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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 SEPTEMBER 30, 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 September 30, 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)
SEPTEMBER 30, DECEMBER 31,
2002 2001
---------------- -------------
ASSETS (UNAUDITED) (NOTE)
Current assets:
Cash and cash equivalents ......................................... $ 24,962 $ 19,399
Accounts receivable, net .......................................... 10,873 13,568
Prepaid expenses and other current assets ......................... 6,583 11,204
Due from Loral companies, net ..................................... -- 4,805
----------- -----------
Total current assets .......................................... 42,418 48,976
Satellites and related equipment, net ................................ 539,588 579,910
Cost in excess of net assets acquired, net ........................... -- 562,201
Deferred tax assets .................................................. 32,130 32,130
Other assets, net .................................................... 18,766 21,668
----------- -----------
Total assets.................................................... $ 632,902 $ 1,244,885
=========== ===========
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
Current liabilities:
Current portion of long-term debt ................................. $ 63,226 $ 49,449
Accounts payable .................................................. 1,277 3,390
Customer advances ................................................. 1,019 1,080
Deferred revenue .................................................. 2,283 5,954
Accrued interest .................................................. 2,136 1,889
Due to Loral companies, net ....................................... 1,307 --
----------- -----------
Total current liabilities ..................................... 71,248 61,762
Customer advances .................................................... 3,119 4,379
Deferred revenue ..................................................... 6,249 5,142
Long-term debt ....................................................... 897,365 959,555
Note payable to Loral SpaceCom ....................................... 31,540 29,700
Commitments and contingencies (Note 8)
Stockholder's (deficit) equity:
Common stock, $.01 par value ...................................... -- --
Paid-in capital ................................................... 604,166 604,166
Retained deficit .................................................. (980,785) (419,819)
----------- -----------
Total stockholder's (deficit) equity ........................... (376,619) 184,347
----------- -----------
Total liabilities and stockholder's (deficit) equity............. $ 632,902 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- ----------
Revenues from satellite services ...................... $ 25,776 $ 27,762 $ 82,976 $ 81,684
Operating expenses:
Cost of satellite services ....................... 22,639 25,493 67,934 76,438
Selling, general and administrative expenses ..... 2,804 2,847 9,147 8,547
--------- --------- --------- ---------
Income (loss) from operations ......................... 333 (578) 5,895 (3,301)
Interest income ....................................... 208 199 509 400
Interest expense ...................................... (3,062) (25,039) (9,812) (75,114)
--------- --------- --------- ---------
Loss before income taxes, cumulative effect
of change in accounting principle and discontinued
operations ....................................... (2,521) (25,418) (3,408) (78,015)
Income tax (provision) benefit ........................ 3,274 (1,447) 4,643 (569)
--------- --------- --------- ---------
Income (loss) before cumulative effect of change in
accounting principle and discontinued operations . 753 (26,865) 1,235 (78,584)
Cumulative effect of change in accounting principle
(Note 9) ......................................... -- -- (562,201) --
--------- --------- --------- ---------
(Loss) income from continuing operations .............. 753 (26,865) (560,966) (78,584)
Loss from operations of discontinued operations, net
of tax provision (Note 7) ........................ -- (3,920) -- (13,765)
--------- --------- --------- ---------
Net (loss) income ..................................... $ 753 $ (30,785) $(560,966) $ (92,349)
========= ========= ========= =========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
2002 2001
------------- -------------
Operating Activities:
Loss from continuing operations ...................... $(560,966) $ (78,584)
Non-cash items:
Deferred taxes ................................... -- 4,016
Depreciation and amortization ..................... 56,469 67,021
Cumulative effect of change in accounting principle 562,201
Interest expense .................................. 909 30,259
Changes in operating assets and liabilities:
Accounts receivable ............................... 2,695 (2,169)
Prepaid expenses and other current assets ......... 3,102 769
Other assets ...................................... 2,902 --
Accounts payable and accrued interest ............. (1,866) (11,149)
Customer advances ................................. (1,321) (874)
Deferred revenue .................................. (2,564) 1,317
Due to (from) Loral companies, net ................ 6,112 17,713
--------- ---------
Net cash provided by operating activities ................. 67,673 28,319
--------- ---------
Net cash provided by discontinued operations .............. -- 1,809
--------- ---------
Investing Activities:
Property and equipment, net .......................... (14,628) (283)
--------- ---------
Net cash used in investing activities ..................... (14,628) (283)
--------- ---------
Financing Activities:
Interest payments on 10% senior notes ................ (45,952) --
Payment of satellite incentive obligation ............ (1,530) (473)
Increase (decrease) in note payable to Loral SpaceCom -- (28,197)
Repayment of notes payable ........................... -- (1,177)
--------- ---------
Net cash used in financing activities ..................... (47,482) (29,847)
--------- ---------
Net increase (decrease) in cash and cash equivalents ...... 5,563 (2)
Cash and cash equivalents at beginning of period .......... 19,399 2
--------- ---------
Cash and cash equivalents at end of period ................ $ 24,962 $ --
========= =========
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 ("LSC"), 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 and nine months ended
September 30, 2002, 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 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):
SEPTEMBER 30, DECEMBER 31,
2002 2001
--------------- -------------
10.00% senior notes due 2006:
Principal amount ............................................ $ 612,704 $ 612,704
Accrued interest (deferred gain on debt exchanges) .......... 245,082 291,034
11.25% senior notes due 2007 (principal amount $37 million) ....... 39,922 40,385
12.50% senior discount notes due 2007 (principal amount at
maturity $49 million and accreted principal amount $49 million) 54,228 54,696
Satellite incentive obligations ................................... 8,655 10,185
---------- ----------
Total debt ................................................... 960,591 1,009,004
Less, current portion ............................................. 63,226 49,449
---------- ----------
Long-term debt ............................................... $ 897,365 $ 959,555
========== ==========
4. NOTE PAYABLE TO LORAL SPACECOM CORPORATION
In connection with the completion of the Company's debt exchange offers in
December 2001, LSC 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.
As of September 30, 2002, the balance of the note was $31.5 million, including
accrued interest.
5
5. RELATED PARTY TRANSACTIONS
Due (to) from Loral companies consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2002 2001
------ ----
Loral Space and Communications Corp. $ 5,522 $ 6,728
Loral Cyberstar, Inc. .............. 7,453 374
Loral Space and Communications Ltd. 1,300 (1,031)
CyberStar L.P. ..................... 79 79
Loral Skynet ....................... (1,033) (1,336)
Space Systems/Loral ("SS/L")........ (14,628) (9)
-------- --------
$ (1,307) $ 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 $31.7 million and $97.5
million for the three and nine months ended September 30, 2001, respectively.
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 $18.9 million and $64.5 million for the three and nine
months ended September 30, 2001, respectively. Cumulative translation income
(losses) attributable to discontinued operations was $0.7 million and $(0.2)
million for the three and nine months ended September 30, 2001, respectively.
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-up component. If that back-up component fails,
Telstar 11 would lose nine of the 34 transponders on the satellite. In such
event, the Company would be entitled to insurance proceeds of approximately $53
million and believes that it would be able to satisfy most of the lost capacity
on another Company owned satellite. Such an event may have an adverse effect on
the financial position and results of operations of 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.
At September 30, 2002, Loral Orion was in compliance with all of the
covenants and conditions under its various lending and funding arrangements
(except for failure to be in compliance with a covenant relating to insurance
under Loral Orion's 10% senior note indenture which has been cured and is
discussed below) and believes that it will continue to meet these covenants and
conditions. Upon acquisition of the Telstar 10/Apstar IIR satellite by Loral
Orion, Loral Orion retained the satellite's existing insurance policy which
provided that a loss of 65% or more of capacity constituted a total loss. Loral
Orion's 10% senior note indenture requires that its in-orbit insurance provide
that a loss of 50% or more of a satellite's capacity constitute a total loss of
that satellite. Loral Orion,
6
upon becoming aware that the existing insurance policy did not meet the
indenture's requirements, took steps to cure the matter and has obtained
insurance meeting the indenture's requirement that a loss of 50% or more
capacity constitute a total loss.
In addition, Telstar 10/Apstar IIR, manufactured by SS/L and owned by Loral
Orion, has the same solar array configuration as two other 1300-class satellites
manufactured by SS/L that have experienced solar array failures. SS/L believes
that these failures are isolated events and do not reflect a systemic problem
in either the satellite design or manufacturing process. Accordingly, Loral
Orion does not believe that this anomaly will affect Telstar 10/Apstar IIR. The
insurance coverage for Telstar 10/Apstar IIR, however, provides for coverage of
losses due to solar array failures only in the event of a capacity loss of 75%
or more. Some of Loral Orion's bondholders have questioned whether this
limitation is in compliance with the Loral Orion indenture insurance covenant.
Management believes that Loral Orion is in compliance with the covenant as
properly interpreted. If, however, Loral Orion's bondholders were to give notice
of a default under the indenture because of such limitations, and a court ruled
against Loral Orion on this matter, the maturity of Loral Orion's 10% senior
notes could be accelerated, and the bondholders could be able to call on the
Loral guarantee of Loral Orion's senior notes.
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.
One of the Company's other satellites has the same solar array configuration as
Telstar 10/Apstar IIR. There can be no assurance that the insurers will not
require either exclusions of, or similar limitations on, coverage due to solar
array failures in connection with the renewal of insurance for the satellite in
2004. An uninsured loss of a satellite would have a material adverse effect on
the Company's consolidated financial position and its results of operations.
On September 20, 2002, Loral Orion entered into an agreement with APT
Satellite Company Limited ("APT") pursuant to which Loral Orion will purchase a
50% interest in the APSTAR-V satellite, a satellite under construction by SS/L
for APT. Loral Orion's aggregate purchase price for its 50% interest in the
satellite is $115.1 million, representing 50% of the current estimated project
cost of constructing, launching and insuring the APSTAR-V satellite, which
purchase price will be adjusted if the actual project cost should be greater or
lesser than $230.2 million. In addition, Loral Orion has agreed to bear the cost
of modifying the footprint of one of the Ku-band beams on the satellite.
Pursuant to Loral Orion's agreement with APT, Loral Orion will pay one-half the
purchase price prior to launch for 13.5 transponders on the satellite. The
corresponding cumulative costs relating to these transponders have been
reflected as satellites under construction on Loral Orion's condensed
consolidated balance sheet as of September 30, 2002. Subject to certain
acceleration rights on the part of Loral Orion, the remainder of the purchase
price for the second 13.5 transponders will be paid by Loral Orion as follows:
on the second anniversary of the satellite's in-service date, $10.66 million for
2.5 additional transponders; on the third anniversary of the satellite's
in-service date, $12.79 million for three additional transponders; and on each
of the fourth and fifth anniversaries of the satellite's in-service date, $17.05
million for four additional transponders. Title to these transponders will pass
to Loral Orion upon its payment thereon. Loral Orion is in discussions to either
lease or sell to LSC certain transponder capacity on the satellite.
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.
7
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 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.
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 the Company. Since there were no quoted market prices in active markets for
the Company, 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. Based on the fair values concluded on by those
professionals, management 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 and nine months ended September 30, 2001 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- -----------------------------
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
-------- ------------- ---------- ------------
Reported loss from continuing operations $(26,865) $(26,865) $(78,584) $(78,584)
Add back amortization of goodwill -- 3,878 -- 11,632
-------- -------- -------- --------
Loss from continuing operations (26,865) (22,987) (78,584) (66,952)
Loss from operations of discontinued
operations, net of taxes (3,920) (3,920) (13,765) (13,765)
-------- -------- -------- --------
Net loss $(30,785) $(26,907) $(92,349) $(80,717)
======== ======== ======== ========
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 September
30, 2002 and December 31, 2001 (in millions):
SEPTEMBER 30, 2002 DECEMBER 31, 2001
---------------------------- -------------------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------- --------------- --------- ----------------
Customer relations $ 7.0 $(4.3) $ 7.0 $(3.6)
Trademarks ....... 6.0 (3.7) 6.0 (3.0)
Regulatory ....... 2.5 (1.4) 2.5 (1.2)
----- ----- ----- -----
Total ....... $15.5 $(9.4) $15.5 $(7.8)
===== ===== ===== =====
8
As of September 30, 2002, the weighted average remaining amortization
period for customer relations and trademarks was three years and for regulatory
fees was eight years.
Total amortization expense for other acquired intangible assets for both
the three months ended September 30, 2002 and 2001 was $0.5 million, and for the
nine months ended September 30, 2002 and 2001 was $1.6 million and $1.8 million,
respectively. Annual amortization expense for other acquired intangible assets
for the five years ending December 31, 2006 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 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 on January 1, 2002.
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.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). SFAS 146
replaces EITF Issue No. 94-3. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.
11. FINANCIAL INFORMATION FOR PARENT, ISSUER'S PARENT, GUARANTOR AND OTHER
SUBSIDIARIES
In December 2001, Loral Orion (the "Parent Company") issued new 10% 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 and nine months ended September 30, 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
9
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.
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2002
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------ ---------- ------------ ------------ ------------
Current assets:
Cash and cash equivalents ....... $ 24,962 $ 1,223 $ -- $ -- $ (1,223) $ 24,962
Accounts receivable, net ........ 10,238 -- 635 -- -- 10,873
Prepaid expenses and other
current assets ................ 5,120 1,481 1,463 -- (1,481) 6,583
----------- ----------- ----------- ----------- ----------- -----------
Total current assets ........ 40,320 2,704 2,098 -- (2,704) 42,418
Property, plant and equipment, net . 329,634 -- 209,954 -- -- 539,588
Notes (payable) receivable from
unconsolidated subsidiaries ..... (31,540) 170,500 -- -- (170,500) (31,540)
Due (to) from Loral companies, net . (1,588) -- 281 -- -- (1,307)
Due (to) from unconsolidated
subsidiaries .................... (99,550) 32,121 104,764 -- (37,335) --
Investments in unconsolidated
subsidiaries .................... 309,959 537,632 (271,698) -- (575,893) --
Investments in and advances to
affiliates ...................... -- 31,092 -- -- (31,092) --
Deferred tax assets ................ 32,130 -- -- -- -- 32,130
Other assets, net .................. 18,056 4,868 710 -- (4,868) 18,766
----------- ----------- ----------- ----------- ----------- -----------
Total assets ................ $ 597,421 $ 778,917 $ 46,109 $ -- $ (822,392) $ 600,055
=========== =========== =========== =========== =========== ===========
Current liabilities:
Current portion of
long-term debt ................ $ 63,226 $ -- $ -- $ -- $ -- $ 63,226
Accounts payable ................ 314 -- 963 -- -- 1,277
Customer advances ............... 421 -- 598 -- -- 1,019
Accrued interest and
preferred dividends ........... 2,136 12,333 -- -- (12,333) 2,136
Deferred revenue ................ 2,232 -- 51 -- -- 2,283
Other current liabilities ....... -- 1,528 -- -- (1,528) --
Income taxes payable ............ -- 7,939 -- -- (7,939) --
Deferred tax liabilities ........ -- 25,472 -- -- (25,472) --
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities ... 68,329 47,272 1,612 -- (47,272) 69,941
Deferred tax liabilities ........... -- 19,114 8,602 -- (27,716) --
Long-term liabilities .............. 8,346 -- 1,022 -- -- 9,368
Long-term debt ..................... 897,365 350,000 -- -- (350,000) 897,365
6% Series C convertible
redeemable preferred stock .... -- 329,382 -- -- (329,382) --
6% Series D convertible
redeemable preferred stock .... -- 138,191 -- -- (138,191) --
Shareholders' equity (deficit):
6% Series C convertible
redeemable preferred stock .... -- 69,386 -- -- (69,386) --
6% Series D convertible
redeemable preferred stock .... -- 26,392 -- -- (26,392) --
Common stock .................... -- 3,767 -- -- (3,767) --
Paid-in capital ................. 604,166 3,037,996 -- -- (3,037,996) 604,166
Treasury stock, at cost ......... -- (3,360) -- -- 3,360 --
Unearned compensation ........... -- (4) -- -- 4 --
Retained (deficit) earnings ..... (980,785) (3,247,819) 34,873 -- 3,212,946 (980,785)
Accumulated other
comprehensive income .......... -- 8,600 -- -- (8,600) --
----------- ----------- ----------- ----------- ----------- -----------
Total stockholder's (deficit)
equity ..................... (376,619) (105,042) 34,873 -- 70,169 (376,619)
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholder's equity
(deficit) .................. $ 597,421 $ 778,917 $ 46,109 $ -- $ (822,392) $ 600,055
=========== =========== =========== =========== =========== ===========
10
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------ ---------- ------------ ------------ ------------
Revenues from satellite services .... $ 23,383 $ -- $ 12,052 $ -- $ (9,659) $ 25,776
Costs of satellite services ......... 25,208 -- 7,090 -- (9,659) 22,639
Selling, general and
administrative expenses .......... 2,743 1,203 61 -- (1,203) 2,804
Management fee expense .............. -- (4) -- -- 4 --
-------- -------- -------- -------- -------- --------
Operating income (loss) ............. (4,568) (1,199) 4,901 -- 1,199 333
Interest and investment income ...... 208 5,341 -- -- (5,341) 208
Interest expense .................... (3,062) (9,831) -- -- 9,831 (3,062)
-------- -------- -------- -------- -------- --------
(Loss) income before income taxes and
equity in net loss of
unconsolidated subsidiaries and
affiliates ....................... (7,422) (5,689) 4,901 -- 5,689 (2,521)
Income tax benefit (provision) ...... 1,600 (1,581) (1,714) -- 4,969 3,274
-------- -------- -------- -------- -------- --------
(Loss) income before equity in
net loss of unconsolidated
subsidiaries and affiliates ...... (5,822) (7,270) 3,187 -- 10,658 753
Equity in net income (loss) of
unconsolidated subsidiaries, net
of taxes ......................... 6,575 (16,281) -- -- 9,706 --
Equity in net loss of affiliates,
net of taxes ..................... -- (20,157) -- -- 20,157 --
-------- -------- -------- -------- -------- --------
Net (loss) income ................... $ 753 $(43,708) $ 3,187 $ -- $ 40,521 $ 753
======== ======== ======== ======== ======== ========
11
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------ ---------- ------------ ------------ ------------
Revenues from satellite services ... $ 75,190 $ -- $ 36,225 $ -- $ (28,439) $ 82,976
Costs of satellite services ........ 75,087 -- 21,286 -- (28,439) 67,934
Selling, general and
administrative expenses ......... 8,372 3,660 775 -- (3,660) 9,147
Management fee expense ............. -- 23 -- -- (23) --
--------- --------- --------- --------- --------- ---------
Operating income (loss) ............ (8,269) (3,683) 14,164 -- 3,683 5,895
Interest and investment income ..... 509 15,958 -- -- (15,958) 509
Interest expense ................... (9,812) (29,483) -- -- 29,483 (9,812)
--------- --------- --------- --------- --------- ---------
(Loss) income before income taxes,
equity in net loss of
unconsolidated subsidiaries and
affiliates and cumulative effect
of change in accounting principle (17,572) (17,208) 14,164 -- 17,208 (3,408)
Income tax benefit (provision) ..... 6,197 (4,735) (4,942) -- 8,123 4,643
--------- --------- --------- --------- --------- ---------
(Loss) income before equity in
net loss of unconsolidated
subsidiaries and affiliates and
cumulative effect of change in
accounting principle ............ (11,375) (21,943) 9,222 -- 25,331 1,235
Equity in net income (loss) of
unconsolidated subsidiaries, net
of taxes ........................ 12,610 (878,750) -- -- 866,140 --
Equity in net loss of affiliates,
net of taxes .................... -- (56,036) -- -- 56,036 --
--------- --------- --------- --------- --------- ---------
(Loss) income before cumulative
effect of change in accounting
principle ....................... 1,235 (956,729) 9,222 -- 947,507 1,235
Cumulative effect of change in
accounting principle ............ (562,201) -- -- -- -- (562,201)
--------- --------- --------- --------- --------- ---------
Net (loss) income .................. $(560,966) $(956,729) $ 9,222 $ -- $ 947,507 $(560,966)
========= ========= ========= ========= ========= =========
12
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------ ---------- ------------ ------------ ------------
Operating activities:
(Loss) income from
continuing operations .................... $(560,966) $(956,729) $ 9,222 $ -- $ 947,507 $(560,966)
Non-cash items:
Cumulative effect of change
in accounting principle ................ 562,201 -- -- -- -- 562,201
Equity in net losses of
affiliates, net of taxes ............... -- 56,036 -- -- (56,036) --
Equity in net losses of
unconsolidated subsidiaries, net of taxes (9,222) 878,750 -- -- (869,528) --
Deferred taxes ........................... -- 4,735 3,388 -- (8,123) --
Depreciation and amortization ............ 40,709 -- 15,760 -- 56,469
Interest expense.......................... 909 -- -- -- -- 909
Changes in operating assets and liabilities:
Accounts receivable, net ................. 2,833 -- (138) -- -- 2,695
Prepaid expenses and other
current assets ......................... 209 -- 2,893 -- -- 3,102
Due to (from) Loral companies,
net .................................... 6,393 -- (281) -- -- 6,112
Due to (from) unconsolidated
subsidiaries ........................... 27,603 (12,899) (30,991) -- 16,287 --
Other assets ............................. 2,780 (446) 122 -- 446 2,902
Accounts payable ......................... (2,363) 171 250 -- (171) (2,113)
Accrued expenses and other
current liabilities .................... 247 (10,210) -- -- 10,210 247
Customer advances ........................ (1,280) -- (41) -- -- (1,321)
Income taxes payable ..................... -- -- -- -- -- --
Deferred revenue ......................... (2,380) -- (184) -- -- (2,564)
Other .................................... -- 97 -- -- (97) --
--------- --------- --------- ------ --------- ---------
Net cash provided by (used in)
operating activities ....................... 67,673 (40,495) -- -- 40,495 67,673
Investing activities:
Property and equipment, net ................ (14,628) -- -- -- -- (14,628)
Investments in and advances
to affiliates ............................ -- (12,092) -- -- 12,092 --
Investments in and advances to
unconsolidated subsidiaries .............. -- (2,240) -- -- 2,240 --
--------- --------- --------- ------ --------- ---------
Net cash used in investing activities ......... (14,628) (14,332) -- -- 14,332 (14,628)
--------- --------- --------- ------ --------- ---------
Financing activities:
Repayments of long-term
obligations .............................. (1,530) -- -- -- -- (1,530)
Interest payments on 10% senior notes ...... (45,952) -- -- -- -- (45,952)
Note payable to Loral Satellite ............ -- 29,500 (29,500)
Preferred dividends ........................ -- (29,485) -- -- 29,485 --
Proceeds from stock issuances .............. -- 9,967 -- -- (9,967) --
--------- --------- --------- ------ --------- ---------
Net cash used in financing activities ......... (47,482) 9,982 -- -- (9,982) (47,482)
--------- --------- --------- ------ --------- ---------
Increase (decrease) in cash
and cash equivalents ....................... 5,563 (44,845) -- -- 44,485 5,563
Cash and cash equivalents --
beginning of period ........................ 19,399 46,068 -- -- (46,068) 19,399
--------- --------- --------- ------ --------- ---------
Cash and cash equivalents --
end of period .............................. $ 24,962 $ 1,223 $ -- $ -- $ (1,223) $ 24,962
========= ========= ========= ====== ========= =========
13
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 4,805 -- -- -- -- 4,805
Due to (from) unconsolidated
subsidiaries .................. (67,766) 12,915 72,978 -- (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
----------- ----------- ----------- ----------- ----------- -----------
Total assets................... $ 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
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholder's equity
(deficit) .................. $ 1,212,574 $ 1,775,555 $ 33,474 $ -- $(1,806,418) $ 1,215,185
=========== =========== =========== =========== =========== ===========
14
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------ ---------- ------------ ------------ ------------
Revenues from satellite services .. $ 24,984 $ -- $ 15,341 $ -- $(12,563) $ 27,762
Costs of satellite services ....... 31,670 -- 6,386 -- (12.563) 25,493
Selling, general and
administrative expenses ........ 2,885 220 (38) -- (220) 2,847
Management fee expense ............ -- 12,147 -- -- (12,147) --
-------- -------- -------- -------- -------- --------
Operating (loss) income ........... (9,571) (12,367) 8,993 -- 12,367 (578)
Interest and investment income .... 198 5,544 1 -- (5,544) 199
Interest expense .................. (25,020) (9,418) (19) -- 9,418 (25,039)
-------- -------- -------- -------- -------- --------
(Loss) income before income taxes,
equity in net loss of
unconsolidated subsidiaries
and affiliates and
discontinued operations ........ (34,393) (16,241) 8,975 -- 16,241 (25,418)
Income tax benefit (provision) .... 1,695 (1,548) (3,142) -- 1,548 (1,447)
-------- -------- -------- -------- -------- --------
(Loss) income before equity in
net loss of unconsolidated
subsidiaries and affiliates and
discontinued operations ........ (32,698) (17,789) 5,833 -- 17,789 (26,865)
Equity in net income (loss) of
unconsolidated subsidiaries, net
of taxes ....................... 4,438 (21,853) -- -- 17,415 --
Equity in net loss of affiliates,
net of taxes ................... -- (12,646) -- -- 12,646 --
-------- -------- -------- -------- -------- --------
(Loss) income from continuing
operations ..................... (28,260) (52,288) 5,833 -- 47,850 (26,865)
Loss from operations of
discontinued operations, net
of taxes ....................... (2,525) -- -- (1,395) -- (3,920)
-------- -------- -------- -------- -------- --------
Net (loss) income ................. $(30,785) $(52,288) $ 5,833 $ (1,395) $ 47,850 $(30,785)
======== ======== ======== ======== ======== ========
15
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATE
------- ------ ---------- ------------ ------------ -----------
Revenues from satellite services .. $ 70,829 $ -- $ 39,502 $ -- $ (28,647) $ 81,684
Costs of satellite services ....... 85,852 -- 19,233 -- (28,647) 76,438
Selling, general and
administrative expenses ........ 8,547 818 -- -- (818) 8,547
Management fee expense ............ -- 35,752 -- -- (35,752) --
--------- --------- --------- --------- --------- ---------
Operating (loss) income ........... (23,570) (36,570) 20,269 -- 36,570 (3,301)
Interest and investment income .... 392 17,757 8 -- (17,757) 400
Interest expense .................. (75,087) (27,797) (27) -- 27,797 (75,114)
--------- --------- --------- --------- --------- ---------
(Loss) income before income taxes,
equity in net loss of
unconsolidated subsidiaries
and affiliates and
discontinued operations ........ (98,265) (46,610) 20,250 -- 46,610 (78,015)
Income tax benefit (provision) .... 6,519 (4,737) (7,088) -- 4,737 (569)
--------- --------- --------- --------- --------- ---------
(Loss) income before equity in
net loss of unconsolidated
subsidiaries and affiliates and
discontinued operations ........ (91,746) (51,347) 13,162 -- 51,347 (78,584)
Equity in net income (loss) of
unconsolidated subsidiaries, net
of taxes ....................... 8,262 (57,618) -- -- 49,356 --
Equity in net loss of affiliates,
net of taxes ................... -- (57,028) -- -- 57,028 --
--------- --------- --------- --------- --------- ---------
(Loss) income from continuing
operations ..................... (83,484) (165,993) 13,162 -- 157,731 (78,584)
Loss from operations of
discontinued operations, net
of taxes ....................... (8,865) -- -- (4,900) -- (13,765)
--------- --------- --------- --------- --------- ---------
Net (loss) income ................. $ (92,349) $(165,993) $ 13,162 $ (4,900) $ 157,731 $ (92,349)
========= ========= ========= ========= ========= =========
16
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------ ---------- ------------ ------------ ------------
Operating activities:
(Loss) income from continuing
operations ............................... $ (83,484) $(165,993) $ 13,162 $ -- $ 157,731 $ (78,584)
Non-cash items:
Equity in net losses of
affiliates, net of taxes ............... -- 57,028 -- -- (57,028) --
Equity in net losses of
unconsolidated subsidiaries,
net of taxes ........................... (8,262) 57,618 -- -- (49,356) --
Deferred taxes ........................... 4,016 4,369 2,800 -- (7,169) 4,016
Depreciation and amortization ............ 51,261 -- 15,760 -- -- 67,021
Interest expense ......................... 30,259 -- -- -- -- 30,259
Changes in operating assets and liabilities:
Accounts receivable, net ............... (2,931) -- 762 -- -- (2,169)
Prepaid expenses and other
current assets ....................... (1,328) -- 2,097 -- -- 769
Due to (from) Loral companies,
net .................................. (5,114) -- (417) -- 23,244 17,713
Due to (from) unconsolidated
subsidiaries ......................... 52,825 4,051 (32,381) (24,495) --
Other assets ........................... -- 1,503 -- -- (1,503) --
Accounts payable and interest
payable .............................. 2,343 (6) (1,716) -- 6 627
Accrued expenses and other
current liabilities .................. (11,776) (10,850) -- -- 10,850 (11,776)
Customer advances ...................... (807) -- (67) -- -- (874)
Income taxes payable ................... -- 366 -- -- (366) --
Deferred revenue ....................... 1,317 -- -- -- -- 1,317
Other .................................. -- (17) -- -- 17 --
--------- --------- --------- --------- --------- ---------
Net cash (used in) provided by
operating activities ....................... 28,319 (51,931) -- -- 51,931 28,319
--------- --------- --------- --------- --------- ---------
Net cash used in discontinued
operations ................................. 1,809 -- -- -- -- 1,809
--------- --------- --------- --------- --------- ---------
Investing activities:
Property and equipment, net ................ (283) -- -- -- (283)
Investments in and advances to
affiliates .............................. -- (19,629) -- -- 19,629 --
Investments in and advances to
unconsolidated subsidiaries ............. -- 7,602 -- -- (7,602) --
--------- --------- --------- --------- --------- ---------
Net cash used in investing activities ......... (283) (12,027) -- -- 12,027 (283)
--------- --------- --------- --------- --------- ---------
Financing activities:
Repayments of long-term
obligations .............................. (1,650) -- -- -- -- (1,650)
Increase in note payable to Loral
SpaceCom ................................. (28,197) -- -- -- -- (28,197)
Preferred dividends ........................ -- (40,255) -- -- 40,255 --
Proceeds from stock issuances .............. -- 13,537 -- -- (13,537) --
--------- --------- --------- --------- --------- ---------
Net cash used in financing
activities ................................. (29,847) (26,718) -- -- 26,718 (29,847)
--------- --------- --------- --------- --------- ---------
Increase (decrease) in cash
and cash equivalents ....................... (2) (90,676) -- -- 90,676 (2)
Cash and cash equivalents--
beginning of period ........................ 2 151,405 -- -- (151,405) 2
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents --
end of period .............................. $ -- $ 60,729 $ -- $ -- $ (60,729) $ --
========= ========= ========= ========= ========= =========
17
12. OTHER MATTERS
Under the New York Stock Exchange criteria for continued listing, the
Exchange will normally give consideration to de-listing a company's stock when
the average closing price of the stock is less than $1.00 over a consecutive
30-trading day period. The average closing price of Loral's common stock has
been less than $1.00 for 30 consecutive trading days, and on August 22, 2002
Loral received notice from the New York Stock Exchange that its stock price is
below the Exchange's price criteria. If Loral is unable to cure this deficiency,
Loral's common stock could be de-listed from the Exchange. De-listing of Loral's
common stock by the New York Stock Exchange could result in a material adverse
effect on the liquidity of Loral's common shares, have an adverse effect on the
trading value and impair Loral's ability to raise funds in the capital markets.
As such, this may impact the ability of Loral to support the Company's
operations. The Exchange has informed Loral that the price is the only criteria
for listing that Loral does not currently meet. Loral has notified the Exchange
of its intent to cure this deficiency. In accordance with the Exchange rules,
Loral has six months from receipt of the notice from the New York Stock Exchange
to cure this deficiency. In the event the actions Loral takes to cure this
deficiency require shareholder approval, the six-month cure period will be
extended until after Loral's next annual shareholders' meeting. Loral believes
(although there can be no assurance) that it will be able to cure this
deficiency within this time frame.
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.
18
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 ("EBITDA") as a measure of
a segment's profit or loss. The following discusses the results of Loral Orion,
Inc. for the three and nine months ended September 30, 2002 and September 30,
2001, respectively.
OPERATING REVENUES FROM CONTINUING OPERATIONS (IN MILLIONS):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ---------
Fixed Satellite Services $25.8 $31.6 $83.0 $97.4
Eliminations (1) ....... -- (3.8) -- (15.7)
----- ----- ----- -----
Operating Revenues ..... $25.8 $27.8 $83.0 $81.7
===== ===== ===== =====
EBITDA (2) (IN MILLIONS):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ---------
Fixed Satellite Services $19.2 $25.5 $62.4 $79.4
Eliminations (1) ....... -- (3.8) -- (15.7)
----- ----- ----- -----
EBITDA ................. $19.2 $21.7 $62.4 $63.7
===== ===== ===== =====
(1) 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 SEPTEMBER 30, 2002 COMPARED WITH 2001
Revenues from continuing operations were $25.8 million and $27.8 million
in 2002 and 2001, respectively. Revenues decreased due to reduced prices and
volume resulting from the global economic downturn in 2002, which has caused a
delay in demand for new telecommunications applications and services. This was
offset by revenues from the Company's former data services business 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 was $22.6 million and
$25.5 million in 2002 and 2001, respectively. This decrease was primarily due to
reduced goodwill amortization resulting from the Company's adoption of SFAS No.
142 (see Accounting Pronouncements), offset by increased insurance costs as a
result of the Company's renewing the insurance on one of it's satellites after
September 11, 2001.
Selling, general and administrative expenses for continuing operations were
$2.8 million in both 2002 and 2001. An increase in corporate management expenses
allocated by Loral in 2002 (see Operational Matters), was offset by a decrease
in marketing, general and administrative expenses.
Interest expense was $3.1 million and $25.0 million in 2002 and 2001,
respectively. The decrease was primarily due to the Company not recognizing any
interest expense on it's new 10% senior notes since interest expense on the new
notes is fully offset by amortization of the deferred gain on the exchange
offers and lower interest expense on the Company's senior notes and senior
19
discount notes that were exchanged for new senior notes in connection with the
Company's exchange offers completed in December 2001 (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 current period tax losses to the extent such
losses are utilized by the consolidated group in the current period; 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 $3.3 million as a current income
tax benefit. For 2001, the Company recorded a deferred income tax provision of
$1.4 million and no benefit under the tax sharing agreement.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH 2001
Revenues from continuing operations were $83.0 million and $81.7 million in
2002 and 2001, respectively. Revenues in 2002 increased as a result of sales to
the Company's former data services business, which are 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). This was
offset by a decrease in volume and prices, resulting from the global economic
downturn in 2002, which has caused a delay in demand for new telecommunications
applications and services.
Cost of satellite services for continuing operations was $67.9 million and
$76.4 million in 2002 and 2001, respectively. This decrease was primarily due to
reduced goodwill amortization resulting from the Company's adoption of SFAS No.
142 (See Accounting Pronouncements), offset by increased insurance costs as a
result of the Company's renewing the insurance on one of it's satellites after
September 11, 2001.
Selling, general and administrative expenses for continuing operations were
$9.1 million and $8.5 million in 2002 and 2001, respectively. The increase was
primarily due to corporate management expenses allocated by Loral in 2002 (see
Operational Matters), offset by lower bad debt expense.
Interest expense was $10.1 million and $75.1 million in 2002 and 2001,
respectively. The decrease was primarily due to the Company not recognizing any
interest expense on it's new 10% senior notes since interest expense on the new
notes is fully offset by amortization of the deferred gain on the exchange
offers and lower interest expense on the Company's senior notes and senior
discount notes that were exchanged for new senior notes in connection with the
Company's exchange offers completed in December 2001 (See Exchange Offers).
For 2002, the Company recorded an income tax benefit of $4.6 million as its
reimbursement for the use of its tax losses under the tax sharing agreement. For
2001, the Company recorded a net tax provision of $0.6 million consisting of a
use of its tax losses under the tax sharing agreement of $3.4 million, offset by
a deferred tax provision of $4.0 million.
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 $25.8 million and $83.0 million for the
three and nine months, respectively, as compared to $31.6 million and $97.4
million in 2001. EBITDA on the same basis was $19.2 million and $62.4 million in
2002, as compared to $25.5 million and $79.4 million in 2001. These decreases
are primarily due to lower revenues for capacity in 2002 from the Company's
former data services business and lower external revenues resulting from the
global economic downturn. At September 30, 2002, the Company had external
contracted backlog of approximately $448 million (which includes $46 million to
Loral companies), as compared to $576 million at December 31, 2001 (which
included $59 million to Loral companies).
OPERATIONAL MATTERS
20
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-up component. If that back-up component fails,
Telstar 11 would lose nine of the 34 transponders on the satellite. In such
event, the Company would be entitled to insurance proceeds of approximately $53
million and believes that it would be able to satisfy most of the lost capacity
on another Company owned satellite. Such an event may have an adverse effect on
the financial position and results of operations of the Company.
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.
At September 30, 2002, Loral Orion was in compliance with all of the
covenants and conditions under its various lending and funding arrangements
(except for failure to be in compliance with a covenant relating to insurance
under Loral Orion's 10% senior note indenture which has been cured and is
discussed below) and believes that it will continue to meet these covenants and
conditions. Upon acquisition of the Telstar 10/Apstar IIR satellite by Loral
Orion, Loral Orion retained the satellite's existing insurance policy which
provided that a loss of 65% or more of capacity constituted a total loss. Loral
Orion's 10% senior note indenture requires that its in-orbit insurance provide
that a loss of 50% or more of a satellite's capacity constitute a total loss of
that satellite. Loral Orion, upon becoming aware that the existing insurance
policy did not meet the indenture's requirements, took steps to cure the matter
and has obtained insurance meeting the indenture's requirement that a loss of
50% or more capacity constitute a total loss.
In addition, Telstar 10/Apstar IIR, manufactured by SS/L and owned by Loral
Orion, has the same solar array configuration as two other 1300-class satellites
manufactured by SS/L that have experienced solar array failures. SS/L believes
that these failures are isolated events and do not reflect a systemic problem in
either the satellite design or manufacturing process. Accordingly, Loral Orion
does not believe that these anomalies will affect Telstar 10/Apstar IIR. The
insurance coverage for Telstar 10/Apstar IIR, however, provides for coverage of
losses due to solar array failures only in the event of a capacity loss of 75%
or more. Some of Loral Orion's bondholders have questioned whether this
limitation is in compliance with the Loral Orion indenture insurance covenant.
Management believes that Loral Orion is in compliance with the covenant as
properly interpreted. If, however, Loral Orion's bondholders were to give notice
of a default under the indenture because of such limitations, and a court ruled
against Loral Orion on this matter, the maturity of Loral Orion's 10% senior
notes could be accelerated, and the bondholders could be able to call on the
Loral guarantee of Loral Orion's senior notes.
On September 20, 2002, Loral Orion entered into an agreement with APT
Satellite Company Limited ("APT") pursuant to which Loral Orion will purchase a
50% interest in the APSTAR-V satellite, a satellite under construction by SS/L
for APT. Loral Orion's aggregate purchase price for its 50% interest in the
satellite is $115.1 million, representing 50% of the current estimated project
cost of constructing, launching and insuring the APSTAR-V satellite, which
purchase price will be adjusted if the actual project cost should be greater or
lesser than $230.2 million. In addition, Loral Orion has agreed to bear the cost
of modifying the footprint of one of the Ku-band beams on the satellite.
APSTAR-V will have a total of 54 transponders, comprised of 24 standard C-band
transponders, 14 extended C-band transponders and 16 Ku-band transponders. Under
this transaction, Loral Orion has agreed to purchase 12 standard C-band, 7
extended C-band and 8 Ku-band transponders on APSTAR-V, which capacity will be
designated Telstar 18. Loral Orion will also have the option to enter into
similar arrangements with APT on replacement satellites upon the end of life of
APSTAR-V. To be located at 138 degrees East Longitude, APSTAR-V is currently
scheduled to be launched in the third quarter of 2003 and will be capable of
providing Ku-band voice, video and data services to China, India and East Asia,
and broadbeam C-band services throughout the Asia-Pacific region, including
Australia and Hawaii. To ensure a timely launch of APSTAR-V, Loral Orion, APT
and SS/L have agreed that a non-Chinese launch provider will be used.
Pursuant to Loral Orion's agreement with APT, Loral Orion will pay one-half
the purchase price prior to launch for 13.5 transponders on the satellite. The
corresponding cumulative costs relating to these transponders have been
reflected as satellites under construction on Loral Orion's condensed
consolidated balance sheet as of September 30, 2002. Subject to certain
acceleration rights on the part of Loral Orion, the remainder of the purchase
price for the second 13.5 transponders will be paid by Loral Orion as follows:
on the second anniversary of the satellite's in-service date, $10.66 million for
2.5 additional transponders; on the third anniversary of the
21
satellite's in-service date, $12.79 million for three additional transponders;
and on each of the fourth and fifth anniversaries of the satellite's in-service
date, $17.05 million for four additional transponders. Title to these
transponders will pass to Loral Orion upon its payments thereon. Loral Orion is
in discussions to either lease or sell to LSC certain transponder capacity on
the satellite.
The Company, like others in the satellite industry, is faced with
significantly higher premiums on launch and in-orbit insurance, increasing
thresholds in determining total losses for satellites in orbit 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 has increased the cost of doing business. The Company intends
to pass on some of the 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.
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.
One of the Company's other satellites has the same solar array configuration as
Telstar 10/Apstar IIR. There can be no assurance that the insurers will not
require either exclusions of, or similar limitations on, coverage due to solar
array failures in connection with the renewal of insurance for the satellite in
2004. An uninsured loss of a satellite would have a material adverse effect on
the Company's consolidated financial position and its results of operations.
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 nine months of 2002 was $2.6 million. The amount
to be allocated to Loral Orion is estimated to be between three and four million
dollars for the year ended 2002.
With the purchase of capacity on the Apstar-V satellite, the Company
expects that it will have the necessary capacity and financial means to continue
its operations and to service its obligations without replacing Telstar 11.
This will provide management additional time to evaluate market conditions and
decide if and when to replace Telstar 11. If management decides to replace
Telstar 11, then to the extent that excess cash flow from the Company's
operations is not sufficient to meet the above requirements, the Company will
need to secure funding from Loral or raise additional financing. Sources of
additional capital may include public or private debt, vendor financing, equity
financing or strategic investments. There can be no assurance that the Company
would be successful in raising any additional financing. To the extent that the
Company seeks to raise additional debt financing, the indenture relating to its
10% senior notes limits the amount of such additional debt to $100 million for
the replacement of Telstar 11 and prohibits the Company from using any of its
interests in its satellites as collateral for indebtedness.
Under the New York Stock Exchange criteria for continued listing, the
Exchange will normally give consideration to de-listing a company's stock when
the average closing price of the stock is less than $1.00 over a consecutive
30-trading day period. The average closing price of Loral's common stock has
been less than $1.00 for 30 consecutive trading days, and on August 22, 2002
Loral received notice from the New York Stock Exchange that its stock price is
below the Exchange's price criteria. If Loral is unable to cure this deficiency,
Loral's common stock could be de-listed from the Exchange. De-listing of Loral's
common stock by the New York Stock Exchange could result in a material adverse
effect on the liquidity of Loral's common shares, have an adverse effect on the
trading value and impair Loral's ability to raise funds in the capital markets.
As such, this may impact the ability of Loral to support the Company's
operations. The Exchange has informed Loral that the price is the only criteria
for listing that Loral does not currently meet. Loral has notified the Exchange
of its intent to cure this deficiency. In accordance with the Exchange rules,
Loral has six months from receipt of the notice from the New York Stock Exchange
to cure this deficiency. In the event the actions Loral takes to cure this
deficiency require shareholder approval, the six-month cure period will be
extended until after Loral's next annual shareholders' meeting. Loral believes
(although there can be no assurance) that it will be able to cure this
deficiency within this time frame.
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.
EXCHANGE OFFERS
On December 21, 2001, Loral Orion issued $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
22
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 covenants, including,
without limitation, restrictions on Loral Orion's ability to pay dividends or
make loans to Loral. The indenture for the new senior notes and certain of
Loral's debt agreements and indentures provide in certain circumstances for
cross default or cross acceleration.
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.
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 the Company. Since there were no quoted market prices in active markets for
the Company, 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. Based on the fair values concluded on by those
professionals, management 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 and nine months ended September 30, 2001 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
------ ----------- ------ -----------
Reported loss from continuing operations $(26,865) $(26,865) $(78,584) $(78,584)
Add back amortization of goodwill -- 3,878 -- 11,632
-------- -------- -------- --------
Loss from continuing operations (26,865) (22,987) (78,584) (66,952)
Loss from operations of discontinued
operations, net of taxes (3,920) (3,920) (13,765) (13,765)
-------- -------- -------- --------
Net loss $(30,785) $(26,907) $(92,349) $(80,717)
======== ======== ======== ========
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"). SFAS 143 addresses
23
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 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 on January 1, 2002.
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.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities ("SFAS 146"). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity.
Previous accounting guidance was provided by EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). SFAS 146
replaces EITF Issue No. 94-3. SFAS 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.
ITEM 4. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Loral Orion's
chief executive officer and its chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as defined
in the Securities and Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of
a date (the "Evaluation Date") within 90 days before the filing date of this
quarterly report, have concluded that as of the Evaluation Date, the Company's
disclosure controls and procedures were adequate and designed to ensure that
material information relating to the Company and its consolidated subsidiaries
would be made known to them by others within those entities.
(b) Changes in internal controls. There were no significant changes in
the Company's internal or, in other factors that could significantly affect the
Company's disclosure controls and procedures subsequent to the Evaluation Date.
24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K:
DATE OF REPORT DESCRIPTION
-------------- -----------
September 20, 2002 ITEM 5 - Other Events Apstar-V satellite agreement
25
SIGNATURES
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 14, 2002 /s/ RICHARD J. TOWNSEND
-----------------------------------------------------------------
Richard J. Townsend
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Registrant's Authorized Officer)
26
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Loral Orion, Inc,. (the "registrant")
on Form 10-Q for the period ending September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Quarterly Report"),
I, Bernard L. Schwartz, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed this Quarterly Report on Form 10-Q of Loral Orion,
Inc.;
(2) Based on my knowledge, this Quarterly Report does not contain any
untrue statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Quarterly Report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this Quarterly Report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Bernard L. Schwartz
- --------------------------
Bernard L. Schwartz
Chief Executive Officer
November 14, 2002
27
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Loral Orion, Inc. (the "registrant")
on Form 10-Q for the period ending September 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the " Quarterly Report
"), I, Richard J. Townsend, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, that:
(1) I have reviewed this Quarterly Report on Form 10-Q of Loral Orion,
Inc.;
(2) Based on my knowledge, this Quarterly Report does not contain any
untrue statement of material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Quarterly Report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for the periods presented in this Quarterly Report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date"); and
c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I have indicated in
this Quarterly Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses
/s/ Richard J. Townsend
- --------------------------
Richard J. Townsend
Chief Financial Officer
November 14, 2002
28
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Loral Orion, Inc. (the "Company") on
Form 10-Q for the period ending June 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Bernard L. Schwartz,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Bernard L. Schwartz
- ------------------------
Bernard L. Schwartz
Chief Executive Officer
November 14, 2002
29
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Loral Orion, Inc. (the "Company") on
Form 10-Q for the period ending June 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Richard J. Townsend,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350,
as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Richard J. Townsend
- ----------------------------
Richard J. Townsend
Chief Financial Officer
November 14, 2002
30