Lockheed Martin 1999 Annual Report Download - page 40

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Lockheed Martin Corporation
Start-Up Activities.” This SOP requires that, at the effective
date of adoption, costs of start-up activities previously capi-
talized be expensed and reported as a cumulative effect
of a change in accounting principle, and further requires
that such costs subsequent to adoption be expensed as
incurred. The adoption of SOP No. 98-5 resulted in the
recognition of a cumulative effect adjustment which reduced
net earnings for the year ended December 31, 1999 by
$355 million, or $.93 per diluted share. The cumulative
effect adjustment was recorded net of income tax benefits
of $227 million, and was primarily composed of approxi-
mately $560 million of costs which were included in inven-
tories as of December 31, 1998.
Effective January 1, 1999, the Corporation adopted
the AICPA’s SOP No. 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal
Use.” This SOP, which requires the capitalization of certain
costs incurred in connection with developing or obtaining
software for internal use, affects the future cash flows under
contracts with the U.S. Government. However, the impact
of the adoption of SOP No. 98-1 was not material to the
Corporation’s consolidated results of operations, cash flows
or financial position.
New accounting pronouncement to be adopted— In June
1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, “Accounting for Derivative Instru-
ments and Hedging Activities.” SFAS No. 133 requires the
recognition of all derivatives as either assets or liabilities in
the Consolidated Balance Sheet, and the periodic measure-
ment of those instruments at fair value. The classification of
gains and losses resulting from changes in the fair values of
derivatives is dependent on the intended use of the deriva-
tive and its resulting designation. In general, these provi-
sions of the Statement could result in a greater degree of
income statement volatility than current accounting practice.
At adoption, existing hedging relationships must be desig-
nated anew and documented pursuant to the provisions of
the Statement. The Corporation does not intend to adopt
SFAS No. 133, as amended, prior to the required date of
January 1, 2001. The Corporation is continuing its process
of analyzing and assessing the impact that the adoption
of SFAS No. 133 is expected to have on its consolidated
results of operations, cash flows and financial position, but
has not yet reached any conclusions.
Note 2—Transaction Agreement with COMSAT Corporation
In September 1998, the Corporation and COMSAT
Corporation (COMSAT) announced that they had entered
into an Agreement and Plan of Merger (the Merger
Agreement) to combine the companies in a two-phase
transaction with a total estimated value of approximately
$2.7 billion at the date of the announcement (the Merger).
The Merger Agreement was approved by the respective
Boards of Directors of the Corporation and COMSAT.
In connection with the first phase of this transaction,
subsequent to obtaining all necessary regulatory approvals
and approval of the Merger by the stockholders of COMSAT,
the Corporation completed a cash tender offer (the Tender
Offer) on September 18, 1999. On that date, the Corpora-
tion accepted for payment approximately 26 million shares
of COMSAT common stock, representing approximately
49 percent of the outstanding common stock of COMSAT,
for $45.50 a share pursuant to the terms of the Merger
Agreement. The total value of this phase of the transaction
was $1.2 billion, and such amount is included in invest-
ments in equity securities in the December 31, 1999
Consolidated Balance Sheet. The Corporation accounts for
its 49 percent investment in COMSAT under the equity
method of accounting.
The second phase of the transaction, which will result
in consummation of the Merger, is to be accomplished by
an exchange of one share of Lockheed Martin common
stock for each remaining share of COMSAT common stock.
Consummation of the Merger remains contingent upon the
satisfaction of certain conditions, including the enactment of
federal legislation necessary to remove existing restrictions