-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TOSlKHT54seslS8tt+QXMIKtMGUNBgQ7BrYZPwViXsy/3ZBvOFHcRNp940vyNl2M 4P3d1mLYqmjazWlzduSEFQ== 0000950123-02-005277.txt : 20020515 0000950123-02-005277.hdr.sgml : 20020515 20020515142309 ACCESSION NUMBER: 0000950123-02-005277 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LORAL ORION INC CENTRAL INDEX KEY: 0001029850 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 522008654 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22085 FILM NUMBER: 02650877 BUSINESS ADDRESS: STREET 1: 2440 RESEARCH BLVD STE 400 CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3012588101 MAIL ADDRESS: STREET 1: 2440 RESEARCH BLVD STREET 2: SUITE 400 CITY: ROCKVILLE STATE: MD ZIP: 20850 FORMER COMPANY: FORMER CONFORMED NAME: LORAL ORION INC DATE OF NAME CHANGE: 19990809 FORMER COMPANY: FORMER CONFORMED NAME: LORAL CYBERSTAR INC DATE OF NAME CHANGE: 19991202 FORMER COMPANY: FORMER CONFORMED NAME: ORION NEWCO SERVICES INC DATE OF NAME CHANGE: 19961231 FORMER COMPANY: FORMER CONFORMED NAME: ORION NETWORK SYSTEMS INC/NEW/ DATE OF NAME CHANGE: 19970404 10-Q 1 y60611e10-q.txt LORAL ORION, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 2002 Commission file number 0-22085 LORAL ORION, INC. Delaware 52-1564318 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 Hills Drive, Bedminster, NJ 07921 Telephone: (908) 470-2300 Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: 11 1/4% Senior Notes Due 2007 12 1/2% Senior Discount Notes Due 2007 10% Senior Notes Due 2006 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [Not Applicable] The number of shares of common stock, par value $.01 per share of the registrant outstanding as of March 31, 2002 was 100, all of which were owned, directly or indirectly, by Loral Space & Communications Ltd. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION I (2) OF FORM 10-Q. DOCUMENTS INCORPORATED BY REFERENCE None PART 1. FINANCIAL INFORMATION LORAL ORION, INC. AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR AMOUNT)
MARCH 31, DECEMBER 31, 2002 2001 ----------- ----------- ASSETS (UNAUDITED) (NOTE) Current assets: Cash and cash equivalents $ 36,277 $ 19,399 Accounts receivable, net 12,251 13,568 Prepaid expenses and other current assets 9,079 11,204 Due from Loral companies, net 8,180 4,805 ----------- ----------- Total current assets 65,787 48,976 Satellites and related equipment, net 561,595 579,910 Cost in excess of net assets acquired, net 562,201 Deferred tax assets 32,130 32,130 Other assets, net 22,757 21,668 ----------- ----------- $ 682,269 $ 1,244,885 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt $ 80,315 $ 49,449 Accounts payable 1,220 3,390 Customer advances 701 1,080 Deferred revenue 3,818 5,954 Accrued interest 2,136 1,889 ----------- ----------- Total current liabilities 88,190 61,762 Customer advances 4,271 4,379 Deferred revenue 6,722 5,142 Long-term debt 928,224 959,555 Note payable to Loral SpaceCom 29,700 29,700 Commitments and contingencies (Note 8) Stockholder's equity (deficit): Common stock, $.01 par value Paid-in capital 604,166 604,166 Retained deficit (979,004) (419,819) ----------- ----------- Total stockholder's equity (deficit) (374,838) 184,347 ----------- ----------- $ 682,269 $ 1,244,885 =========== ===========
- --------- NOTE: The December 31, 2001 balance sheet has been derived from the audited consolidated financial statements at that date. See notes to condensed consolidated financial statements 2 LORAL ORION, INC. AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ----------------------------- 2002 2001 --------- --------- Revenues from satellite services $ 29,621 $ 26,324 Operating expenses: Cost of satellite services 22,766 25,570 Selling, general and administrative expenses 3,108 3,326 --------- --------- Income (loss) from operations 3,747 (2,572) --------- --------- Interest income 106 15 Interest expense (3,258) (25,238) Other income 114 103 --------- --------- Income (loss) before income taxes, cumulative effect of change in accounting principle and discontinued operations 709 (27,692) Income tax benefit 2,307 306 --------- --------- Income (loss) before cumulative effect of change in accounting principle and discontinued operations 3,016 (27,386) Cumulative effect of change in accounting principle (Note 9) (562,201) --------- --------- Loss from continuing operations (559,185) (27,386) Loss from operations of discontinued operations, net of tax provision (Note 7) (4,875) --------- --------- Net loss $(559,185) $ (32,261) ========= =========
See notes to condensed consolidated financial statements 3 LORAL ORION, INC. AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ----------------------------- 2002 2001 --------- --------- Operating Activities: Loss from continuing operations $(559,185) $ (27,386) Non-cash items: Deferred income tax provision 1,227 Depreciation and amortization 18,823 22,507 Cumulative effect of change in accounting principle 562,201 Non-cash interest (income) expense (141) 9,903 Changes in operating assets and liabilities: Accounts receivable 1,317 27 Prepaid expenses and other current assets 1,617 1,361 Other assets (1,089) (371) Accounts payable and accrued interest (1,923) (12,065) Customer advances (487) (577) Deferred revenue (556) (626) Due from Loral companies, net (3,375) (831) --------- --------- Net cash provided by (used in) operating activities 17,202 (6,831) --------- --------- Net cash provided by discontinued operations 6,519 --------- --------- Financing Activities: Payment of satellite incentive obligation (324) (109) Increase in note payable to Loral SpaceCom 1,164 Repayment of notes payable (380) --------- --------- Net cash (used in) provided by financing activities (324) 675 --------- --------- Net increase in cash and cash equivalents 16,878 363 Cash and cash equivalents at beginning of period 19,399 2 --------- --------- Cash and cash equivalents at end of period $ 36,277 $ 365 ========= =========
See notes to condensed consolidated financial statements 4 LORAL ORION, INC. AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS The principal business of Loral Orion, Inc. (the "Company" or "Loral Orion"), formerly known as Loral Cyberstar, Inc., is providing fixed satellite services, including video distribution and other satellite transmission services by leasing transponder capacity on its satellites to its customers for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television ("DTH"). Loral Skynet, a division of Loral SpaceCom Corporation, which is a subsidiary of Loral Space & Communications Corporation, which is in turn a subsidiary of Loral Space & Communications Ltd. ("Loral"), manages the Company's business. Prior to December 21, 2001, the Company operated in two business segments: Fixed Satellite Services and Data Services. On December 21, 2001, the Company, in connection with an exchange offer for its outstanding senior notes and senior discount notes (notes 3, 4 and 7), transferred its data services business to a subsidiary of Loral. Accordingly, the Company now operates in one segment, Fixed Satellite Services ("FSS"). 2. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules of the Securities and Exchange Commission ("SEC") and, in the opinion of the Company, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations, financial position, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules. The Company believes that the disclosures made are adequate to keep the information presented from being misleading. The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the full year. It is suggested that these financials statements be read in conjunction with the Company's latest Annual Report on Form 10-K. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. 3. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
MARCH 31, DECEMBER 31, 2002 2001 ---------- ---------- 10.00% senior notes due 2006 (principal amount $613 million) ...................... $ 903,738 $ 903,738 11.25% senior notes due 2007 (principal amount $37 million) ....................... 40,233 40,385 12.50% senior discount notes due 2007 (principal amount at maturity $49 million and accreted principal amount $49 million) ......................................... 54,707 54,696 Satellite incentive obligations ................................................... 9,861 10,185 ---------- ---------- Total debt .................................................................. 1,008,539 1,009,004 Less, current portion ............................................................. 80,315 49,449 ---------- ---------- Long-term debt .............................................................. $ 928,224 $ 959,555 ========== ==========
4. NOTE PAYABLE TO LORAL SPACECOM CORPORATION In connection with the completion of the Company's debt exchange offers in December 2001, Loral SpaceCom Corporation ("LSC") a subsidiary of Loral, canceled its $79.7 million intercompany note issued to it by Loral Orion which ranked pari passu to senior debt in exchange for the transfer of Loral Orion's data services business (see Note 7) and the issuance of a new note to LSC in the principal amount of $29.7 million due 2006, having an interest rate of 10% per annum payable in kind, subordinated to Loral Orion's new 10% senior notes. Loral Orion's data services business was transferred to a newly-formed subsidiary of Loral, which assumed the name Loral Cyberstar, Inc. 5 5. RELATED PARTY TRANSACTIONS Due from (to) Loral companies consist of the following (in thousands):
MARCH 31, DECEMBER 31, 2002 2001 ------- ------- Loral Space and Communications Corp. $ 5,382 $ 6,728 Loral Cyberstar, Inc. .............. 3,278 374 Loral Space and Communications Ltd . 206 (1,031) CyberStar L.P. ..................... 79 79 Loral Skynet ....................... (765) (1,336) Space Systems/Loral ................ (9) ------- ------- $ 8,180 $ 4,805 ======= =======
6. SEGMENTS The Company has presented the results of its previously reported data services segment as a discontinued operation (see Note 7). As a result, the Company's continuing operations are organized and operate in one business segment: Fixed Satellite Services (see Note 1). The Company's segment information for 2001 has been restated to reflect the results of such transactions. Revenues before elimination of intercompany revenues from its discontinued operations and other eliminations totaled $32.9 million for the three months ended March 31, 2001. 7. DISCONTINUED OPERATIONS In connection with the completion of the Company's debt exchange offers in December 2001, the Company transferred its data services business to a subsidiary of Loral. Accordingly, the historical condensed consolidated statements of operations and cash flows for 2001 have been restated to account for the data services segment as a discontinued operation. The financial data presented for the Company's data services segment reflects the historical sales and expenses of the data services segment after elimination of intercompany transactions with FSS. Discontinued operations include revenue for the data services segment of $23.8 million for the three months ended March 31, 2001. Cumulative translation losses attributable to discontinued operations was $0.5 million for the three months ended March 31, 2001. 8. COMMITMENTS AND CONTINGENCIES In November 1995, a component on Telstar 11 malfunctioned, resulting in a 2-hour service interruption. The malfunctioning component supported nine transponders serving the European portion of Telstar 11's footprint. Full service was restored using a back- 6 up component. If that back-up component fails, Telstar 11 would lose a significant amount of usable capacity. In such event, while the Company would be entitled to insurance proceeds of approximately $195 million as of March 31, 2002, and could lease replacement capacity and function as a reseller with respect to such capacity, the loss of capacity would have a material adverse effect on the Company. Telstar 12 was launched in October 1999 into 15 degrees W.L., and commenced operations in January 2000. Although Telstar 12 was originally intended to operate at 12 degrees W.L., Loral Orion reached an agreement with Eutelsat to operate Telstar 12 at 15 degrees W.L. while Eutelsat continued to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority rights at such location on Loral Orion's behalf. As part of this coordination effort Loral Orion agreed to provide to Eutelsat four transponders on Telstar 12 for the life of the satellite and has retained risk of loss. Eutelsat also has the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. As part of the international coordination process, the Company continues to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees W.L. If these discussions are not successful, Telstar 12's useable capacity may be reduced. Telstar 10/Apstar IIR has experienced minor losses of power from its solar arrays. Although, to date, Telstar 10/Apstar IIR has not experienced any degradation in performance, there can be no assurance that Telstar 10/Apstar IIR will not experience additional power loss that could result in performance degradation, including loss of transponder capacity. In the event of additional power loss, the extent of the performance degradation, if any, will depend on numerous factors, including the amount of the additional power loss, when in the life of Telstar 10/Apstar IIR the loss occurred, and the number and type of uses being made of transponders then in service. A complete or partial loss of Telstar 10/Apstar IIR could result in a loss of revenues and profits. Based upon information currently available, including design redundancies to accommodate small power losses and the fact that no pattern has been identified as to the timing or specific location within the solar arrays of the failures, the Company believes that this matter will not have a material adverse effect on its consolidated financial position or its results of operations. While the Company has in the past, consistent with industry practice, typically obtained in-orbit insurance for its satellites, the Company cannot guarantee that, upon a policy's expiration, the Company will be able to renew the insurance on acceptable terms, especially on satellites that have, or that are part of a family of satellites that have experienced problems in the past. For example, in connection with the renewal of the insurance for the Telstar 10/Apstar IIR satellite in October 2001, the insurance underwriters have excluded losses due to solar array failures, since Telstar 10/Apstar IIR was manufactured by Space Systems/Loral ("SS/L") and has the same solar array configuration as another 1300-class satellite manufactured by SS/L that recently experienced a solar array failure. SS/L believes that this failure is an isolated event and does not reflect a systemic problem in either the satellite design or manufacturing process. Accordingly, the Company does not believe that this anomaly will affect Telstar 10/ Apstar IIR. Loral is currently in discussions with the Company's insurers to remove this exclusion from the Telstar 10/ Apstar IIR policy in return for a deductible for losses arising from electrical problems on the satellite's solar arrays. There can be no assurance that these discussions will be successful. An uninsured loss of a satellite will have a material adverse effect on the Company's consolidated financial position and its results of operations. Loral Orion anticipates it will have additional requirements over the next three years to fund the replacement of Telstar 11 which is expected to reach the end of its useful life in 2005. To the extent that excess cash flow from Loral Orion's satellites is not sufficient to meet these requirements, Loral Orion will need to secure funding from Loral or raise additional financing to fund this requirement and there can be no assurance that the Company will be successful in doing so. Sources of additional capital may include public or private debt, vendor financing, equity financings or strategic investments. To the extent that Loral Orion seeks to raise additional debt financing, its indenture relating to the Company's 10% senior notes limits the amount of such additional debt to $100 million for such replacement satellite and prohibits Loral Orion from using Telstar 11, Telstar 10/Apstar IIR and Telstar 12 as collateral for indebtedness. The Company is party to various litigation arising in the normal course of its operations. In the opinion of management, the ultimate liability for these matters, if any, will not have a material adverse effect on the Company's financial position or results of operations. 9. ACCOUNTING FOR GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. SFAS 142 also changed the evaluation criteria for testing goodwill for impairment from an undiscounted cash flow approach, which was 7 previously utilized under the guidance in Accounting Principles Board Opinion No. 17, Intangible Assets, to a test based on fair value. Fair value is determined by the amount at which an asset or liability could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Quoted market prices in active markets are the best evidence of fair value and must be used as the basis for the measurement, if available. If quoted market prices are not available, the estimate of fair value must be based on the best information available, including prices for similar assets and liabilities and the results of using other valuation techniques, such as public company trading multiples and future discounted cash flows. The Company adopted SFAS 142 on January 1, 2002. Goodwill In accordance with SFAS 142, the Company's previously recognized cost in excess of net assets acquired ("goodwill") of $562 million (at December 31, 2001) from the acquisition of the Company by Loral in 1998 was reviewed under the new transitional guidance as of January 1, 2002. The Company hired professionals in the valuation consulting business to determine the fair value of its goodwill. Since there were no quoted market prices in active markets for the Company's goodwill, the measurement of fair value was based on the best information available in the circumstances, including reasonable and supportable assumptions and projections, to determine that the most appropriate method of fair value was public company trading multiples. Those professionals determined that the Company's goodwill under the new guidance in SFAS 142 was fully impaired. Accordingly, as of January 1, 2002, the Company recorded a non-cash charge for the cumulative effect of the change in accounting principle of $562 million. The charge is the result of a change in the evaluation criteria for goodwill from an undiscounted cash flow approach which was previously utilized under the guidance in Accounting Principles Board Opinion No. 17 to the fair value approach which is stipulated in SFAS 142. The following table presents the actual financial results and as adjusted financial results without the amortization of goodwill for the Company for the three months ended March 31, 2001 (in thousands):
Actual As adjusted ------ ----------- Reported loss from continuing operations ....... $(27,386) $(27,386) Add back amortization of goodwill .............. 3,877 --------- ---------- Loss from continuing operations ................ $(27,386) (23,509) Loss from operations of discontinued operations, net of taxes ...................... (4,875) (4,875) --------- ---------- Net loss ....................................... $(32,261) $(28,384) ========= ==========
Other Acquired Intangible Assets The Company evaluated the useful lives of its other acquired intangible assets in connection with the adoption of SFAS 142 and determined that no changes to the useful lives were necessary. Other acquired intangible assets are included in other assets in the Company's condensed consolidated balance sheets and were as follows at March 31, 2002 and December 31, 2001 (in millions):
March 31, 2002 December 31, 2001 -------------------- -------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ----- ----- ----- ----- Customer relations $ 7.0 $(3.8) $ 7.0 $(3.6) Trademarks ....... 6.0 (3.3) 6.0 (3.0) Regulatory ....... 2.5 (1.2) 2.5 (1.2) ----- ----- ----- ----- Total ........ $15.5 $(8.3) $15.5 $(7.8) ===== ===== ===== =====
8 As of March 31, 2002, customer relations and trademarks are being amortized over three years and the weighted average remaining amortization period for regulatory fees was eight years. Total amortization expense for other acquired intangible assets for the three months ending March 31, 2002 and 2001 was $0.5 million. Annual amortization expense for other acquired intangible assets over the next five years is estimated to be as follows (in millions): 2002 $ 2.0 2003 2.0 2004 2.0 2005 1.2 2006 -- 10. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. The Company is required to adopt SFAS 143 on January 1, 2003. The Company has not yet determined the impact that the adoption of SFAS 143 will have on its results of operations or its financial position. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. The Company adopted SFAS 144 on January 1, 2002. The Company has determined that there was no effect on the Company's consolidated financial position or results of operations relating to the adoption of SFAS 144. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 generally requires that any gains or losses on extinguishment of debt in current or prior periods be classified as other income (expense), beginning in fiscal 2003, with early adoption encouraged. The Company is currently evaluating the impact of adopting the provisions of SFAS No. 145 in its consolidated financial statements. 11. FINANCIAL INFORMATION FOR PARENT, ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES In December 2001, Loral Orion (the "Parent Company") issued new senior notes in an exchange offer (see Note 3) which are fully and unconditionally guaranteed, on a joint and several basis, by one of its wholly-owned subsidiaries (the "Guarantor Subsidiary") and Loral ("Issuer's Parent"). The Company's remaining original senior notes and senior discount notes are fully and unconditionally guaranteed on a joint and several basis by the Parent Company, the Guarantor Subsidiary and substantially all of the other wholly-owned subsidiaries in existence through December 21, 2001 (the "Other Subsidiaries"). Presented below is condensed consolidating financial information for the Parent Company, Issuer's Parent, the Guarantor Subsidiary and the Other Subsidiaries for the three months ended March 31, 2002 and 2001. The Other Subsidiaries were part of the Company's data services segment, the net assets of which were substantially transferred on December 21, 2001 to a subsidiary of Loral (see Note 7), and have been accounted for as a discontinued operation. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of the Parent Company, Issuer's Parent, Guarantor Subsidiary and Other Subsidiaries. The supplemental condensed consolidating financial information reflects the investments of the Parent Company in the Guarantor Subsidiary and the Other Subsidiaries using the equity method of accounting. The Company's significant transactions with its subsidiaries other than the investment account and related equity in net loss of unconsolidated subsidiaries are the intercompany payables and receivables between its subsidiaries. The note payable due to Loral SpaceCom bears interest at 10% per annum. All principal and interest on this note is due at maturity on July 30, 2006. 9 FINANCIAL INFORMATION FOR PARENT, ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES LORAL ORION, INC. CONDENSED CONSOLIDATING BALANCE SHEET MARCH 31, 2002 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ----------- ----------- ---------- ----------- ----------- Current assets: Cash and cash equivalents ........ $ 36,277 $ 18,050 $ -- $ -- $ (18,050) $ 36,277 Accounts receivable, net ......... 10,124 -- 2,127 -- -- 12,251 Prepaid expenses and other current assets ......................... 4,332 100 4,747 -- (100) 9,079 ----------- ----------- ----------- ---------- ----------- ----------- Total current assets ...... 50,733 18,150 6,874 -- (18,150) 57,607 Property, plant and equipment, net . 341,135 -- 220,460 -- -- 561,595 Notes (payable) receivable from unconsolidated subsidiaries ...... (29,700) 200,000 -- -- (200,000) (29,700) Due from Loral companies, net ...... 8,180 -- -- -- -- 8,180 Due to (from) unconsolidated subsidiaries ..................... (76,453) 17,215 82,817 -- (23,579) -- Investments in unconsolidated subsidiaries ..................... 300,881 564,689 (271,698) -- (593,872) -- Investments in and advances to affiliates ....................... -- 62,283 -- -- (62,283) -- Deferred tax assets ................ 32,130 -- -- -- -- 32,130 Other assets, net .................. 21,924 5,385 832 -- (5,384) 22,757 ----------- ----------- ----------- ---------- ----------- ----------- $ 648,830 $ 867,722 $ 39,285 $ -- $ (903,268) $ 652,569 =========== =========== =========== ========== =========== =========== Current liabilities: Current portion of long-term debt $ 80,315 $ -- $ -- $ -- $ -- $ 80,315 Accounts payable ................. 507 1,080 713 -- (1,080) 1,220 Customer advances ................ 573 -- 128 -- -- 701 Accrued interest and preferred dividends ...................... 2,136 14,231 -- -- (14,231) 2,136 Deferred revenue ................. 2,453 -- 1,365 -- -- 3,818 Income taxes payable ............. -- 7,952 -- -- (7,952) -- Deferred tax liabilities ......... -- 22,274 -- -- (22,274) -- ----------- ----------- ----------- ---------- ----------- ----------- Total current liabilities . 85,984 45,537 2,206 -- (45,537) 88,190 Deferred tax liabilities ........... -- 20,385 6,362 -- (26,747) -- Long-term liabilities .............. 9,460 -- 1,533 -- 10,993 Long-term debt ..................... 928,224 350,000 -- -- (350,000) 928,224 Shareholders' equity (deficit): 6% Series C convertible redeemable preferred stock ................ -- 485,371 -- -- (485,371) -- 6% Series D convertible redeemable preferred stock ................ -- 296,529 -- -- (296,529) -- Common stock ..................... -- 3,376 -- -- (3,376) -- Paid-in capital .................. 604,166 2,774,812 -- -- (2,774,812) 604,166 Treasury stock, at cost .......... -- (3,360) -- -- 3,360 -- Unearned compensation ............ -- (4) -- -- 4 -- Retained (deficit) earnings ...... (979,004) (3,132,033) 29,184 -- 3,102,849 (979,004) Accumulated other comprehensive income ......................... -- 27,109 -- -- (27,109) -- ----------- ----------- ----------- ---------- ----------- ----------- Total stockholder's equity (deficit) (374,838) 451,800 29,184 -- (480,984) (374,838) ----------- ----------- ----------- ---------- ----------- ----------- $ 648,830 $ 867,722 $ 39,285 $ -- $ (903,268) $ 652,569 =========== =========== =========== ========== =========== ===========
10 FINANCIAL INFORMATION FOR PARENT, ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES - (CONTINUED) LORAL ORION, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2002 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- --------- --------- -------- --------- --------- Revenues from satellite services ............... $ 26,836 $ -- $ 12,892 $ -- $ (10,107) $ 29,621 --------- --------- --------- -------- --------- --------- Total revenues ........................ 26,836 -- 12,892 -- (10,107) 29,621 Costs of satellite services .................... 25,775 7,098 -- (10,107) 22,766 Selling, general and administrative expenses ..................................... 2,704 19 404 -- (19) 3,108 Management fee expense ......................... -- 291 -- -- (291) -- --------- --------- --------- -------- --------- --------- Operating income (loss) ........................ (1,643) (310) 5,390 -- 310 3,747 Interest and investment income ................. 220 5,230 -- -- (5,230) 220 Interest expense ............................... (3,258) (9,847) -- -- 9,847 (3,258) --------- --------- --------- -------- --------- --------- (Loss) income before income taxes, equity in net loss of unconsolidated subsidiaries and affiliates and cumulative effect of change in accounting principle ..... (4,681) (4,927) 5,390 -- 4,927 709 Income tax benefit (provision) ................. 4,164 (1,549) (1,857) -- 1,549 2,307 --------- --------- --------- -------- --------- --------- (Loss) income before equity in net loss of unconsolidated subsidiaries and affiliates and cumulative effect of change in accounting principle ......................... (517) (6,476) 3,533 -- 6,476 3,016 Equity in net loss of unconsolidated subsidiaries, net of tax benefit ............. 3,533 (874,287) -- -- 870,754 -- Equity in net loss of affiliates, net of taxes ........................................ -- (15,597) -- -- 15,597 -- --------- --------- --------- -------- --------- --------- (Loss) income before cumulative effect of change in accounting principle ............... 3,016 (896,360) 3,533 -- 892,827 3,016 Cumulative effect of change in accounting principle .................................... (562,201) -- -- -- -- (562,201) --------- --------- --------- -------- --------- --------- Net (loss) income .............................. $(559,185) $(896,360) $ 3,533 $ -- $ 892,827 $(559,185) ========= ========= ========= ======== ========= =========
11 FINANCIAL INFORMATION FOR PARENT, ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES - (CONTINUED) LORAL ORION, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE QUARTER ENDED MARCH 31, 2002 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- --------- --------- --------- --------- --------- Operating activities: (Loss) income from continuing operations . $(559,185) $(896,360) $ 3,533 $ -- $ 892,827 $(559,185) Non-cash items: Cumulative effect of change in accounting principle.................. 562,201 -- -- -- -- 562,201 Equity in net loss of affiliates, net of taxes ................................ -- 15,597 -- -- (15,597) -- Equity in net loss of unconsolidated subsidiaries, net of taxes ........... (3,533) 874,287 -- -- (870,754) -- Deferred taxes ......................... -- 1,536 752 -- (2,288) -- Depreciation and amortization .......... 13,570 -- 5,253 -- 18,823 Non-cash interest income .............. (141) -- -- -- -- (141) Changes in operating assets and liabilities: Accounts receivable, net ................. 2,947 -- (1,630) -- -- 1,317 Other current assets ..................... 817 165 800 -- (165) 1,617 Due to (from) Loral companies, net ....... (3,653) -- 278 -- -- (3,375) Due to (from) unconsolidated subsidiaries 9,364 (4,300) (10,116) -- 5,052 -- Other assets ............................. (1,089) 290 -- -- (290) (1,089) Accounts payable ......................... (2,170) (277) -- -- 277 (2,170) Accrued expenses and other current liabilities.............................. 247 (8,312) -- -- 8,312 247 Customer advances ........................ (487) -- -- -- -- (487) Income taxes payable ..................... -- 13 -- -- (13) -- Deferred revenue ......................... (1,686) -- 1,130 -- -- (556) Other .................................... -- (166) -- -- 166 -- --------- --------- --------- --------- --------- --------- Net cash provided by (used in) operating Activities ............................... 17,202 (17,527) -- -- 17,527 17,202 Investing activities: Investments in and advances to affiliates -- (1,557) -- -- 1,557 -- Investments in and advances to unconsolidated subsidiaries ............ -- 172 -- -- (172) -- --------- --------- --------- --------- --------- --------- Net cash (used in) provided by investing Activities ............................... -- (1,385) -- -- 1,385 -- --------- --------- --------- --------- --------- --------- Financing activities: Repayments of long-term obligations (324) -- -- -- -- (324) Preferred dividends ...................... -- (11,963) -- -- 11,963 -- Proceeds from stock issuances ............ -- 2,857 -- -- (2,857) -- --------- --------- --------- --------- --------- --------- Net cash (used in) provided by financing activities ............................... (324) (9,106) -- -- 9,106 (324) --------- --------- --------- --------- --------- --------- Increase (decrease) in cash and cash equivalents .............................. 16,878 (28,018) -- -- 28,018 16,878 Cash and cash equivalents -- beginning of period ................................... 19,399 46,068 -- -- (46,068) 19,399 --------- --------- --------- --------- --------- --------- Cash and cash equivalents -- end of period . $ 36,277 $ 18,050 $ -- $ $ (18,050) $ 36,277 ========= ========= ========= ========= ========= =========
12 FINANCIAL INFORMATION FOR PARENT, ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES - (CONTINUED) LORAL ORION, INC. CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2001 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ----------- ----------- -------- ----------- ----------- Current assets: Cash and cash equivalents ........ $ 19,399 $ 46,068 $ -- $ -- $ (46,068) $ 19,399 Accounts receivable, net ......... 13,071 -- 497 -- -- 13,568 Prepaid expenses and other current assets ......................... 6,053 265 5,151 -- (265) 11,204 ----------- ----------- ----------- -------- ----------- ----------- Total current assets ...... 38,523 46,333 5,648 -- (46,333) 44,171 Property, plant and equipment, net . 354,196 -- 225,714 -- -- 579,910 Costs in excess of net assets acquired, net .................... 562,201 -- -- -- -- 562,201 Notes (payable) receivable from unconsolidated subsidiaries ...... (29,700) 200,000 -- -- (200,000) (29,700) Due to (from) Loral companies, net . (15,135) -- 19,940 -- -- 4,805 Due to (from) unconsolidated subsidiaries ..................... (47,826) 12,915 53,038 -- (18,127) -- Investments in unconsolidated subsidiaries ..................... 297,349 1,432,614 (271,698) -- (1,458,265) -- Investments in and advances to affiliates ....................... -- 77,061 -- -- (77,061) -- Deferred tax assets ................ 32,130 -- -- -- -- 32,130 Other assets, net .................. 20,836 6,632 832 -- (6,632) 21,668 ----------- ----------- ----------- -------- ----------- ----------- $ 1,212,574 $ 1,775,555 $ 33,474 $ -- $(1,806,418) $ 1,215,185 =========== =========== =========== ======== =========== =========== Current liabilities: Current portion of long-term debt $ 49,449 $ -- $ -- $ -- $ -- $ 49,449 Accounts payable ................. 2,677 1,357 713 -- (1,357) 3,390 Customer advances ................ 952 -- 128 -- -- 1,080 Accrued interest and preferred dividends ...................... 1,889 22,543 -- -- (22,543) 1,889 Deferred revenue ................. 5,719 -- 235 -- -- 5,954 Income taxes payable ............. -- 7,939 -- -- (7,939) -- Deferred tax liabilities ......... -- 21,222 -- -- (21,222) -- ----------- ----------- ----------- -------- ----------- ----------- Total current liabilities . 60,686 53,061 1,076 -- (53,061) 61,762 Deferred tax liabilities ........... -- 21,626 5,214 -- (26,840) -- Long-term liabilities .............. 7,986 -- 1,533 -- 2 9,521 Long-term debt ..................... 959,555 350,000 -- -- (350,000) 959,555 Shareholders' equity (deficit): 6% Series C convertible redeemable preferred stock ................ -- 485,371 -- -- (485,371) -- 6% Series D convertible redeemable preferred stock ................ -- 296,529 -- -- (296,529) -- Common stock...................... -- 3,368 -- -- (3,368) -- Paid-in capital .................. 604,166 2,771,964 -- -- (2,771,964) 604,166 Treasury stock, at cost .......... -- (3,360) -- -- 3,360 -- Unearned compensation ............ -- (81) -- -- 81 -- Retained (deficit) earnings ...... (419,819) (2,223,710) 25,651 -- 2,198,059 (419,819) Accumulated other comprehensive income ......................... -- 20,787 -- -- (20,787) -- ----------- ----------- ----------- -------- ----------- ----------- Total stockholder's equity 184,347 1,350,868 25,651 -- (1,376,519) 184,347 ----------- ----------- ----------- -------- ----------- ----------- $ 1,212,574 $ 1,775,555 $ 33,474 $ -- $(1,806,418) $ 1,215,185 =========== =========== =========== ======== =========== ===========
13 FINANCIAL INFORMATION FOR PARENT, ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES - (CONTINUED) LORAL ORION, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2001 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- -------- -------- -------- -------- Revenues from satellite services ........ $ 22,259 $ -- $ 12,660 $ -- $ (8,595) $ 26,324 -------- -------- -------- -------- -------- -------- Total revenues ................. 22,259 -- 12,660 -- (8,595) 26,324 Costs of satellite services ............. 27,820 -- 6,345 -- (8,595) 25,570 Selling, general and administrative expenses .............................. 3,326 313 -- -- (313) 3,326 Management fee expense .................. -- 10,435 -- -- (10,435) -- -------- -------- -------- -------- -------- -------- Operating (loss) income ................. (8,887) (10,748) 6,315 -- 10,748 (2,572) Interest and investment income .......... 114 6,270 4 -- (6,270) 118 Interest expense ........................ (25,234) (8,593) (4) -- 8,593 (25,238) -------- -------- -------- -------- -------- -------- (Loss) income before income taxes, equity in net loss of unconsolidated subsidiaries and affiliates and discontinued operations ........... (34,007) (13,071) 6,315 -- 13,071 (27,692) Income tax benefit (provision) .......... 2,516 (1,596) (2,210) -- 1,596 306 -------- -------- -------- -------- -------- -------- (Loss) income before equity in net loss of unconsolidated subsidiaries and affiliates and discontinued operations ............................ (31,491) (14,667) 4,105 -- 14,667 (27,386) Equity in net loss of unconsolidated subsidiaries, net of tax benefit ...... 2,362 (20,668) -- -- 18,306 -- Equity in net loss of affiliates, net of taxes ................................. -- (23,674) -- -- 23,674 -- -------- -------- -------- -------- -------- -------- (Loss) income from continuing operations ............................ (29,129) (59,009) 4,105 -- 56,647 (27,386) Loss from operations of discontinued operations, net of taxes .............. (3,132) -- -- (1,743) -- (4,875) -------- -------- -------- -------- -------- -------- Net loss (income) ....................... $(32,261) $(59,009) $ 4,105 $ (1,743) $ 56,647 $(32,261) ======== ======== ======== ======== ======== ========
14 FINANCIAL INFORMATION FOR PARENT, ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES - (CONTINUED) LORAL ORION, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE QUARTER ENDED MARCH 31, 2001 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- --------- --------- -------- --------- --------- Operating activities: Loss income from continuing operations .... $ (29,129) $ (59,009) $ 4,105 $ -- $ 56,647 $ (27,386) Non-cash items: Equity in net loss of affiliates, net of taxes ................................... -- 23,674 -- -- (23,674) -- Equity in net loss of unconsolidated subsidiaries, net of taxes ............ (2,362) 20,668 -- -- (18,306) -- Deferred taxes .......................... 1,227 1,418 950 -- (2,368) 1,227 Depreciation and amortization ........... 17,254 -- 5,253 -- -- 22,507 Non-cash interest expense ............... 9,903 -- -- -- -- 9,903 Changes in operating assets and liabilities: Accounts receivable, net .................. (219) -- 246 -- -- 27 Prepaid expenses and other current assets . 969 -- 392 -- -- 1,361 Due to (from) Loral companies, net ........ 4,990 -- (4,745) -- -- 245 Due to (from) unconsolidated subsidiaries . 2,532 6,150 (4,558) -- (5,200) (1,076) Other assets .............................. (371) 2,594 -- -- (2,594) (371) Accounts payable and interest payable ..... (12,065) (8,149) -- -- 8,149 (12,065) Accrued expenses and other current liabilities ............................. 1,664 -- (1,664) -- -- -- Customer advances ......................... (595) -- 18 -- -- (577) Income taxes payable ...................... -- 178 -- -- (178) -- Deferred revenue .......................... (626) -- -- -- -- (626) Other ..................................... (3) 47 3 -- (47) -- --------- --------- --------- -------- --------- --------- Net cash (used in) provided by operating activities ................................ (6,831) (12,429) -- -- 12,429 (6,831) --------- --------- --------- -------- --------- --------- Net cash provided by discontinued operations 6,519 -- -- -- -- 6,519 --------- --------- --------- -------- --------- --------- Investing activities: Investments in and advances to affiliates . -- (14,933) -- -- 14,933 -- Investments in and advances to unconsolidated subsidiaries ............. -- (14,956) -- -- 14,956 -- --------- --------- --------- -------- --------- --------- Net cash used in investing activities ....... -- (29,889) -- -- 29,889 -- --------- --------- --------- -------- --------- --------- Financing activities: Repayment of notes payable ................ (380) -- -- -- -- (380) Repayments of long-term obligations ....... (109) -- -- -- -- (109) Preferred dividends ....................... -- (16,123) -- -- 16,123 -- Proceeds from stock issuances ............. -- 4,870 -- -- (4,870) -- Repayment of note due to Loral SpaceCom ... 1,164 -- -- -- -- 1,164 --------- --------- --------- -------- --------- --------- Net cash (used in) provided by financing activities ................................ 675 (11,253) -- -- 11,253 675 --------- --------- --------- -------- --------- --------- Increase (decrease) in cash and cash equivalents ............................... 363 (53,571) -- -- 53,571 363 Cash and cash equivalents -- beginning of period .................................... 2 151,405 -- -- (151,405) 2 --------- --------- --------- -------- --------- --------- Cash and cash equivalents -- end of period .. $ 365 $ 97,834 $ -- $ -- $ (97,834) $ 365 ========= ========= ========= ======== ========= =========
15 ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS Except for the historical information contained herein, the matters discussed in the following Management's Narrative Analysis of Results of Operations of Loral Orion, Inc. ("Loral Orion" or the "Company") are not historical facts, but are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. In addition, the Company or its representatives have made and may continue to make forward-looking statements, orally or in writing, in other contexts, such as in reports filed with the SEC, press releases or statements made with the approval of an authorized executive officer of the Company. These forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "plans," "may," "will," "would," "could," "should," "anticipates," "estimates," "project," "intend," or "outlook" or the negative of these words or other variations of these words or other comparable words, or by discussion of strategy that involves risks and uncertainties. These forward-looking statements are only predictions, and actual events or results may differ materially as a result of a wide variety of factors and conditions, many of which are beyond the Company's control. Some of the factors and conditions that could affect the outcome of forward-looking statements relate to (i) the Company's financial structure, and (ii) operational matters. For a detailed discussion of these factors and conditions, please refer to the section of the Company's latest Annual Report on Form 10-K titled "Certain Factors that May Affect Future Results" beginning on page 5 and to the other periodic reports filed with the SEC by Loral Orion. In addition, we caution you that the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the Company's control. The Company undertakes no obligation to update any forward-looking statements. GENERAL The principal business of Loral Orion, Inc. (the "Company" or "Loral Orion") is leasing transponder capacity on its satellites to its customers for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television ("DTH"). Loral Skynet, a division of Loral SpaceCom Corporation, which is a subsidiary of Loral Space & Communications Corporation, which is in turn a subsidiary of Loral Space & Communications Ltd. ("Loral"), manages the Company's continuing operations. Prior to December 21, 2001, the Company operated in two business segments: Fixed Satellite Services and Data Services. On December 21, 2001, the Company, in connection with the debt exchange offers for its outstanding senior notes and senior discount notes, transferred its data services business to a subsidiary of Loral. Accordingly, it now operates in one segment, Fixed Satellite Services. No restrictions exist on the ability of any of the subsidiaries of Loral Orion ("Subsidiary Guarantors") other than inconsequential subsidiaries, to pay dividends or make other distributions to the Company, except to the extent provided by law generally (e.g., adequate capital to pay dividends under state corporate laws). The historical condensed consolidated statements of operations and cash flows for 2001 have been restated to account for the data services segment as a discontinued operation. The financial data presented for the Company's data services segment reflects the historical sales and expenses of the data services segment after elimination of intercompany transactions with FSS. CRITICAL ACCOUNTING MATTERS See the Company's latest Annual Report on Form 10-K filed with the SEC and Accounting Pronouncements below. RESULTS OF OPERATIONS In evaluating financial performance, management uses revenues and earnings before interest, taxes, depreciation and amortization 16 ("EBITDA") as a measure of a segment's profit or loss. The following discusses the results of Loral Orion, Inc. for the three months ended March 31, 2002 and March 31, 2001 respectively. OPERATING REVENUES FROM CONTINUING OPERATIONS (IN MILLIONS):
QUARTER ENDED MARCH 31, 2002 2001 ----- ----- Fixed Satellite Services . $29.8 $32.9 Eliminations (1) ......... (0.2) (6.6) ----- ----- Operating Revenues ....... $29.6 $26.3 ===== =====
EBITDA (2) (IN MILLIONS):
QUARTER ENDED MARCH 31, 2002 2001 -------- --------- Fixed Satellite Services.. $ 22.8 $ 26.8 Eliminations (1).......... (0.2) (6.6) -------- --------- EBITDA.................... $ 22.6 $ 20.2 ======== =========
(1) Primarily represents sales to the Company's discontinued operation (formerly the data services segment) in 2001 (see below). (2) EBITDA (which is equivalent to operating income (loss) before depreciation and amortization, including amortization of unearned compensation) 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 the Company'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. THREE MONTHS ENDED MARCH 31, 2002 COMPARED WITH 2001 Revenues from continuing operations in 2002 and 2001 were $29.6 million and $26.3 million, respectively. This increase was primarily due to sales to the Company's former data services business of $3.0 million in 2002, which were eliminated in 2001 until the Company transferred the data services business to a subsidiary of Loral in connection with the Company's exchange offers (see Exchange Offers). Cost of satellite services for continuing operations in 2002 and 2001 were $22.8 million and $25.6 million, respectively. This decrease was primarily due to reduced amortization expense resulting from the Company's adoption of SFAS No. 142 (See Accounting Pronouncements), offset by increased insurance costs as a result of the Company renewing the insurance on one of its satellites after September 11, 2001. Selling, general and administrative expenses for continuing operations in 2002 and 2001 were $3.1 million and $3.3 million, respectively, which was primarily due to lower bad debt expense, offset by costs allocated by Loral in 2002. Interest expense in 2002 and 2001 was $3.4 million and $25.2 million, respectively. The decrease was primarily due to the accounting for the Company's exchange offers completed in December 2001, as the Company does not recognize any interest expense on its new 10% senior notes. (See Exchange Offers) The Company is included in the consolidated U.S. federal income tax return of Loral Space & Communications Corporation. Pursuant to a tax sharing agreement for 2002 with Loral Space & Communications Corporation, the Company is entitled to reimbursement for the use of its tax losses when such losses are utilized by the consolidated group; otherwise the Company is required to pay its separate Company income tax liability to Loral Space & Communications Corporation. For 2002, the Company recorded a net receivable under this tax sharing agreement of approximately $2.3 million as a current income tax benefit. On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which resulted in the Company recording a charge for the cumulative effect of change in accounting principle of $562 million (see Accounting Pronouncements). SEGMENT RESULTS Segment revenues in 2002 were $29.8 million as compared to $32.9 million in 2001. EBITDA on the same basis was $22.8 million in 2002, as compared to $26.8 million in 2001. These decreases are primarily due to lower revenues for capacity in 2002 from the Company's discontinued operation (formerly the data services segment). At March 31, 2002, the Company had an external contracted backlog (representing future revenues under customer contracts) of approximately $546.3 million, as compared to $576.0 million at December 31, 2001. 17 OPERATIONAL MATTERS Loral Orion anticipates it will have additional requirements over the next three years to fund the replacement of Telstar 11 which is expected to reach the end of its useful life in 2005. To the extent that excess cash flow from Loral Orion's satellites is not sufficient to meet these requirements, Loral Orion will need to secure funding from Loral or raise additional financing to fund this requirement and there can be no assurance that the Company will be successful in doing so. Sources of additional capital may include public or private debt, vendor financing, equity financings or strategic investments. To the extent that Loral Orion seeks to raise additional debt financing, its indenture relating to the Company's 10% senior notes limits the amount of such additional debt to $100 million for such replacement satellite and prohibits Loral Orion from using Telstar 11, Telstar 10/Apstar IIR and Telstar 12 as collateral for indebtedness. Telstar 12, originally intended to operate at 12 degrees W.L., was launched aboard an Ariane launch vehicle in October 1999 into the orbital slot located at 15 degrees W.L., and commenced operations in January 2000. Under an agreement reached with Eutelsat, Loral Orion agreed to operate Telstar 12 at 15 degrees W.L. while Eutelsat continues to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority rights at such location on Loral Orion's behalf. As part of this coordination effort, Loral Orion agreed to provide to Eutelsat four 54 MHz transponders on Telstar 12 for the life of the satellite and has retained risk of loss with respect to those transponders. Eutelsat also has the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. As part of the international coordination process, Loral continues to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees W.L. If these discussions are not successful, Telstar 12's useable capacity may be reduced. On September 28, 1999, Loral Orion purchased from APT Satellite Company Limited ("APT") for approximately $273 million, the rights to all transponder capacity and existing customer leases on the Apstar IIR satellite (except for one C-band transponder retained by APT), and renamed the satellite the Telstar 10/Apstar IIR satellite. Loral Orion has full use of the transponders for the remaining life of Telstar 10/Apstar IIR. Loral Orion also has the right to provide replacement satellites upon the end of life of Telstar 10/Apstar IIR, for which it will be required to pay a fee to APT for the right to use the orbital slot. Telstar 10/Apstar IIR has experienced minor losses of power from its solar arrays. Although, to date, Telstar 10/Apstar IIR has not experienced any degradation in performance, there can be no assurance that Telstar 10/Apstar IIR will not experience additional power loss that could result in performance degradation, including loss of transponder capacity. In the event of additional power loss, the extent of the performance degradation, if any, will depend on numerous factors, including the amount of the additional power loss, when in the life of Telstar 10/Apstar IIR the loss occurred, and the number and type of uses being made of transponders then in service. A complete or partial loss of Telstar 10/Apstar IIR could result in a loss of revenues and profits. Based upon information currently available, including design redundancies to accommodate small power losses and the fact that no pattern has been identified as to the timing or specific location within the solar arrays of the failures, the Company believes that this matter will not have a material adverse effect on its consolidated financial position or its results of operations. While the Company has in the past, consistent with industry practice, typically obtained in-orbit insurance for its satellites, the Company cannot guarantee that, upon a policy's expiration, the Company will be able to renew the insurance on acceptable terms, especially on satellites that have, or that are part of a family of satellites that have, experienced problems in the past. For example, in connection with the renewal of the insurance for the Telstar 10/Apstar IIR satellite in October 2001, the insurance underwriters have excluded losses due to solar array failures, since Telstar 10/Apstar IIR was manufactured by Space Systems/Loral ("SS/L") and has the same solar array configuration as another 1300-class satellite manufactured by SS/L that recently experienced a solar array failure. SS/L believes that this failure is an isolated event and does not reflect a systemic problem in either the satellite design or manufacturing process. Accordingly, the Company does not believe that this anomaly will affect Telstar 10/ Apstar IIR. Loral is currently in discussions with the Company's insurers to remove this exclusion from the Telstar 10/ Apstar IIR policy, in return for a deductible for losses arising from electrical problems on the satellite's solar arrays. There can be no assurance that these discussions will be successful. An uninsured loss of a satellite will have a material adverse effect on the Company's consolidated financial position and results of operations. The Company, like others in the satellite industry, is faced with significantly higher premiums on launch and in-orbit insurance and significantly shorter coverage periods than those that have been available in the past, which was due in part to the events of September 11, 2001. This development in the insurance industry will increase the Company's cost of doing business. The Company 18 intends to pass on such increased cost to its customers. There can be no assurance, however, that it will be able to do so. Insurance market conditions have historically been cyclical in nature. While the Company anticipates that these conditions will improve in the future, there can be no assurance that they will. Beginning in 2002, Loral initiated the allocation of corporate management expenses to its individual subsidiaries and divisions, including Loral Orion. The allocation of these expenses is computed with respect to Loral Orion in a manner consistent with Loral's other subsidiaries and divisions, using a fixed formula based on three factors: employee payroll, revenues and assets. The amount allocated for the first three months of 2002 was $0.9 million. The amount expected to be allocated to Loral Orion is estimated to be between three and four million dollars for the year ended 2002. EXCHANGE OFFERS On December 21, 2001, Loral Orion completed exchange offers and consent solicitations by issuing $613 million principal amount of new senior notes due 2006 guaranteed by Loral, in exchange for the extinguishment of $841 million principal amount of Loral Orion senior notes due in 2007 and senior discount notes due 2007 as discussed below. As part of the exchange, Loral issued to the new noteholders 6.04 million five-year warrants to purchase Loral common stock at a price of $2.37 per share. The warrants were valued at $6.7 million using the Black Scholes option pricing model with the following assumptions: stock volatility, 75%, risk free interest rate, 4.36%, and no dividends during the expected term, and is reflected in capital in excess of par value on the consolidated balance sheet. After the exchange offers, principal amount of $37 million of the existing senior notes and principal amount of $49 million of the existing senior discount notes remain outstanding at their original maturities and interest rates, but the indentures for the existing notes were amended so as to remove substantially all of their operating restrictions and events of default. The interest rate on the new senior notes is 10%, a reduction from the 11.25% interest rate on the existing senior notes and the 12.5% rate on the existing senior discount notes. Interest is payable semi-annually on July 15 and January 15, beginning July 15, 2002. As a result of the lower interest rate and the $229 million reduction in principal amount of debt, Loral Orion's annual cash interest payments will be reduced by approximately $39 million. Under U.S. generally accepted accounting principles dealing with debt restructurings, the Company recorded an after-tax extraordinary gain of $26 million on the exchange, after expenses of $5 million. The carrying value of the new senior notes on the balance sheet is $904 million, although the actual principal amount of the new senior notes is $613 million. The difference between this carrying value and the actual principal amount of the new senior notes will be amortized over the life of the new senior notes, fully offsetting interest expense through maturity of the new senior notes. The indenture relating to the new senior notes contains limitations on Loral Orion and its subsidiaries, including, without limitation, restrictions on Loral Orion's ability to pay dividends or make loans to Loral. In connection with the consummation of the exchange offers, Loral SpaceCom Corporation ("LSC"), cancelled its $79.7 million intercompany note issued to it by Loral Orion which ranked pari passu to senior debt in exchange for the transfer of the Company's data services business and the issuance of a new note to LSC in the principal amount of $29.7 million due 2006, having an interest rate of 10% per annum payable in kind, and subordinated to Loral Orion's new senior notes. Loral Orion's data services business was transferred to a newly-formed subsidiary of Loral, which assumed the name "Loral CyberStar, Inc". ACCOUNTING PRONOUNCEMENTS On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142") which addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. SFAS 142 also changed the evaluation criteria for testing goodwill for impairment from an undiscounted cash flow approach, which was previously utilized under the guidance in Accounting Principles Board Opinion No. 17, Intangible Assets, to a test based on fair value. Fair value is determined by the amount at which an asset or liability could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Quoted market prices in active markets are the best evidence of fair value and must be used as the basis for the measurement, if available. If quoted market prices are not available, the estimate of fair value must be based on the best information available, including prices for similar assets and liabilities and the results of using other valuation techniques, such as public company trading multiples and future discounted cash flows. The Company adopted SFAS 142 on January 1, 2002. In accordance with SFAS 142, the Company's previously recognized cost in excess of net assets acquired ("goodwill") of $562 million (at December 31, 2001) from the acquisition of the Company by Loral in 1998 was reviewed under the new transitional guidance as of January 1, 19 2002. The Company hired professionals in the valuation consulting business to determine the fair value of its goodwill. Since there were no quoted market prices in active markets for the Company's goodwill, the measurement of fair value was based on the best information available in the circumstances, including reasonable and supportable assumptions and projections, to determine that the most appropriate method of fair value was public company trading multiples. Those professionals determined that the Company's goodwill under the new guidance in SFAS 142 was fully impaired. Accordingly, as of January 1, 2002, the Company recorded a non-cash charge for the cumulative effect of the change in accounting principle of $562 million. The charge is the result of a change in the evaluation criteria for goodwill from an undiscounted cash flow approach which was previously utilized under the guidance in Accounting Principles Board Opinion No. 17 to the fair value approach which is stipulated in SFAS 142. The following table presents the actual financial results and as adjusted financial results without the amortization of goodwill for the Company for the three months ended March 31, 2001 (in thousands):
Actual As Adjusted ------ ----------- Reported loss from continuing operations......... $(27,386) $(27,386) Add back amortization of goodwill................ 3,877 -------- -------- Loss from continuing operations.................. (27,386) (23,509) Loss from operations of discontinued operations, net of taxes........................ (4,875) (4,875) -------- -------- Net loss......................................... $(32,261) $(28,384) ======== ========
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. The Company is required to adopt SFAS 143 on January 1, 2003. The Company has not yet determined the impact that the adoption of SFAS 143 will have on its results of operations or its financial position. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. The Company adopted SFAS 144 on January 1, 2002. The Company has determined that there was no effect on the Company's consolidated financial position or results of operations relating to the adoption of SFAS 144. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS 145 generally requires that any gains or losses on extinguishment of debt in current or prior periods be classified as other income (expense), beginning in fiscal 2003, with early adoption encouraged. The Company is currently evaluating the impact of adopting the provisions of SFAS No. 145 in its consolidated financial statements. 20 PART II. OTHER INFORMATION ITEM 6. REPORTS ON FORM 8-K (a) Reports on Form 8-K:
Date of Report Description -------------- ----------- January 8, 2002 Item 5 - Other Events Name change to Loral Orion, Inc.
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LORAL ORION, INC. Registrant Date: May 14, 2002 /s/ RICHARD J. TOWNSEND ------------------------------------------------- Richard J. Townsend Senior Vice President and Chief Financial Officer (Principal Financial Officer and Registrant's Authorized Officer) 21 -----END PRIVACY-ENHANCED MESSAGE-----