-----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, FysOe99+CsJAtG+zTkmN5/JJmvDf+dq6YWRDsC7z1OR2z65Nj8/rGiXqkkR3dS3W sPMcaw+nxWrbYFcCg9FWag== 0001005150-98-001154.txt : 19981118 0001005150-98-001154.hdr.sgml : 19981118 ACCESSION NUMBER: 0001005150-98-001154 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORION NETWORK SYSTEMS INC/NEW/ 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: SEC FILE NUMBER: 333-19167 FILM NUMBER: 98752134 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: ORION NEWCO SERVICES INC DATE OF NAME CHANGE: 19961231 10-Q 1 FORM 10-Q 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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 Commission file number 000-22085 LORAL ORION, INC. (Exact name of registrant as specified in its charter) Delaware 52-2008654 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization No. ) Identification) 2440 Research Boulevard, Suite 400, Rockville, Maryland 20850 - ------------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (301) 258-8101 - -------------------------------------------------------------------------------- (Registrant's telephone number including area code) 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 __ INDEX LORAL ORION, INC.
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets --- September 30, 1998 and December 31, 1997 (Predecessor Company).......................................................................... 3 Condensed Consolidated Statements of Operations --- Three and six months ended September 30, 1998; three months ended September 30, 1997 and March 31, 1998 and nine months ended September 30, 1997 (Predecessor Company)................................. 5 Condensed Consolidated Statements of Cash Flows --- Six months ended September 30, 1998; three months ended March 31, 1998 and nine months ended September 30, 1997 (Predecessor Company)....................................................... 6 Notes to Condensed Consolidated Financial Statements........................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Opera tions................................................................................. 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................................................... 17 Signature............................................................................................... 18
PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS LORAL ORION, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, ------------------- 1997 SEPTEMBER 30, PREDECESSOR 1998 COMPANY ---------------- ----------------- (unaudited) Note ASSETS Current assets: Cash $ 57,005 $ 70,009 Restricted assets 50,180 50,064 Accounts receivable 14,323 11,781 Prepaid expenses and other current assets 5,272 6,846 ---------------- ----------------- Total current assets 126,780 138,700 Restricted and segregated assets, including accrued interest of approximately $1.0 million and $3.7 million at September 30, 1998 21,604 306,826 and December 31, 1997, respectively Property and equipment at cost: Land 74 74 Satellite and related equipment 255,188 322,159 Telecommunications equipment 32,028 40,654 Furniture and computer equipment 10,225 8,627 ---------------- ----------------- 297,515 371,514 Less, accumulated depreciation (25,876) (77,080) Satellite construction in progress, including capitalized interest of $13.2 million and $7.3 million at September 30, 1998 and December 31, 1997, respectively 322,319 106,843 ---------------- ----------------- Net property and equipment 593,958 401,277 Due from Loral 6,366 -- Deferred financing costs, net 20,058 22,510 Costs in excess of net assets acquired associated with the Loral Merger, net 597,571 -- Deferred income taxes 49,769 -- Other assets, net 6,226 27,179 ---------------- ----------------- TOTAL ASSETS $ 1,422,332 $ 896,492 ================ =================
See Notes to Condensed Consolidated Financial Statements. Note: The December 31, 1997 Balance Sheet has been derived from the audited consolidated financial statements at that date. 3 LORAL ORION, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------- 1997 SEPTEMBER 30, PREDECESSOR 1998 COMPANY ---------------- ---------------- (unaudited) Note LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 1,193 $ 5,231 Accrued liabilities 32,021 10,595 Other current liabilities 8,889 7,130 Interest payable 10,386 24,772 Current portion of long-term debt 2,020 6,405 ---------------- ---------------- Total current liabilities 54,509 54,133 Long-term debt 908,593 790,671 Other liabilities 34,288 21,803 Redeemable preferred stock -- 76,734 Stockholders' equity (deficit): Common stock, $.01 par value, 1,000 and 40,000,000 shares authorized; 100 and 15,959,089 shares outstanding -- 160 Capital in excess of par value 478,511 153,294 Treasury stock, 0 and 269,274 shares at September 30, 1998 and December 31,1997, respectively -- (91) Unearned compensation (3,850) -- Cumulative translation adjustment (350) (956) Accumulated deficit (49,369) (199,256) ---------------- ----------------- Total stockholders' equity (deficit) 424,942 (46,849) ---------------- ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,422,332 $ 896,492 ================ =================
See Notes to Condensed Consolidated Financial Statements. Note: The December 31, 1997 Balance Sheet has been derived from the audited consolidated financial statements at that date. 4 LORAL ORION, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS SIX MONTHS THREE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, MARCH 31, SEPTEMBER 30, ------------- ------------- --------- ------------- 1998 1997 1998 1998 1997 PREDECESSOR PREDECESSOR PREDECESSOR COMPANY COMPANY COMPANY -------------- ----------- -------------- ----------- ----------- REVENUE $ 21,153 $ 17,619 $ 41,396 $ 18,790 $ 54,539 OPERATING EXPENSES: Direct 7,265 6,312 14,277 6,406 19,691 Sales and marketing 5,186 4,820 11,986 5,790 13,381 Engineering and technical services 2,779 1,792 4,328 1,898 5,415 General and administrative 3,351 3,839 7,308 3,707 10,732 Depreciation and amortization 16,327 12,127 32,443 12,483 35,823 Merger costs 196 -- 301 12,145 -- -------- -------- -------- -------- -------- Total operating expenses 35,104 28,890 70,643 42,429 85,042 -------- -------- -------- -------- -------- LOSS FROM OPERATIONS (13,951) (11,271) (29,247) (23,639) (30,503) OTHER (INCOME) EXPENSE: Interest income (2,427) (6,124) (7,574) (5,425) (18,254) Interest expense 14,996 22,331 32,748 21,190 62,291 Other (219) 32 (120) 287 605 -------- -------- -------- -------- -------- Total other (income) expense 12,350 16,239 25,054 16,052 44,642 -------- -------- -------- -------- -------- Loss before taxes, extraordinary loss on extinguishment of debt, minority interest and preacquisition loss of acquired subsidiary (26,301) (27,510) (54,301) (39,691) (75,145) Income tax benefit (expense) (3,313) -- 4,932 -- -- Extraordinary loss on extinguishment of debt -- -- -- -- (15,763) Limited Partners' and minority interest in the net loss of Orion Atlantic and other consolidated entities -- -- -- -- 12,043 Preacquisition loss of acquired subsidiary -- -- -- -- 626 -------- -------- -------- -------- -------- NET LOSS (29,614) (27,510) (49,369) (39,691) (78,239) Preferred stock dividend and accretion, net of forfeitures -- 2,309 -- (1,387) 6,281 -------- -------- -------- -------- -------- Net loss attributable to common stockholders $(29,614) $(29,819) $(49,369) $(38,304) $(84,520) ======== ======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements. 5 LORAL ORION, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS NINE MONTHS SIX MONTHS ENDED ENDED ENDED MARCH 31, 1998 SEPTEMBER 30, 1997 SEPTEMBER 30, 1998 PREDECESSOR COMPANY PREDECESSOR COMPANY ------------------ ------------------- ------------------- OPERATING ACTIVITIES Net loss $ (49,369) $ (39,691) $ (78,239) Adjustments to reconcile net loss to net cash used in operating activities: Extraordinary loss on extinguishment of debt -- -- 15,763 Deferred taxes 2,231 -- -- Depreciation and amortization 32,443 12,483 35,823 Amortization of deferred financing costs 1,303 609 2,382 Provision for bad debts 650 150 797 Non cash interest expense 15,276 10,292 27,625 Interest earned on restricted assets (5,825) (4,629) (2,616) Other -- 1,644 -- Limited Partners' and minority interest in the net loss of Orion Atlantic and other consolidated entities -- -- (12,043) Changes in operating assets and liabilities: Accounts receivable (1,934) (1,408) (1,533) Prepaid expenses and other current assets (5,170) 4,388 (3,506) Other assets 188 201 (2,743) Accounts payable and accrued liabilities 19,834 (2,199) (3,224) Other current liabilities 1,427 333 1,889 Interest payable (53) (11,754) 1,848 Deferred revenue 12,000 -- 12,250 Due from Loral (6,366) -- -- --------- --------- --------- Net cash provided by (used in) operating activities 16,635 (29,581) (5,527) INVESTING ACTIVITIES Capital expenditures (10,794) (3,805) (11,924) Increase in restricted and segregated assets (12,000) -- (357,182) Uses of and transfers from restricted and segregated assets 276,123 31,962 -- Satellite construction costs, including capitalized interest (261,394) (14,575) (80,600) Purchase of Teleport Europe GmbH, net of cash acquired -- -- (8,375) Other -- -- (183) --------- --------- --------- Net cash provided by (used in) investing activities (8,065) 13,582 (458,264) FINANCING ACTIVITIES Debt and equity financing costs -- -- (25,959) Proceeds from issuance of common stock -- 2,117 1,325 Proceeds from issuance of debt -- -- 770,397 Repayment of senior notes payable and notes payable (534) (254) (215,581) Swap termination fee -- -- (5,288) Payment of satellite incentive obligations (5,461) (1,302) (16,867) Other 629 (770) (3,613) --------- --------- --------- Net cash (used in) provided by financing activities (5,366) (209) 504,414 Net increase (decrease) in cash and cash equivalents 3,204 (16,208) 40,623 Cash and cash equivalents at beginning of period 53,801 70,009 42,188 --------- --------- --------- Cash and cash equivalents at end of period $ 57,005 $ 53,801 $ 82,811 ========= ========= =========
See Notes to Condensed Consolidated Financial Statements. 6 LORAL ORION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A. BASIS OF PRESENTATION BUSINESS AND OWNERSHIP Loral Orion, Inc., (the "Company" or "Loral Orion"), formally Loral Orion Network Systems, Inc., is a holding company with no assets or operations other than its investments in its subsidiaries. Through the operations of its Subsidiary Guarantors, the Company's principal business is the provision of satellite-based communications services. Each of the Subsidiary Guarantors is a wholly-owned (100%) subsidiary of the Company. The Subsidiary Guarantors comprise all of the direct and indirect subsidiaries of the Company (other than inconsequential subsidiaries). GENERAL 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 results of operations, financial position and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such 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 six months ended September 30, 1998 and the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. It is suggested that these financial statements be read in conjunction with the audited consolidated financial statements and notes thereto of Orion Network Systems', Inc. latest annual report on Form 10-K. RECENT DEVELOPMENTS ACQUISITION OF THE COMPANY BY LORAL On March 20, 1998, Orion Network Systems, Inc. ("Orion") was acquired by Loral Space & Communications Ltd. ("Loral"), through the merger (the "Merger") of a wholly owned subsidiary of Loral, Loral Satellite Corporation ("Merger Sub"), with and into Orion. Loral consummated the acquisition by issuing 17.9 million shares of its common stock and assuming existing Orion options and warrants to purchase 1.9 million shares of Loral common stock representing an aggregate purchase price of $469 million. Orion was the surviving corporation (the "Surviving Corporation") of the Merger and thereby became a subsidiary of Loral. At the effective date of the Merger, Loral contributed its investment in Orion to Loral Space & Communications Corporation, a wholly owned subsidiary of Loral, and Orion changed its name to "Loral Orion Network Systems, Inc." The name has since been changed to "Loral Orion, Inc." Following the Merger, the capital stock of Loral Orion ceased to be publicly traded. However, the Company continues to have registered bonds outstanding and will continue to have filing requirements with the SEC. The foregoing description of the Merger does not purport to be complete and is qualified in its entirety by the terms and conditions of the Merger Agreement, filed as Exhibits 2.1 and 2.2 to Registration Statement No. 333-46407 on Form S-4. 7 LORAL ORION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE A. BASIS OF PRESENTATION (CONTINUED) For accounting purposes, the Merger was accounted for as of March 31, 1998 using the purchase method. Accordingly, the condensed consolidated balance sheet at March 31, 1998 reflected the push-down of the purchase price allocations (based on preliminary estimates and subject to adjustment) to the assets and liabilities (including an increase of $148.6 million to the carrying value of the Senior Notes and Senior Discount Notes, based on quoted market prices) of Orion at that date and a related increase in deferred tax assets of $52.0 million. The cost in excess of net assets acquired ($597.6 million) is being amortized over 40 years using the straight-line method. Had the acquisition of the Company occurred on January 1, 1997, the unaudited pro forma sales, operating loss and net loss applicable to common stockholders for the nine months ended September 30, 1998 and 1997 would have been $60.2 million and $54.5 million; $44.1 million and $41.5 million; and $67.7 million and $54.2 million, respectively. These results, which are based on various assumptions are not necessarily indicative of what would have occurred had the acquisition been consummated on January 1, 1997. COMPREHENSIVE INCOME As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income". SFAS 130 established new rules for the reporting and display of comprehensive income and its components. SFAS 130 requires unrealized gains or losses on the Company's foreign currency translation adjustments, to be included in other comprehensive income. Total comprehensive loss for the six months ended September 30, 1998, three months ended March 31, 1998 and nine months ended September 30, 1997 are as follows (in thousands):
THREE MONTHS NINE MONTHS ENDED ENDED SIX MONTHS MARCH 31, 1998 SEPTEMBER 30, 1997 ENDED PREDECESSOR PREDECESSOR SEPTEMBER 30, 1998 COMPANY COMPANY ------------------ -------------- ------------------ Net loss $ (49,369) $ (39,691) $ (78,239) Cumulative translation adjustment (350) -- (742) ------------------ ------------------ ------------------- Comprehensive loss $ (49,719) $ (39,691) $ (78,981) ================== ================== ===================
EARNINGS PER SHARE Earnings per share is not presented since it is not considered meaningful due to the Merger with Loral and recapitalization of the Company. 8 LORAL ORION, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE B. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
DECEMBER 31, 1997 SEPTEMBER 30, PREDECESSOR 1998 COMPANY ------------- ----------- Senior notes (net of premium of $58.4 million at September 30, 1998 and unamortized discount of $4.9 million at December 31, 1997) $ 503,422 $ 440,100 Senior discount notes (maturity value of $484 million) 397,878 292,337 Convertible junior subordinated debentures -- 50,000 Notes payable - TT&C Facility 5,233 6,022 Satellite incentive obligations 3,027 6,479 Other 1,053 2,138 ------------- ------------- Total long-term debt 910,613 797,076 Less: current portion 2,020 6,405 ------------- ------------- Long-term debt less current portion $ 908,593 $ 790,671 ============= =============
In connection with the Merger, Loral did not assume Orion's Senior Notes or Senior Discount Notes. Such debt remains outstanding and is non-recourse to Loral. The carrying value of Orion's Senior Notes and Senior Discount Notes was increased to reflect a fair value adjustment of $148.6 million in connection with the Merger, based on quoted market prices at March 31, 1998. NOTE C. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Prior to March 31, 1998, all of the redeemable convertible preferred stock outstanding at December 31, 1997, including accrued dividends on the Series C Preferred Stock, have been converted to approximately 6.1 million shares of common stock at prices ranging from $8.50 to $17.50 per share. NOTE D. INCOME TAXES The Company is included in the consolidated U.S. Federal income tax return of for 1998 Loral Space & Communications Corporation. Pursuant to a tax sharing agreement for 1998 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. For the six months ended September 30, 1998, the Company recorded a receivable under this tax sharing agreement of approximately $7.1 million and a deferred tax provision of $2.2 million. The deferred tax asset of $49.8 million on the accompanying balance sheet arises from the tax effect of the temporary differences between the carrying amount of the Senior Notes and the Senior Discount Notes payable for financial and income tax purposes. NOTE E. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform to the current period presentation. 9 LORAL ORION, INC. ITEM 2. 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, and elsewhere in this Form 10-Q, are 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, Loral Orion or their 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 Loral Orion with the Securities and Exchange Commission, press releases or oral statements made by or with the approval of an authorized executive officer of Loral Orion. Actual results could differ materially from those projected or suggested in any forward-looking statements as a result of a wide variety of factors or conditions. See the section of Orion Network System's, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1997, entitled "Forward Looking Statements". GENERAL The Company's principal business is providing satellite communications for private communications networks and video distribution and other satellite transmission services. No restrictions exist on the ability of Subsidiary Guarantors 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). ORION 2 AND ORION 3 Orion 2. During the second quarter, the Company entered into a satellite procurement contract with Space Systems/Loral ("SS/L"), a wholly owned subsidiary of Loral, for the construction and launch of the Orion 2 satellite for operation in the Atlantic Ocean region at 12(degree) W.L. (the "SS/L Contract"). The SS/L Contract provides for delivery in-orbit of the Orion 2 aboard an Ariane 44L launch vehicle by June 30, 1999. The SS/L satellite design provides for 38 Ku-band transponders with a footprint covering the Eastern United States, Southeastern Canada, Europe, the Commonwealth of Independent States, the Middle East, North and South Africa and South America. The Company also notified Matra Marconi Space ("Matra") that it cancelled its satellite procurement contract with Matra for the construction and launch of a satellite for operation in the Atlantic Ocean region at 12(degree) W.L. (the "Matra Contract"). As a result of the cancellation of the Matra Contract, the Company will have no obligation to make further payments to Matra, but Matra will be entitled to retain amounts previously paid by the Company of $49.1 million. The Company believes that the Orion 2 satellite being procured from SS/L offers significant benefits compared to the Matra satellite. Orion's cash will be used to fund the SS/L Contract up to an amount that when added to the amounts previously paid to Matra, will not exceed $202 million, the total amount that would otherwise have been due to Matra if the Matra Contract had not been canceled. Any requirements to SS/L in excess of $202 million for Orion 2 will be funded with additional equity contributed from Loral. Moreover, the SS/L-designed satellite is both larger and more powerful than the Matra-designed satellite. The SS/L satellite will have 8 additional transponders and will provide greater transmitted power to Orion's customers. The expected in-orbit life of the SS/L satellite is approximately 16 years compared to 13 years for the Matra satellite. The SS/L satellite is designed to provide enhanced transponder switching capabilities as compared to the Matra satellite and also allows for both uplinking and downlinking of transmissions from South Africa, while the Matra satellite would not have allowed for uplinking. Orion 3. The Company entered into a satellite contract with Hughes Space and Communications International, Inc. in 1997 for the construction and launch of Orion 3. The contract provides for delivery in orbit of Orion 3 by the first quarter of 1999, for a firm fixed price of $208 million excluding launch insurance and performance incentives. 10 LORAL ORION, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Pre-Construction Lease on Orion 3. The Company has entered into a contract with DACOM Corp., a Korean communications company ("DACOM"), under which DACOM will, subject to certain conditions, lease eight dedicated transponders on Orion 3 for 13 years, in return for approximately $89 million, payable over a period from December 1996 through seven months following the lease commencement date for the transponders (which is scheduled to occur by May 1999). Payments are subject to refund if Orion 3 fails to commence commercial operation by June 30, 1999. Through September 30, 1998, the Company has received $35.1 million from DACOM. Satellite Launch and Operation Risk. There can be no assurance that Orion 2 or Orion 3 will be successfully launched or operate in accordance with their design. While the Company intends to procure launch insurance for the satellites, a total or partial loss of either satellite will involve delays and loss of revenue which will impair the Company's ability to service its indebtedness, including the Notes, and such insurance will not protect the Company against business interruption, loss or delay of revenues or similar losses and may not fully reimburse the Company for its expenditures. OVERVIEW The Company's revenues are principally generated from two to five year contracts for delivery of communications services derived principally from recurring monthly fees from its customers. The revenues from each contract vary, depending upon the type of service, amount of capacity, data handling ability of the network, the number of very small aperture terminals ("VSATs") (which generally are owned by the Company), value-added services and other factors. Substantially all of the Company's contracts are denominated in U.S. dollars. The Company begins to record revenues under its contracts upon service commencement to the customer. The services provided by the Company have been subject to decreasing prices over recent years due to increased competition. This pricing pressure is expected to continue (and may accelerate) for the foreseeable future, particularly if, as expected, capacity continues to increase. The Company will need to increase its volume of sales in order to compensate for such price reductions. The Company believes that customers will increase the data speed in their communications networks to support new applications, and that such upgrading of customer networks will lead to increased revenues that will mitigate the effect of price reductions. However, there can be no assurance that this will occur. The Company expects to continue to incur net losses and have negative cash flow (after payments for capital expenditures and interest) for the foreseeable future. The Company's direct cost of services includes principally (i) costs relating to the installation, maintenance and licensing of VSAT earth stations at its customers' premises; (ii) satellite lease payments for transponder capacity (generally for services outside of the Orion 1 footprint); (iii) in-orbit insurance premiums; and (iv) personnel costs and travel related to TT&C, network monitoring, network design and similar activities. These costs will increase as the Company's business grows. Sales and marketing expenses consist of salaries, sales commissions (including commissions to third party sales representatives), travel and promotional expenses. The Company commenced a significant expansion of its marketing program in 1997 which has continued in 1998. Due to the complexity of the Company's services, and the continued expansion of sales personnel, sales and marketing expenses increased significantly during the nine months of 1998 and they are expected to increase through the remainder of 1998. General and administrative expenses consist of personnel costs other than for selling and engineering and include information systems, professional services, and occupancy costs. These costs will increase generally as the Company's operations expand. Depreciation and amortization expenses result mainly from the depreciation of the Orion 1 satellite, goodwill amortization and the depreciation of VSATs and the related equipment to service the expansion of the private network communication services business. Interest income is primarily the result of interest earned on the proceeds from the Company's debt and equity offerings. Interest costs stem primarily from the Company's outstanding Senior Notes and Senior Discount Notes. 11 LORAL ORION, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) RESULTS OF OPERATIONS Acquisition of Teleport Europe GmbH. On March 26, 1997, the Company acquired German-based Teleport Europe GmbH (a communications company specializing in private satellite networks for voice and data services), whose name was subsequently changed to Loral Orion-Europe GmbH ("Orion Europe"). The Company has consolidated the operations of Orion Europe for the nine months ended September 30, 1997, retroactively to January 1, 1997. The effect of this consolidation on operations prior to acquisition was to increase consolidated revenues by approximately $4.1 million, increase total operating expenses by approximately $4.0 million and other expenses by approximately $0.7 million. The preacquisition loss of Orion Europe of $0.6 million has been deducted from the consolidated statement of operations for the nine months ended September 30, 1997. On March 20, 1998, Orion Network Systems, Inc. ("Orion") was acquired by Loral Space & Communications Ltd. ("Loral"), through the merger (the "Merger") of a wholly owned subsidiary of Loral, Loral Satellite Corporation ("Merger Sub"), with and into Orion. Loral consummated the acquisition by issuing 17.9 million shares of its common stock and assuming existing Orion options and warrants to purchase 1.9 million shares of Loral common stock representing an aggregate purchase price of $469 million. Orion was the surviving corporation (the "Surviving Corporation") of the Merger and thereby became a wholly owned subsidiary of Loral. At the effective date of the Merger, Loral contributed its investment in Orion to Loral Space & Communications Corporation, a wholly owned subsidiary of Loral, and Orion changed its name to "Loral Orion Network Systems, Inc." The name has since been changed to "Loral Orion, Inc." For accounting purposes, the Merger was accounted for as of March 31, 1998 using the purchase method. Accordingly, the condensed consolidated balance sheet at March 31, 1998 reflected the push-down of the purchase price allocations (based on preliminary estimates and subject to adjustment) to the assets and liabilities (including an increase of $148.6 million to the carrying value of the Senior Notes and Senior Discount Notes, based on quoted market prices) of Orion at that date and a related increase in deferred tax assets of $52.0 million. The cost in excess of net assets acquired ($597.6 million) is being amortized over 40 years using the straight-line method. Had the acquisition of the Company occurred on January 1, 1997, the unaudited pro forma sales, operating loss and net loss applicable to common stockholders for the nine months ended September 30, 1998 and 1997 would have been $60.2 million and $54.5 million; $44.1 million and $41.5 million; and $67.7 million and $54.2 million, respectively. These results, which are based on various assumptions are not necessarily indicative of what would have occurred had the acquisition been consummated on January 1, 1997. In order to provide an understanding of the Company, the results of operations discusses the actual results for the three months ended September 30, 1998 and September 30, 1997; and the pro forma results of operations for the nine months ended September 30, 1998 compared with the pro forma results of operations for the nine months ended September 30, 1997. Revenue and Backlog. Total revenues for the three months ended September 30, 1998 and 1997 were $21.2 million and $17.6 million, an increase of $3.6 million or 20 percent. This increase is primarily attributable to the private communications network services operations which included the addition of 132 customer sites in service compared to the same period in 1997. The pro forma revenues for the nine months ended September 30, 1998 and 1997 were $60.2 million and $54.5 million, an increase of $5.7 million or 10 percent, which is attributable to the additional installed customer sites in service for private communications network services for the nine month period ended September 30, 1998 compared to the same period in 1997. At September 30, 1998, the Company had a customer contract backlog (representing future revenues under contract) of approximately $299.7 million compared to $254.1 million at September 30, 1997, an increase of 18 percent. Revenue from customer contract backlog is typically earned over two to five years. 12 LORAL ORION, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OPERATING EXPENSES Direct Expenses. Direct expenses for the three months ended September 30, 1998, were $7.3 million compared to $6.3 million for the same period in 1997, an increase of $1.0 million or 16 percent. This increase was primarily attributable to Internet access and terrestrial link charges in support of the Worldcast Internet access product which provides international internet connectivity through the Orion 1 satellite and additional maintenance costs associated with growth in the installed customer base of private networks. Direct expenses for the pro forma nine months ended September 30, 1998 and 1997 were $20.7 million and $19.7 million, respectively. Sales and Marketing Expenses. Sales and marketing expenses were $5.2 million for the three months ended September 30, 1998, as compared to $4.8 million for the same period in 1997, an increase of $0.4 million or 8 percent. Sales and marketing expenses for the pro forma nine months ended September 30, 1998 and 1997 were $17.8 million and $13.4 million, an increase of $4.4 million or 33 percent. These increases primarily relate to additional sales salaries and commissions, independent contractor fees and advertising associated with the growth in the private communications network service business and Worldcast. The Company expects the increase in sales and marketing expenses to continue for the remainder of 1998. Engineering and Technical Services Expenses. Engineering and technical services expenses for the three months ended September 30, 1998 were $2.8 million compared to $1.8 million for the same period in 1997. Engineering and technical services expenses for the pro forma nine months ended September 30, 1998 and 1997 were $6.2 million and $5.4 million, respectively. These increases are primarily due to additional salaries associated with support of Worldcast Internet. General Administrative Expenses. General and administrative expenses were $3.4 million for the three months ended September 30, 1998, compared to $3.8 million for the same period in 1997. General and administrative expenses for the pro forma nine months ended September 30, 1998 and 1997 were $11.0 million and $10.7 million, respectively. Depreciation and Amortization. Depreciation and amortization expense for the three months ended September 30, 1998 were $16.3 million compared to $12.1 million for the same period in 1997, an increase of $4.2 million or 35 percent. Depreciation and amortization expense for the pro forma nine months ended September 30, 1998 and 1997 were $48.3 million and $46.8 million, an increase of $1.9 million or 4 percent. These increases were primarily the result of depreciation of ground equipment to service the expansion of the private network communication services business and amortization of costs in excess of assets acquired and unearned compensation associated with the acquisition of the Company by Loral. Interest. Interest income was $2.4 million for the three months ended September 30, 1998, compared to $6.1 million for the same period in 1997. Interest income for the pro forma nine months ended September 30, 1998 and 1997 were $13.0 million and $18.3 million, respectively. The decrease in interest income is due to a reduction in the balance held in the Company's segregated funds, which were used for the construction of satellites. Interest expense, net of capitalized interest of $6.1 million and $2.0 million, respectively, was $15 million for the three months ended September 30, 1998, and $22.3 million for the comparable period in 1997. The decrease in interest expense for the three months ended September 30, 1998 is due to additional capitalized interest costs attributable to the two satellites under construction, redemption of the convertible debentures and amortization of the fair value adjustment of the outstanding debt. Interest expense for the pro forma nine months ended September 30, 1998 and 1997 were $49.3 million and $54.5 million, respectively. 13 LORAL ORION, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Income Taxes. 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 1998 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. For the six months ended September 30, 1998, the Company recorded a receivable under this tax sharing agreement of approximately $7.1 million and a deferred tax provision of $2.2 million. The deferred tax asset of $49.8 million on the accompanying balance sheet arises from the tax effect of the temporary differences between the carrying amount of the Senior Notes and the Senior Discount Notes payable for financial and income tax purposes. Net Loss. As a result of the above, the Company incurred net losses of $18.5 million and $27.5 million for the three months ended September 30, 1998 and 1997. Net losses for the pro forma nine months ended September 30, 1998 and 1997 were $56.7 million and $54.2 million, respectively. LIQUIDITY AND CAPITAL RESOURCES Existing Capital Resources. As of September 30, 1998, the Company had cash and cash equivalents of $57.0 million and restricted assets of $71.8 million, including $70.8 million plus accrued interest of $1.0 million placed in a pledged account (to pre-fund the next three interest payments on the Senior Notes). While the Company believes its existing resources are adequate to fund its needs for the remainder of 1998, based upon its current expectations for growth, the Company anticipates it will have additional funding requirements over the next three years to fund the purchase of VSATs, other capital expenditures and other capital needs. Interest charges on the Senior Notes are fully provided for by restricted cash through January 2000. The in-orbit delivered costs of the Orion 2 and Orion 3 satellites are expected to aggregate approximately $356.5 million, of which $301.2 million has been incurred by the Company through September 30, 1998. The Company will need to make additional payments of approximately $13.0 million and $42.3 million in 1998 and 1999, respectively. These amounts exclude the cost of launch insurance and $8.0 million of incentive payments for Orion 3 payable over 15 years from the date of launch. The contracts for Orion 2 and Orion 3 provide firm fixed prices for the construction and launch of those satellites and provide for penalties in the event of late delivery by the manufacturer, however, the Company's actual payments could be substantially higher due to any change orders for the satellites, increased insurance rates, delays and other factors. The Company can use a portion of its working capital to make payments for additional satellites and certain related costs (or to pay interest and principal on the Senior Notes) if it chooses to do so. The Company has working capital of $72.3 million at September 30, 1998, of which $50.2 million is restricted. However, there can be no assurance that cost increases for Orion 2 and/or Orion 3 due to change orders, increased insurance rates or construction delays, among other factors may not increase the Company's capital requirements or that the Company's growth may vary from its expectations resulting in changes in its cash requirements or expected cash. The balance of the Company's funding requirements are dependent upon its growth and cash flow from operations. The Company cannot predict whether its existing resources and cash flows will be adequate to cover its future cash needs. If existing resources and cash flows are not sufficient to cover the Company's future cash needs, the Company will need to secure borrowings from Loral, or raise additional financing. The Company does not have a revolving credit facility or other source of readily available capital. Sources of additional capital may include public or private debt, equity financings or strategic investments. To the extent that the Company seeks to raise additional debt financing, the Indentures limit the amount of such additional debt (under a variety of provisions contained in such Indentures) and prohibit the Company from using Orion 1, Orion 2 or Orion 3 as collateral for indebtedness for money borrowed. If the Company requires additional financing and is unable to obtain such financing from Loral or from outside sources in the amounts and at the times needed, there would be a material adverse effect on the Company. 14 LORAL ORION, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OTHER MATTERS IMPACT OF YEAR 2000 The Company's Year 2000 Program is proceeding on schedule. The Year 2000 Issue is the result of computer programs which were written using two digits rather than four to signify a year (i.e., the year 1997 is denoted as "97" and not "1997"). Computer programs written using only two digits may recognize the year 2000 as the year 1900. This could result in a system failure or miscalculations causing disruption of operations. The Company has implemented a Year 2000 program (the "Year 2000 Program") for its internal products, system and equipment, as well as for key vendor and customer supplied products, systems and equipment. As part of the Year 2000 Program, the Company is assessing the Year 2000 capabilities of, among other things, its satellite, ground equipment, research and development activities, and facility management systems. The Year 2000 Program consists of the following phases: Inventory of Year 2000 items, Assessment (including prioritization), Remediation (including modification, upgrading and replacement), Testing and Auditing. This five-step program is divided into six major sections covering both information and non-information technology systems: 1) business systems, 2) technical systems, 3) products and services, 4) imbedded hardware/firmware, 5) vendor supplied products and 6) customer provided products. To date, the Company completed approximately 90% of the inventory phase and approximately 25% of its assessment phase. The Company expects to complete the first four phases, through the testing phase, of the Year 2000 Program during the second quarter of 1999, which is prior to any anticipated material impact on the operations of the Company. The fifth phase, the audit phase, is expected to commence in January of 1999 and continue through the third quarter of 1999 to accommodate re-audits if deemed necessary. Both internal and external resources are being utilized to execute the Company's plan. The program to address Year 2000 has been underway since July 1997. The incremental costs incurred to date for this effort by the Company was approximately $25,000. Based on the efforts of the Company to date, the Company anticipates additional incremental expenses of approximately $125,000 will be incurred to substantially complete the effort. Based upon the accomplishments to date, no contingency plans are expected to be needed. As risks are identified, contingency plans will be developed and implemented as necessary. However, because of the progress achieved to date and the Company's expectations that its Year 2000 program will be substantially complete in the second quarter of calendar 1999, the Company believes adequate time will be available to insure alternatives can be developed, assessed and implemented prior to a Year 2000 issue having a material negative impact on the operations of the Company. However, there can be no assurance that such modifications and conversions, if required, will be completed on a timely basis. The cost of the program and the dates on which the Company believes it will substantially complete Year 2000 modifications are based on management's best estimates. Such estimates were derived using software surveys and programs to evaluate calendar date exposures and numerous assumptions of future events, including the continued availability of certain resources, third-party year 2000 readiness and other factors. Because none of these estimates can be guaranteed, actual results could differ materially and adversely from those anticipated. Specific factors that might cause an adjustment of costs are: number of personnel trained in this area, the ability to locate and correct all relevant computer codes, the ability to validate supplier certification and similar uncertainies. The Company's failure to remediate a material Year 2000 problem could result in an interruption or failure of certain basic business operations. These failures could materially and adversely effect the Company's results of operations, liquidity and financial condition. The Company is also assessing the Year 2000 readiness of key third-party suppliers. Information requests have been distributed to such suppliers and replies are being evaluated. If the 15 LORAL ORION, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) risk is deemed material, on-site visits to suppliers will be conducted to verify the adequacy of the information received. However, due to the general uncertainty of the Year 2000 problem, including uncertainty with regard to third-party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have an adverse material impact on the Company's results of operations, liquidity or financial condition. The Company's Year 2000 Program is expected to have considerably reduced the Company's level of exposure in regard to third-party supplier Year 2000 problems. 16 LORAL ORION, INC. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K: 27 Financial Data Schedule (b) Reports on Form 8-K during the three months ended September 30, 1998: None. 17 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: November 16, 1998 /s/ Michael P. DeBlasio ------------------------------------------ Michael P. DeBlasio First Senior Vice President (Principal Financial Officer and Principal Accounting Officer) 18 EX-27 2 FDS --
5 0001029850 LORAL ORION, INC. 1,000 US DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 57,005 0 14,323 0 0 126,780 297,515 (25,876) 1,422,332 54,509 0 0 0 0 424,942 1,422,332 0 60,186 0 113,072 41,106 800 40,939 (93,992) 4,932 (89,060) 0 0 0 (89,060) 0 0
-----END PRIVACY-ENHANCED MESSAGE-----