
they plan to operate. We don't know whether these service providers will be
successful. We expect that Globalstar service providers will operate in more
than 100 countries, many of which have developing economies. Globalstar's
strategy of focusing on areas which lack basic telephone service exposes it to
the risk that customers in these economies will not be able to afford the
service.
THERE ARE RISKS IN CONDUCTING BUSINESS INTERNATIONALLY.
Some of our business is conducted outside the United States, which imposes
more risks. We could be harmed financially and operationally by changes in
foreign regulations and telecommunications standards, tariffs or taxes and other
trade barriers. Customers in developing countries could have difficulty in
obtaining the U.S. dollars they owe us, including as a result of exchange
controls. Additionally, exchange rate fluctuations may adversely affect the
ability of our customers to pay us in U.S. dollars. Moreover, if we ever need to
pursue legal remedies against our foreign business partners or customers, we may
have to sue them abroad, where it could be hard for us to enforce our rights.
WE ARE SUBJECT TO EXPORT CONTROLS, WHICH MAY RESULT IN DELAYS, UNFORSEEN
ADDITIONAL COSTS AND UNCERTAINTIES TO SELL IN CERTAIN MARKETS.
Like other exporters of space-related products and services, SS/L needs
licenses from the U.S. government whenever it sells a satellite to a foreign
customer or launches a satellite abroad. Satellite export licensing has lately
been politically controversial, resulting in delays of some approvals, and
creating uncertainties about the continuing ability of U.S. satellite
manufacturers to sell in certain markets.
On December 23, 1998, the Office of Defense Trade Controls of the U.S.
Department of State temporarily suspended the previously approved technical
assistance agreement under which SS/L had been preparing for the launch of the
ChinaSat-8 satellite. According to the agency, the purpose of the temporary
suspension is to permit it to review the agreement for conformity with
newly-enacted legislation (Section 74 of the Arms Export Control Act) as to the
export of missile equipment or technology. This suspension has delayed SS/L's
performance of its contractual obligations. If our customer terminates the
ChinaSat-8 contract because of this delay, SS/L will have to refund advances it
has received from ChinaSat. These advances totaled $124 million as of December
31, 1998. In addition, SS/L may incur penalties of up to $12 million upon such
termination. SS/L believes that it would cost about $38 million to refurbish and
retrofit the satellite so that it could be sold to another customer. We cannot
guarantee that SS/L would find a replacement customer.
The U.S. government recently announced that it will not grant an export
license to Hughes Space & Communications, Inc. for a telecommunications
satellite it is building for Asia Pacific Mobile Telecommunications. We do not
know what this denial may mean for future applications of export licenses to
Chinese customers or the resolution of the ChinaSat-8 suspension. If the U.S.
government continues to deny export licenses for satellites sold to the Chinese
or other markets, SS/L's business could be hurt.
SS/L IS THE TARGET OF A GRAND JURY INVESTIGATION; CONGRESS HAS HELD RELATED
HEARINGS.
SS/L could be accused of criminal violations of the export control laws
arising out of the participation of its employees in a committee formed to
review the findings of the Chinese regarding the 1996 crash of a Long March
rocket in China. Whether or not SS/L is indicted or convicted, SS/L will remain
subject to the State Department's general statutory authority to prohibit
exports of satellites and related services if it finds that SS/L has violated
the Arms Export Control Act. Further, the State Department can suspend export
privileges whenever it determines that grounds for debarment exist and that
suspension "is reasonably necessary to
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protect world peace or the security or foreign policy of the United States." If
SS/L were to be indicted and convicted of a criminal violation of the Arms
Export Control Act, it:
- would be subject to a fine of $1 million per violation;
- could be debarred from certain export privileges; and
- could be debarred from participation in government contracts.
Since many of SS/L's satellites are built for foreign customers and/or launched
on foreign rockets, a debarment would have a material adverse effect on SS/L's
business, which in turn would affect us.
A committee of the U.S. House of Representatives, chaired by Representative
Cox, is investigating U.S. satellite export policy toward China. The committee
recently issued a report which has been declassified in part. The other portions
of the report, which could be issued shortly, could contain negative comments
about SS/L's compliance with the export control laws.
Further, we can't assure you that future licenses for satellites will be
granted in the same manner and time frame, if at all, as in the past after the
State Department takes over the licensing from the Commerce Department in March
1999.
WE SHARE CONTROL OF OUR AFFILIATES WITH THIRD PARTIES.
Third parties have significant ownership, voting and other rights in many
of our subsidiaries and affiliates. As a result, we do not always have full
control over management of these entities and the rights of these third parties
and fiduciary duties under applicable law could result in these entities taking
actions not in our best interests or in refraining to take actions that we deem
advisable. To the extent that these entities are or become customers of SS/L,
these conflicts could become acute. For example:
- Although we are the managing general partner and largest equity owner of
Globalstar, our control is limited by the supermajority rights of
Globalstar's limited partners.
- Primary operational control of SatMex is vested in Mexican nationals, as
required by Mexican law, subject to certain supermajority rights which we
retain.
- The Europe*Star joint venture, initiated by Alcatel, is under its
control, subject to our supermajority rights.
- Future joint ventures between Alcatel and us within the Loral Global
Alliance will be controlled by the initiating party, subject to
supermajority rights in favor of the non-initiating party.
- Alcatel is an investor in CyberStar, and has supermajority rights in it.
THERE ARE POTENTIAL CONFLICTING COMMERCIAL INTERESTS AMONG OUR SUBSIDIARIES AND
AFFILIATES.
Loral Skynet, SatMex, Loral Orion and Europe*Star have adopted a marketing
policy that provides for collaboration and cross-selling of capacity among the
Loral Global Alliance members. If, however, the members of the Loral Global
Alliance do not collaborate but rather compete in areas of overlapping capacity,
conflicting commercial interests among our subsidiaries and affiliates may
arise. Both Loral Skynet and Loral Orion own or are building satellites whose
coverage areas overlap with those of SatMex and Europe*Star. If Loral Skynet and
Loral Orion do not collaborate with SatMex and Europe*Star, or vice versa, under
the Loral Global Alliance, Loral Skynet and Loral Orion might compete directly
with Europe*Star and SatMex for customers.
Partners and affiliates of Globalstar, including companies affiliated with
us, will be among Globalstar's service providers and may, therefore, have
conflicts with Globalstar and/or us over service provider agreements.
OUR BUSINESS IS REGULATED, CAUSING UNCERTAINTY AND ADDITIONAL COSTS.
Our business is regulated by authorities in more than 100 jurisdictions,
including the Federal Communications Commission, the International
Telecommunications Union and the European Union. As a result, some
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of the activities which are important to our strategy are beyond our control.
The following are some strategically important activities which are regulated by
various government authorities:
- the expansion of Loral Skynet's operations beyond the domestic U.S.
market;
- the proposed launch and operation of Orion 2 and Orion 3;
- the international service offered by Loral Orion;
- the manufacture and export of satellites;
- the launch of Globalstar satellites; and
- the expansion of SatMex's Latin American business.
Regulatory authorities in the various jurisdictions in which we operate can
modify, withdraw or impose charges or conditions upon the licenses which we
need, and so increase our cost of doing business. The regulatory process also
requires that we negotiate with third parties operating or intending to operate
satellites at or near orbital locations where we place our satellites so that
the frequencies of the satellites do not interfere. Because we cannot guarantee
the results of negotiations with third parties, "frequency coordination" is an
additional source of uncertainty. We cannot guarantee successful frequency
coordination for our satellites. In particular, we have learned that Eutelsat,
which may claim a priority filing with the International Telecommunications
Union, has recently placed a satellite that is beyond its useful life at 12.5
degrees W.L., near the 12 degrees W.L. orbital location intended for Orion 2. If
Eutelsat launches a replacement satellite into the 12.5 degrees W.L. orbital
location, it would interfere with the Orion 2 satellite at 12 degrees W.L. We
have entered into discussions with Eutelsat to resolve the issues relating to
this orbital location; however, we cannot guarantee a successful resolution.
Failure to successfully coordinate our satellites' frequencies or to
resolve other required regulatory approvals could have a material adverse effect
on our financial condition and on our results of operations.
SS/L COMPETES WITH LARGE MANUFACTURERS THAT HAVE SIGNIFICANT RESOURCES.
In the manufacture of our satellites, we compete with very large
well-capitalized companies, including several of the world's largest
corporations, such as Hughes Space & Communications, Inc., a subsidiary of
General Motors Corporation, and Lockheed Martin Corporation. These companies
have considerable financial resources which they may use to gain advantages in
marketing and in technological innovation. SS/L's success will depend on its
ability to innovate on a cost-effective and timely basis.
WE COMPETE WITH A NUMBER OF SERVICE PROVIDERS FOR MARKET SHARE AND CUSTOMERS;
TECHNOLOGICAL DEVELOPMENTS FROM COMPETITORS OR OTHERS MAY REDUCE DEMAND FOR
SATELLITE-BASED SERVICES.
When Globalstar enters the satellite-based mobile phone business, it will
face intense competition for customers from various companies, and in
particular, Iridium LLC, ICO Global and providers of land-based mobile phone
services. We cannot assure you that Globalstar will attract enough subscribers
either to compete effectively or to implement its current business plan.
We face competition in the provision of fixed satellite services from
companies such as PanAmSat Corporation, GE Americom, SES Astra and
quasi-governmental organizations such as Intelsat. Because this market is
mature, competition may cause downward price pressures, which may adversely
affect our profits.
We, through Loral Orion and our affiliate CyberStar, also face competition
in the provision of high-speed data communications, such as Internet
applications, from providers of land-based data communications services, such as
cable operators and traditional telephone service providers. In addition, Loral
Orion and CyberStar may face competition in the future from Teledesic
Corporation's proposed system and Hughes' Spaceway system. We cannot assure you
that Loral Orion or CyberStar will attract enough customers either to compete
effectively or to implement their business plans.
As land-based telecommunications services expand, demand for some
satellite-based services may be reduced. New technology could render
satellite-based services less competitive by satisfying consumer demand in other
ways or through the use of incompatible standards.
We also compete for local regulatory approval in places in which both we
and a competitor may want to operate. We also compete for scarce frequency
assignments and fixed orbital positions.
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THE YEAR 2000 PROBLEM.
Many computer systems and software programs may not function properly in
the year 2000 and beyond because of a once common programming standard which
used two digits instead of four digits to signify a year. These computer systems
and software programs read the year 1999 as "99" and not "1999". Because of
this, the year 2000 may appear as the year 1900, which could result in system
failures or disruptions. This problem is often referred to as the "Year 2000"
issue.
If we are unable to fix a material Year 2000 problem, we could experience
an interruption or failure of our business operations. Likewise, if our
suppliers are unable to fix a material Year 2000 problem, a resulting
interruption or failure of their business could hurt us.
WE RELY ON KEY PERSONNEL.
We need highly qualified personnel. Except for Mr. Bernard L. Schwartz, our
Chairman and Chief Executive Officer, none of our officers has an employment
contract nor do we maintain "key man" life insurance. The departure of any of
our key executives could have an adverse effect on our business.
THERE ARE RISKS REGARDING FORWARD-LOOKING STATEMENTS.
Some statements or information contained in this document are not
historical facts but are "forward-looking statements" (as such term is defined
in the Private Securities Litigation Reform Act of 1995). They can be identified
by the use of forward-looking words such as "believes", "expects", "plans",
"may", "will", "should", or "anticipates" or their negatives or other variations
of these words or other comparable words, or by discussions of strategy that
involve risks and uncertainties. Some of the factors which may cause future
results and performance to differ from what we may imply here are:
- the space environment, where our satellites operate, is a harsh
environment;
- governments may change regulations or institute new rules, which could
have an impact on our operations;
- we need to be able to have access to scarce rockets to launch our
satellites;
- Globalstar is a development-stage company that may continue to lose
money, have negative cash flow, require additional money and suffer
delays in meeting its targets;
- we depend on SS/L for operating income;
- there is severe competition in our business; and
- our subsidiaries and affiliates owe significant amounts of money.
We warn you that forward-looking statements are only predictions. Actual
events or results may differ materially as a result of risks that we face,
including those presented above. These are representative of factors that could
affect the outcome of the forward-looking statements.
ITEM 2. PROPERTIES
The Company leases approximately 47,000 square feet for its corporate
offices in New York. The Company's subsidiaries also maintain office space,
manufacturing and telemetry, tracking and control facilities primarily in the
United States. Management believes that the facilities are sufficient for its
current operations.
Satellite Manufacturing and Technology
SS/L's research, production and testing facilities are carried on in
SS/L-owned facilities covering approximately 562,000 square feet on 84 acres in
Palo Alto, California. In addition, SS/L leases approximately 780,000 square
feet of space from various third parties.
Fixed Satellite Services
Loral Skynet owns two telemetry, tracking and control stations covering
approximately 39,000 square feet on 220 acres in Hawley, Pennsylvania and Three
Peaks, California and leases approximately 51,000 square feet of office space.
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Data Services
Loral Orion owns seven acres of land in Mt. Jackson, Virginia and leases
approximately 78,000 square feet for office space and its operations center.
CyberStar leases approximately 44,000 square feet for office space and its
network operations center.
ITEM 3. LEGAL PROCEEDINGS
Export Control Matters. Various agencies and departments of the U.S.
government regulate Loral's ability to pursue business outside the United
States. Exports of space-related products, services and technical information
require U.S. government licenses. There can be no assurance that Loral or SS/L
will be able to obtain necessary licenses or approvals, and the inability to do
so, or the failure to comply with the terms thereof when granted, could have a
material adverse effect on their respective businesses.
On February 15, 1996, a Chinese Long March rocket carrying an Intelsat
satellite built by SS/L crashed seconds after launch. Thereafter, at the request
of insurance companies concerned about underwriting future Long March launches,
the manufacturer of the Long March, China Great Wall Industries Corporation
("CGWIC"), asked SS/L employees and personnel from other interested companies to
serve on a committee formed to consider whether studies of the crash made by the
Chinese had correctly identified the cause of the failure. In meetings with
CGWIC, the committee reviewed CGWIC's launch failure analysis, which consisted
of a preliminary explanation for the crash (a failed solder joint) and CGWIC's
plan for further studies it planned to make.
In May 1996, an SS/L employee transmitted a copy of the committee's
preliminary report to the members of the committee and, contrary to the
intentions of SS/L's management, to CGWIC before consulting with the U.S. State
Department. Upon becoming apprised of the facts, SS/L immediately informed the
State Department, and thereafter submitted a detailed voluntary written
disclosure to the State Department that included copies of the written materials
provided to CGWIC and descriptions of the committee's meetings with the Chinese
and of the events surrounding disclosure of the preliminary report. For the next
18 months, the Company had no notice of any adverse action being taken or
contemplated in connection with the matter.
SS/L is a target of a grand jury investigation being conducted by the U.S.
Attorney for the District of Columbia as to whether an unlawful transfer of
technology occurred in connection with the committee's work. The Company and
several of its employees have received subpoenas from that grand jury. SS/L is
not in a position to predict the outcome of this investigation. If SS/L were to
be indicted and convicted of a criminal violation of the Arms Export Control
Act, it would be subject to a fine of $1 million for each violation, and could
be debarred from certain export privileges and, possibly, from participation in
government contracts. Since many of SS/L's satellites are built for foreign
customers and/or launched on foreign rockets, such a debarment would have a
material adverse effect on SS/L's business, which would in turn affect the
Company. Indictment for such violations would subject SS/L to discretionary
debarment from further export licenses. Whether or not SS/L is indicted or
convicted, SS/L will remain subject to the State Department's general statutory
authority to prohibit exports of satellites and related services if it finds a
violation of the Arms Export Control Act that puts SS/L's reliability in
question, and it can suspend export privileges whenever it determines that
grounds for debarment exist and that such suspension "is reasonably necessary to
protect world peace or the security or foreign policy of the United States."
As far as SS/L can determine, no sensitive information or technology was
conveyed to the Chinese, and no secret or classified information was discussed
with or reported to them. SS/L believes that its employees acted openly and in
good faith and that none engaged in intentional misconduct. Accordingly, the
Company does not believe that SS/L has committed a criminal violation of the
export control laws. The Company does not expect the grand jury investigation or
its outcome to result in a material adverse effect upon its business. However,
there can be no assurance as to those conclusions.
In May 1997, SS/L applied for an export license for the launch of another
SS/L satellite in China, which was granted following the required Presidential
waiver in February 1998. The Company believes that the authorizations were
properly granted, and does not believe that it or any of its officers acted
improperly in obtaining them. The policy of the Bush administration, which has
been continued under President Clinton, has been to grant such waivers routinely
as being in the national interest; indeed, the Company is unaware of any
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requested waiver for a Chinese satellite launch ever having been denied.
According to press reports, President Bush signed three waivers covering nine
Long March launches, and President Clinton has signed eight waivers covering 11
Long March launches. This policy has, until recently, also enjoyed bipartisan
Congressional support. On December 23, 1998, the Office of Defense Trade
Controls ("ODTC") of the U.S. Department of State temporarily suspended the
previously approved technical assistance agreement under which SS/L had been
preparing for the launch of the ChinaSat-8 program. According to ODTC, the
purpose of the temporary suspension is to permit that agency to review the
agreement for conformity with newly-enacted legislation (Section 74 of the Arms
Export Control Act) with respect to the export of missile equipment or
technology. SS/L has complied with ODTC's instructions, and believes that a
review of the agreement will conclude that its terms comply with the new law.
The ODTC, however, has not completed its review, and the scheduled launch date
for ChinaSat-8 is being delayed. If such a delay were to continue for an
extended period, or if the suspension was not lifted, SS/L's customer could
decide to terminate the contract. If such a termination were to occur, SS/L
would have to refund advances received from ChinaSat ($124 million as of
December 31, 1998) and may incur penalties of up to $12 million and believes it
would incur costs of approximately $38 million to refurbish and retrofit the
satellite so that it could be sold to another customer. There can be no
assurance that SS/L will be able to find such a replacement customer.
Several Congressional committees have held hearings on U.S. satellite
export policy toward China, alleged influence of campaign contributions
(including contributions made by Loral's Chairman and CEO) on the Clinton
Administration's export policy toward China, and related matters. One of the
House committees investigating these matters, chaired by Representative Cox,
recently issued a classified report that is said to be critical of past
government and industry technology transfer practices and policies. This report
is also said to contain 38 proposals for legislative and executive action to
address perceived concerns. It is possible that adoption of some or all of such
proposals could have an adverse effect upon the ability of U.S.-based satellite
manufacturers such as SS/L, and possibly other U.S. exporters, to market their
products abroad in competition with foreign-based manufacturers, and might
adversely affect their ability to perform existing contracts. In addition, the
portions of the report that have not yet been declassified could contain
negative comments about SS/L's compliance with the export control laws.
CCD Lawsuits. On September 12, 1991, Loral Fairchild Corp. ("Loral
Fairchild"), a subsidiary of Loral Corporation ("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 in September
1997.
Environmental Regulation. Operations at SS/L, Loral Skynet, Loral Orion,
CyberStar 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 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 presents, the reported high and low sales prices of the
Company's common stock as reported on the NYSE:
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1998
Quarter ended March 31, 1998................................ $30 1/2 $19
Quarter ended June 30, 1998................................. 33 15/16 24 1/2
Quarter ended September 30, 1998............................ 31 7/8 12 1/8
Quarter ended December 31, 1998............................. 20 1/2 10 3/4
YEAR ENDED 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
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). Loral Orion's
indentures relating to its senior notes and its senior discount notes also
contain restrictions on Loral Orion's ability to make dividend payments to its
parent. Loral's indenture relating to its 9 1/2% Senior Notes due 2006 issued in
January 1999 also imposes limitations on Loral's ability to pay dividends to its
shareholders.
(b) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK
At February 26, 1999, there were approximately 6,960 holders of record of
the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from, and should be
read in conjunction with, the related financial statements. Historical financial
information as of and for the two years ended March 31, 1996, represents the
space and communications operations of Old Loral.
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LORAL SPACE & COMMUNICATIONS LTD.
(In thousands except per share data)
YEARS ENDED NINE MONTHS YEARS ENDED
DECEMBER 31, ENDED MARCH 31,(1)
----------------------- DECEMBER 31, -------------------
1998(1) 1997(1) 1996(1) 1996 1995
---------- ---------- ------------ -------- --------
STATEMENT OF OPERATIONS DATA:
Revenues........................... $1,301,702 $1,312,591
Management fee from affiliate...... $ 5,088 $ 5,608 $ 3,169
Operating income (loss)............ (33,780) 13,552 (12,201) 2,587 (33)
Equity in net loss of
affiliates(2).................... (120,417) (49,037) (4,709) (8,628) (8,988)
Net income (loss).................. (138,798) 40,004 8,877 (13,785) (7,873)
Preferred dividends and
accretion(3)..................... (46,425) (26,315)
Net income (loss) applicable to
common stockholders.............. (185,223) 13,689 8,877 (13,785) (7,873)
Earnings (loss) per share -- basic
and diluted...................... (.68) .06 .04 (.08) N/A
OTHER DATA:
Ratio of earnings to fixed
charges.......................... 1.9x 3.7x
Deficiency of earnings to cover
fixed charges.................... $ 140,438
CASH FLOW DATA:
Provided by (used in) operating
activities....................... $ 4,417 $ (230,248) $ (3,003) $ (1,319) $ (8,439)
Used in investing activities....... 473,235 1,022,772 1,962 115,031 92,055
Provided by (used in) equity
transactions..................... 589,187 (18,097) 602,413 116,362 100,494
Provided by financing
transactions..................... 199,856 316,912 583,292
Dividends paid per common share.... N/A N/A
DECEMBER 31, MARCH 31,
------------------------------------ -------------------
1998(1) 1997(1) 1996(1) 1996(1) 1995(1)
---------- ---------- ---------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 546,772 $ 226,547 $1,180,752 $ 12 $ --
Total assets........................ 5,229,215 3,010,447 1,699,326 354,396 251,819
Convertible preferreds(3)........... 583,292
Debt................................ 1,555,775 435,398
Non-current liabilities............. 236,160 221,211 26,834
Shareholders' equity(4)/Invested
equity............................ 2,935,721 1,980,520 1,070,069 354,396 251,819
- ---------------
(1) On March 20, 1998, Loral acquired all of the outstanding stock of Loral
Orion in exchange for common stock of Loral. The 1998 financial information
includes Loral Orion commencing from April 1, 1998. 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
Loral Skynet from AT&T; Loral's financial information includes the results
of Loral Skynet from that date. Financial information as of and for the two
years in the period ended March 31, 1996, represents the space and
communications operations of Old Loral. The results of operations for the
two 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 principal affiliates are Globalstar, SatMex since November 17,
1997 and Europe*Star since December 1998. Loral also has an investment in
SkyBridge which is accounted for under the equity method. Loral sold its
interest in K&F Industries, Inc. in 1997.
(3) Convertible preferred equivalent obligations were exchanged for 6% Series C
Preferred Stock and were reclassified to shareholders' equity in 1997 upon
approval by the Company's shareholders.
(4) As of December 31, 1998, 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 $7.57 and $7.56,
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)
NINE MONTHS YEARS ENDED
ENDED MARCH 31,
DECEMBER 31, -----------------------
1996 1996 1995
---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $1,017,653 $1,121,619 $ 633,717
Gross profit................................................ 64,157 34,406 27,785
Net income.................................................. 31,025 12,367 5,554
MARCH 31,
DECEMBER 31, -----------------------
1996 1996 1995
------------ ---------- ----------
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 19,181 $ 126,863 $ 52,222
Total assets................................................ 1,059,064 908,677 766,475
Long-term debt.............................................. 127,586 65,052 34,040
Shareholders' equity........................................ 478,893 447,868 435,501
GLOBALSTAR, L.P.
(In thousands, except per partnership interest amounts)
YEAR ENDED DECEMBER 31, 1994
--------------------------------
PRE-CAPITAL
CUMULATIVE SUBSCRIPTION
MARCH 23, 1994 MARCH 23 PERIOD(1)
(COMMENCEMENT (COMMENCEMENT ------------
OF OPERATIONS) TO YEARS ENDED DECEMBER 31, OF OPERATIONS) TO JANUARY 1 TO
DECEMBER 31, ----------------------------------------- DECEMBER 31, MARCH 22,
1998 1998(3) 1997 1996 1995 1994 1994
---- ------- ---- ---- ---- ----------------- ------------
STATEMENT OF OPERATIONS DATA:
Revenues....................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operating loss................. 404,033 146,684 88,071 61,025 80,226 28,027 6,872
Net loss applicable to ordinary
partnership interests........ 406,978 151,740 88,788 71,969 68,237 26,244 6,872
Net loss per weighted average
ordinary partnership interest
outstanding basic and
diluted...................... 2.69 1.74 1.53 1.50 0.73
Cash distributions per ordinary
partnership interest.........
OTHER DATA:
Deficiency of earnings to cover
fixed charges(2)............. 330,475 184,683 81,869 N/A N/A
CASH FLOW DATA:
Used in operating activities... 206,749 24,958 68,615 51,756 38,368 23,052
Used in investing activities... 2,014,396 684,834 619,538 379,130 280,345 50,549
Provided by partners' capital
transactions................. 898,320 14,825 132,990 284,714 318,630 147,161
Provided by (used in) other
financing activities......... 1,379,564 287,552 998,137 95,750 (1,875)
DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- -------- -------- --------
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 56,739 $ 464,154 $ 21,180 $ 71,602 $ 73,560
Total assets.............................................. 2,670,025 2,149,053 942,913 505,391 151,271
Vendor financing liability................................ 371,170 197,723 130,694 42,219
Debt...................................................... 1,396,175 1,099,531 96,000
Redeemable preferred partnership interests................ 303,089 302,037
Ordinary partners' capital................................ 602,401 380,828 315,186 386,838 112,944
- ---------------
(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.
(3) The results of operations for 1998, include a $17.3 million loss from launch
failure.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the matters
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations of Loral Space & Communications Ltd. and subsidiaries
("Loral" or the "Company"), Globalstar, L.P. ("Globalstar") and Satelites
Mexicanos, S.A. de C.V. ("SatMex") 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 is one of the world's leading satellite communications companies,
with substantial activities in satellite manufacturing and satellite-based
communications services. Loral is developing the building blocks necessary to
create a seamless, global networking capability for the information age. In
1998, Loral advanced its strategy significantly by acquiring Orion Network
Systems, Inc., increasing its ownership in Globalstar, forming the Loral Global
Alliance, including the formation of Europe*Star Limited ("Europe*Star"), and
organizing and integrating its businesses to form four distinct operating
segments. Accordingly, as of February 28, 1999, Loral has increased its
satellite fleet to seven satellites in orbit (including three owned by SatMex,
Loral's 49% owned affiliate). Loral will expand the geographic coverage and
capacity of its fixed satellite services by launching three additional
satellites for the Telstar and Loral Orion fleets in 1999. Loral's four
operating segments are:
Satellite Manufacturing and Technology. Designing and manufacturing
satellites and other space systems and developing satellite technology for
a broad variety of customers and applications through Space Systems/Loral,
Inc. ("SS/L"),
Fixed Satellite Services. Leasing transponder capacity and providing
value added services to customers for a wide variety of applications,
including the distribution of broadcast programming, news gathering,
business television, distance learning and direct-to-home ("DTH") services.
The Company's fixed satellite service ("FSS") assets, managed by Loral
Skynet and marketed under the Loral Global Alliance banner, consist of
seven high-power geosynchronous ("GEO") satellites as of February 28,
1999 - three Loral Skynet Telstar satellites and one satellite of Loral
Orion, Inc. ("Loral Orion"), as well as three SatMex satellites. The two
satellites expected to be launched by the recently formed Europe*Star joint
venture with Alcatel, in which Loral owns a 47% interest, also will be part
of the Loral Global Alliance and form a component of the Company's FSS
business segment,
Data Services. Business in development, providing managed
communications networks and Internet and intranet services through Loral
Orion and delivering high-speed broadband data communications through
CyberStar, L.P. ("CyberStar"), using transponder capacity on the Telstar
and Loral Orion fleets, and
Global Mobile Telephony. Providing worldwide wireless mobile
telephony and narrow-band data communications through a constellation of
low-earth orbiting ("LEO") satellites (the "Globalstar System") operated by
Globalstar, which is expected to commence service in September 1999. Loral
is the managing general partner and owned approximately 43%, 40% and 32% of
Globalstar as of December 31, 1998, 1997 and 1996, respectively.
CONSOLIDATED OPERATING RESULTS
In evaluating financial performance, management uses revenues and earnings
before interest, taxes, depreciation and amortization ("EBITDA") as a measure of
a segment's profit or loss. The following discussion of revenues and EBITDA
reflects the results of Loral's operating segments for the two years ended
December 31, 1998 and 1997 and for the nine months ended December 31, 1996.
Also, see Note 15 to Loral's consolidated financial statements for additional
information on segment results. The remainder of the discussion relates to the
consolidated results of Loral, unless otherwise noted.
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Operating revenues:
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
-------------------- DECEMBER 31,
1998 1997 1996
-------- -------- ------------
(IN MILLIONS)
Satellite manufacturing and technology(1)......... $1,390.2 $1,442.6 $ 1,017.7
Fixed satellite services(2)....................... 254.2 83.0
Data services(3).................................. 39.8
Management fee from affiliate..................... 5.1
-------- -------- ---------
Operating segment revenues........................ 1,684.2 1,525.6 1,022.8
Less: Affiliate eliminations(4)................... (104.8) (12.9) (1,017.7)
Intercompany eliminations(5)................ (277.7) (200.1)
-------- -------- ---------
Operating revenues................................ $1,301.7 $1,312.6 $ 5.1
======== ======== =========
EBITDA(6):
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------ DECEMBER 31,
1998 1997 1996
------- ------- ------------
(IN MILLIONS)
Satellite manufacturing and technology(1).......... $ 107.0 $ 99.7 $ 77.3
Fixed satellite services(2)........................ 171.2 51.8
Data services(3)................................... (13.3)
Corporate expenses(7).............................. (31.9) (15.7) (11.2)
------- ------- ------
EBITDA for operating segments before development
and start-up costs, and intercompany and
affiliate eliminations........................... 233.0 135.8 66.1
Development and start-up costs(8):
Data services(3)................................. (33.3) (32.6)
Global mobile telephony(9)....................... (145.0) (87.1) (45.0)
------- ------- ------
Total development and start-up costs............... (178.3) (119.7) (45.0)
------- ------- ------
Segment EBITDA..................................... 54.7 16.1 21.1
Less: Affiliate eliminations(4).................... 70.2 77.2 (32.3)
Intercompany eliminations(5)................. (23.7) (17.0)
------- ------- ------
EBITDA as reported................................. $ 101.2 $ 76.3 $(11.2)
======= ======= ======
- ---------------
(1) Satellite Manufacturing and Technology includes 100% of SS/L's results. In
1996 Loral increased its ownership in SS/L from 32.7% to 51% and used the
equity method of accounting. In February 1997, Loral agreed to acquire the
remaining 49% of SS/L.
(2) Fixed Satellite Services includes 100% of the following companies since
their respective dates of acquisition: Loral Skynet acquired on March 14,
1997; Loral Orion's transponder leasing business acquired on March 20, 1998;
SatMex, a 49% equity investee acquired on November 17, 1997; and
Europe*Star, a 47% equity investee, since December 1998.
(3) Data services includes 100% of CyberStar and 100% of Loral Orion's data
services business since its acquisition on March 20, 1998.
(4) Represents amounts related to unconsolidated affiliates (SatMex, Europe*Star
and Globalstar and, in 1996, SS/L). These amounts are eliminated in order to
arrive at Loral's consolidated results. Loral's proportionate share of these
affiliates is included in equity in net loss from affiliates in Loral's
consolidated statements of operations.
(5) Represents the elimination of sales and EBITDA primarily for satellites
under construction by SS/L for wholly owned subsidiaries; as well as
eliminating sales for the lease of transponder capacity by Data Services
from Fixed Satellite Services.
(6) EBITDA (which is equivalent to operating income (loss) before depreciation
and amortization) is provided because it is a measure commonly used in the
communications industry to analyze companies on the basis of operating
performance, leverage and liquidity and is presented to enhance the
understanding of Loral's operating results. However, EBITDA should not be
construed as an alternative to net income as an indicator of a company's
operating performance, or cash flow from operations as a measure of a
company's liquidity. EBITDA may be calculated differently and, therefore,
may not be comparable to similarly titled measures reported by other
companies.
(7) Represents unallocated corporate expenses incurred in support of the
Company's operations.
(8) Represents EBITDA for operations in the development stage (CyberStar and
Globalstar).
(9) Includes 100% of Globalstar. Loral owned approximately 43%, 40% and 32% as
of December 31, 1998, 1997 and 1996, respectively.
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1998 COMPARED WITH 1997
Total revenues for Loral's operating segments were $1.7 billion for 1998
versus $1.5 billion in 1997, before intercompany and affiliate eliminations of
$383 million in 1998 and $213 million in 1997. The increase in revenues was due
primarily to growth in fixed satellite services as a result of including SatMex