Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2003
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 whether the registrant is an accelerated filer (as
defined in Rule 12 b-20. Yes [ ] No [X]
The number of shares of common stock, par value $.01 per share of the
registrant outstanding as of March 31, 2003 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)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 18,662 $ 42,964
Accounts receivable, net................................................ 9,448 7,615
Prepaid expenses and other current assets............................... 10,773 13,213
Due from Loral companies................................................ 55,677 57,477
----------- ------------
Total current assets................................................ 94,560 121,269
Satellites and related equipment, net...................................... 507,980 524,699
Other assets, net.......................................................... 16,107 17,318
----------- ------------
Total assets........................................................ $ 618,647 $ 663,286
=========== ============
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
Current liabilities:
Current portion of long-term debt....................................... $ 64,628 $ 64,727
Accounts payable........................................................ 1,187 2,387
Customer advances....................................................... 4,829 3,731
Due to Loral companies.................................................. 45,427 51,623
Accrued interest........................................................ 2,136 4,700
----------- ------------
Total current liabilities........................................... 118,207 127,168
Customer advances.......................................................... 8,633 8,765
Long-term debt............................................................. 863,317 894,829
Note payable to Loral SpaceCom............................................. 33,126 31,540
Commitments and contingencies (Note 5)
Stockholder's (deficit) equity:
Common stock, $.01 par value............................................ -- --
Paid-in capital......................................................... 604,166 604,166
Retained deficit........................................................ (1,008,802) (1,003,182)
----------- ------------
Total stockholder's deficit......................................... (404,636) (399,016)
----------- ------------
Total liabilities and stockholder's deficit......................... $ 618,647 $ 663,286
=========== ============
See notes to condensed consolidated financial statements
2
LORAL ORION, INC. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
---------- ----------
Revenues from satellite services.......................... $ 25,197 $ 29,621
Operating expenses:
Cost of satellite services............................. 23,670 22,766
Selling, general and administrative expenses........... 4,250 3,108
---------- ----------
Operating (loss) income................................... (2,723) 3,747
Interest income........................................... 37 220
Interest expense.......................................... (2,920) (3,258)
---------- ----------
(Loss) income before income taxes and cumulative effect
of change in accounting principle...................... (5,606) 709
Income tax (provision) benefit............................ (14) 2,307
---------- -----------
(Loss) income before cumulative effect of change in
accounting principle................................... (5,620) 3,016
Cumulative effect of change in accounting principle
(Note 6)............................................... -- (562,201)
---------- ----------
Net loss.................................................. $ (5,620) $ (559,185)
========== ==========
See notes to condensed consolidated financial statements
3
LORAL ORION, INC. AND SUBSIDIARIES
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2003 2002
----------- ----------
Operating activities:
Net loss.................................................. $ (5,620) $ (559,185)
Non-cash items:
Depreciation and amortization......................... 18,823 18,823
Interest, net......................................... 1,165 (141)
Provision for bad debts............................... 2,135 626
Cumulative effect of change in accounting principle -- 562,201
Changes in operating assets and liabilities:
Accounts receivable................................... (3,968) 691
Prepaid expenses and other current assets............. 1,935 1,617
Other assets.......................................... 1,211 (1,089)
Accounts payable and interest payable................. (3,764) (1,923)
Customer advances..................................... 966 (1,043)
Due from Loral companies, net......................... (4,396) (3,375)
----------- ----------
Net cash provided by operating activities.................... 8,487 17,202
----------- ----------
Investing activities:
Capital expenditures...................................... (1,599) --
----------- ----------
Net cash used in investing activities........................ (1,599) --
----------- ----------
Financing activities:
Interest payments on 10% senior notes..................... (30,634) --
Payment of satellite incentive obligation................. (556) (324)
----------- ----------
Net cash used in financing activities........................ (31,190) (324)
----------- ----------
Net (decrease) increase in cash and cash equivalents......... (24,302) 16,878
Cash and cash equivalents at beginning of period............. 42,964 19,399
----------- ----------
Cash and cash equivalents at end of period................... $ 18,662 $ 36,277
=========== ==========
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"), 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 ("Loral
SpaceCom" or "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. The Company operates in one business
segment, Fixed Satellite Services ("FSS").
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules of the Securities and
Exchange Commission ("SEC") and, in the opinion of the Company, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results of operations, financial position, and cash flows
for the periods presented. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to SEC rules. The Company believes that the
disclosures made are adequate to keep the information presented from being
misleading. The results of operations for the three months ended March 31, 2003,
are not necessarily indicative of the results to be expected for the full year.
The December 31, 2002 balance sheet has been derived from the audited
consolidated financial statements at that date. It is suggested that these
financial statements be read in conjunction with the Company's latest Annual
Report on Form 10-K.
Risks and Uncertainties
The Company had total long-term debt of $928 million, including current
portion of $65 million, outstanding at March 31, 2003, most of which matures in
2006. In addition to its debt service requirements, the Company's business is
capital intensive and requires substantial investment. Much of this investment
has already been incurred, primarily to launch the Company's three satellites.
At March 31, 2003, the Company had incurred costs of approximately $20 million
(of which it has paid $5 million) related to the construction of Telstar
18/Apstar V which it intends to launch in 2003. The Company will need to incur
approximately $9 million of additional costs to complete the construction,
launch and insure Telstar 18/Apstar V and an additional $58 million to acquire
additional transponders in the future on Telstar 18/Apstar V over the second
through fifth anniversaries of the launch.
At March 31, 2003 the Company had a retained deficit of $1 billion and
stockholder's deficit of $405 million. The Company has generated cash from
operating activities of $8 million and $17 million in the three months ended
March 31, 2003 and 2002, respectively. The Company believes its cash and net
cash provided by operating activities will be adequate to meet its expected cash
requirements through at least March 31, 2004. If the Company does not generate
sufficient cash to satisfy its debt service and operating requirements, the
Company may be required to seek alternative financing. Current market conditions
present uncertainty as to the ability of the Company to secure additional
financing, if needed, and there can be no assurances as to the availability of
additional financing or whether the terms of such financing, if it is available,
would be acceptable to the Company.
Income Taxes
The Company continued to maintain a 100% valuation allowance against its
deferred tax asset under the criteria of SFAS No. 109, Accounting for Income
Taxes, and recorded no benefit under the tax sharing agreement with Loral Space
and Communications Corporation for its loss. In the first quarter of 2002, the
Company recorded a benefit of $2.3 million under the tax sharing agreement for
its loss.
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):
5
MARCH 31, DECEMBER 31,
2003 2002
----------- -------------
10.00% senior notes due 2006:
Principal amount.................................................... $ 612,704 $ 612,704
Accrued interest (deferred gain on debt exchanges).................. 214,446 245,080
11.25% senior notes due 2007 (principal amount $37 million)............ 39,597 39,762
12.50% senior discount notes due 2007 (principal amount at
maturity and accreted principal amounted to $49 million) 53,727 53,982
Satellite incentive obligations........................................ 7,471 8,028
----------- -------------
Total debt.......................................................... 927,945 959,556
Less, current portion.................................................. 64,628 64,727
----------- -------------
Long-term debt...................................................... $ 863,317 $ 894,829
=========== =============
4. RELATED PARTY TRANSACTIONS
Due (to) from Loral companies consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2003 2002
----------- ------------
Loral Space and Communications Corp....... $ 48,672 $ 48,672
Loral Cyberstar, Inc...................... 7,004 8,805
Loral SpaceCom............................ (28,815) (28,877)
Loral Skynet.............................. (3,139) (7,854)
Space Systems/Loral ("SS/L").............. (13,473) (14,892)
CyberStar, L.P............................ 1 --
----------- ------------
$ 10,250 $ 5,854
=========== ============
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 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 March
31, 2003, the balance of the note was $33.1 million, including accrued interest.
5. COMMITMENTS AND CONTINGENCIES
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 Telstar 18/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 estimated
project cost of constructing, launching and insuring the Telstar 18/Apstar V
satellite, which purchase price will be adjusted if the actual project cost
should be greater or less than $230.2 million. 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 March
31, 2003. 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.
As a result of finalizing the Telstar 18/Apstar V launch arrangements in March
2003, Loral Orion agreed to take two fewer transponders without any
corresponding change to the transponder cost borne by each of the parties. Loral
Orion and APT are in the process of finalizing the definitive documents to
reflect this change. Loral SpaceCom has agreed to purchase from Loral Orion 4.75
transponders on Telstar 18/Apstar V, together with a lease of an additional
transponder for an approximate two year period from the Telstar 18/Apstar V
in-service date for approximately $29 million.
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 a significant amount of usable capacity. In such event,
while the Company would be entitled to insurance proceeds of approximately $195
million as of March 31, 2003, and could lease replacement
6
capacity and function as a reseller with respect to such capacity, the loss of
capacity would have a material adverse effect on the Company.
Telstar 12, 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 Orion
continues to conduct discussions with various administrations regarding Telstar
12's operations at 15 degrees W.L. If these discussions are not successful,
Telstar 12's useable capacity may be reduced.
Telstar 10/Apstar IIR has experienced minor losses of power from its solar
arrays. Although, to date, Telstar 10/Apstar IIR has not experienced any
degradation in performance, there can be no assurance that Telstar 10/Apstar IIR
will not experience additional power loss that could result in performance
degradation, including loss of transponder capacity. In the event of additional
power loss, the extent of the performance degradation, if any, will depend on
numerous factors, including the amount of the additional power loss, when in the
life of Telstar 10/Apstar IIR the loss occurred, and the number and type of use
being made of transponders then in service. It is also possible that one or more
transponders on a satellite may need to be removed from service to accommodate
the power loss and to preserve full performance capabilities of the remaining
transponders. A complete or partial loss of Telstar 10/Apstar IIR could result
in a loss of revenues and profits. Based upon information currently available,
including design redundancies to accommodate small power losses and that no
pattern has been identified as to the timing or specific location within the
solar arrays of the failures, the Company believes that this matter will not
have a material adverse effect on its consolidated financial position or results
of operations.
While the Company has in the past, consistent with industry practice and
the requirements of our indenture, 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. Telstar 10/Apstar IIR, 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, the Company does not believe that
these anomalies will affect Telstar 10/Apstar IIR. The insurance coverage for
Telstar 10/Apstar IIR provides for coverage of losses due to solar array
failures only in the event of a capacity loss of 75% or more. One other
satellite owned by Loral Orion 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 this satellite in 2004.
An uninsured loss of a satellite would have a material adverse effect on the
Company's consolidated financial position and results of operations. Some of
Loral Orion's bondholders have questioned whether this limitation is in
compliance with the insurance covenant in the Loral Orion indenture. Loral Orion
believes that it 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.
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.
6. 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,
7
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.
Other Acquired Intangible Assets
The Company evaluated the useful lives of its other acquired intangible
assets in connection with the adoption of SFAS 142 and determined that no
changes to the useful lives were necessary. Other acquired intangible assets are
included in other assets in the Company's condensed consolidated balance sheets
and were as follows at March 31, 2003 and December 31, 2002 (in millions):
MARCH 31, 2003 DECEMBER 31, 2002
------------------------- --------------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------- ------------ ------- ------------
Customer relations $ 7.0 $ (4.7) $ 7.0 $ (4.5)
Trademarks.......... 6.0 (4.1) 6.0 (3.9)
Regulatory.......... 2.5 (1.5) 2.5 (1.4)
------- ------- ------- ------
Total.......... $ 15.5 $ (10.3) $ 15.5 $ (9.8)
======= ======= ======= ======
As of March 31, 2003, the weighted average remaining amortization period for
customer relations and trademarks was two years and for regulatory fees was
seven and a half years.
Total amortization expense for other acquired intangible assets for both the
three months ended March 31, 2003 and 2002 was $0.5 million. Annual amortization
expense for other acquired intangible assets for the five years ending December
31, 2007 is estimated to be as follows (in millions):
2003... $ 2.0
2004... 2.0
2005... 1.2
2006... --
2007... --
7. NEW ACCOUNTING PRONOUNCEMENTS
SFAS 143
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 has determined
that there was no effect on its consolidated results of operations or its
financial position upon the adoption of SFAS 143 on January 1, 2003.
FIN 45
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure
8
Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of
Others ("FIN 45"). FIN 45 elaborates on the disclosures to be made by the
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002; while the
provisions of the disclosure requirements are effective for financial statements
of interim or annual reports ending after December 15, 2002. The Company adopted
the disclosure provisions of FIN 45 during the fourth quarter of 2002. The
Company adopted the recognition provisions of FIN 45 on January 1, 2003 and has
determined that there was no effect on its consolidated results of operations or
its financial position.
FIN 46
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51 ("FIN 46"). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company is
currently evaluating the provisions of FIN 46.
SFAS 149
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivates) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS 149 is effective for contracts entered into or modified after June 30,
2003, except as stated in the statement for hedging relationships designated
after June 30, 2003. The Company is currently evaluating the provisions of SFAS
149.
8. FINANCIAL INFORMATION FOR PARENT, ISSUER'S PARENT, GUARANTOR SUBSIDIARIES AND
OTHER SUBSIDIARIES
Loral Orion's (the "Parent Company") 10% Senior Notes due 2006 ("New Senior
Notes") are fully and unconditionally guaranteed, on a joint and several basis,
by the Parent Company and several of its wholly-owned subsidiaries (the
"Guarantor Subsidiaries") 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
Subsidiaries and substantially all of the other wholly-owned subsidiaries (the
"Other Subsidiaries").
Presented below is condensed consolidating financial information for the
Parent Company, Issuer's Parent, the Guarantor Subsidiaries and the Other
Subsidiaries as of March 31, 2003 and December 31, 2002 and for the three months
ended March 31, 2003 and 2002. The condensed consolidating financial information
has been presented to show the nature of assets held, results of operations and
cash flows of the Parent Company, Issuer's Parent, Guarantor Subsidiaries and
Other Subsidiaries. The supplemental condensed consolidating financial
information reflects the investments of the Parent Company in the Guarantor
Subsidiaries and the Other Subsidiaries using the equity method of accounting.
The Company's significant transactions with its subsidiaries other than the
investment account and related equity in net loss of unconsolidated subsidiaries
are the intercompany payables and receivables between its subsidiaries.
9
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2003
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------ ------------
Current assets:
Cash and cash equivalents $ 18,662 $ 2,556 $ - $ - $ (2,556) $ 18,662
Accounts receivable, net 9,327 - 121 - - 9,448
Prepaid expenses and other current assets 6,370 206 6,224 - (2,027) 10,773
----------- ----------- ----------- ----------- ------------ -----------
Total current assets 34,359 2,762 6,345 - (4,583) 38,883
Property, plant and equipment, net 308,533 - 199,447 - - 507,980
Note (payable) receivable from unconsolidated
subsidiary (33,126) 140,216 - - (140,216) (33,126)
Due to (from) unconsolidated subsidiaries and
Loral companies (108,741) 40,855 118,025 - (39,889) 10,250
Investments in unconsolidated subsidiaries 306,398 (44,436) (271,698) - 9,736 -
Investments in and advances to affiliates - 16,006 - - (16,006) -
Other assets, net 15,439 2,934 666 - (2,932) 16,107
----------- ----------- ----------- ----------- ------------ -----------
Total assets $ 522,862 $ 158,337 $ 52,785 $ - $ (193,890) $ 540,094
=========== =========== =========== =========== ============ ===========
Current liabilities:
Current portion of long-term debt $ 64,628 $ - $ - $ - $ - $ 64,628
Accounts payable 224 1,327 963 - (1,327) 1,187
Customer advances 1,453 - 248 - - 1,701
Accrued interest and preferred dividends 2,136 15,887 - - (15,887) 2,136
Other current liabilities - - - - 57 57
Deferred revenue 3,030 - 41 - - 3,071
Income taxes payable - 8,123 - - (8,123) -
----------- ----------- ---------- ----------- ------------ -----------
Total current liabilities 71,471 25,337 1,252 - (25,280) 72,780
Long-term liabilities 7,624 50,240 12,523 - (61,754) 8,633
Long-term debt 863,317 350,000 - - (350,000) 863,317
6% Series C convertible redeemable preferred stock - 116,901 - - (116,901) -
6% Series D convertible redeemable preferred stock - 22,913 - - (22,913) -
Stockholder's (deficit) equity:
6% Series C convertible redeemable preferred stock - 67,852 - - (67,852) -
6% Series D convertible redeemable preferred stock - 12,711 - - (12,711) -
Common stock, par value $.01 - 4,356 - - (4,356) -
Paid-in capital 604,166 3,391,220 - - (3,391,220) 604,166
Treasury stock, at cost - (3,360) - - 3,360 -
Unearned compensation - (228) - - 228 -
Retained deficit (1,023,716) (3,833,641) 39,010 - 3,809,545 (1,008,802)
Accumulated other comprehensive income - (45,964) - - 45,964 -
----------- ----------- ----------- ----------- ----------- -----------
Total stockholder's (deficit) equity (419,550) (407,054) 39,010 - 382,958 (404,636)
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and stockholder's (deficit)
equity $ 522,862 $ 158,337 $ 52,785 $ - $ (193,890) $ 540,094
=========== =========== =========== =========== =========== ===========
10
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------ ------------
Revenues from satellite services $ 23,075 $ - $ 10,937 $ - $ (8,815) $ 25,197
Costs of satellite services 24,602 - 7,883 - (8,815) 23,670
Selling, general and administrative expenses 3,976 1,422 274 - (1,422) 4,250
------------ ------------ ------------ ------------ ------------ ------------
Operating income (loss) (5,503) (1,422) 2,780 - 1,422 (2,723)
Interest and investment income 37 5,547 - - (5,547) 37
Interest expense (2,920) (10,917) - - 10,917 (2,920)
Gain on investment - 1,107 - - (1,107) -
------------ ------------ ------------ ------------ ------------ ------------
(Loss) income before income taxes and equity in
net losses of unconsolidated subsidiaries and
affiliates (8,386) (5,685) 2,780 - 5,685 (5,606)
Income tax benefit (provision) (192) (1,663) (972) - 2,813 (14)
------------ ------------ ------------ ------------ ------------ ------------
(Loss) income before equity in net losses of
unconsolidated subsidiaries and affiliates (8,578) (7,348) 1,808 - 8,498 (5,620)
Equity in net income (losses) of unconsolidated
subsidiaries 1,808 (35,520) - - 33,712 -
Equity in net income (losses) of affiliates - (5,306) - - 5,306 -
------------ ------------ ------------ ------------ ------------ ------------
Net (loss) income $ (6,770) $ (48,174) $ 1,808 $ - $ 47,516 $ (5,620)
============ ============ ============ ============ ============ ============
11
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ------------ ------------ ------------ ------------
Operating activities:
Net (loss) income $ (6,770) $(48,174) $ 1,808 $ - $ 47,516 $ (5,620)
Non-cash items:
Equity in net losses of affiliates - 5,306 - - (5,306) -
Equity in net losses of unconsolidated
subsidiaries (1,808) 35,520 - - (33,712) -
Deferred taxes - 1,663 1,150 - (2,813) -
Depreciation and amortization 13,569 14 5,254 - (14) 18,823
Provisions for bad debts 2,146 - (11) - - 2,135
Interest expense 1,165 - - - - 1,165
Changes in operating assets and liabilities:
Accounts receivable, net (3,996) - 28 - - (3,968)
Prepaid expenses and other current assets (425) - 2,360 - - 1,935
Due to (from) unconsolidated subsidiaries
and Loral companies, net 5,713 710 (10,109) - (710) (4,396)
Other assets 1,182 874 29 - (874) 1,211
Accounts payable (3,532) - (232) - - (3,764)
Accrued expenses and other current
liabilities - (9,389) - - 9,389 -
Customer advances 1,243 - (277) - - 966
-------- -------- -------- ------------ ------------ ----------
Net cash provided by (used in) operating
activities 8,487 (13,476) - - 13,476 8,487
-------- -------- -------- ------------ ------------ ----------
Investing activities:
Capital expenditures (1,599) - - - - (1,599)
Investments in and advances to unconsolidated
subsidiaries - 195 - - (195) -
-------- -------- -------- ------------ ------------ ----------
Net cash (used in) provided by in investing
activities (1,599) 195 - - (195) (1,599)
-------- -------- -------- ------------ ------------ ----------
Financing activities:
Interest payments on 10% senior notes (30,634) - - - - (30,634)
Repayments of other long-term obligations (556) - - - - (556)
Note receivable from unconsolidated affiliate - 17,284 - - (17,284) -
Proceeds from stock issuances - 2,157 - - (2,157) -
-------- -------- -------- ------------ ------------ ----------
Net cash used in financing activities (31,190) 19,441 - - (19,441) (31,190)
-------- -------- -------- ------------ ------------ ----------
Increase (decrease) in cash and cash equivalents (24,302) 6,160 - - (6,160) (24,302)
Cash and cash equivalents--beginning of period 42,964 1,514 - - (1,514) 42,964
-------- -------- -------- ------------ ------------ ----------
Cash and cash equivalents--end of period $ 18,662 $ 7,674 $ - $ - $ (7,674) $ 18,662
======== ======== ======== ============ ============ ==========
12
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------- ------------- -------------
Current assets:
Cash and cash equivalents......... $ 42,964 $ 1,514 $ -- $ -- $ (1,514) $ 42,964
Accounts receivable, net.......... 7,477 -- 138 -- -- 7,615
Prepaid expenses and other current
assets.......................... 5,540 823 8,584 -- (1,734) 13,213
------------- ------------- ------------- ------------- ------------- -------------
Total current assets............ 55,981 2,337 8,722 -- (3,248) 63,792
Property, plant and equipment, net. 319,998 -- 204,701 -- -- 524,699
Note (payable) receivable from
unconsolidated subsidiary......... (31,540) 157,500 -- -- (157,500) (31,540)
Due to (from) unconsolidated
subsidiaries and Loral companies.. (97,652) 36,448 107,917 -- (40,859) 5,854
Investments in unconsolidated
subsidiaries...................... 304,590 (20,185) (271,698) -- (12,707) --
Investments in and advances to
affiliates........................ -- 21,507 -- -- (21,507) --
Other assets, net.................. 16,622 3,191 696 -- (3,191) 17,318
------------- ------------- ------------- ------------- ------------- -------------
Total assets.................... $ 567,999 $ 200,798 $ 50,338 $ -- $ (239,012) $ 580,123
============= ============= ============= ============= ============= =============
Current liabilities:
Current portion of long-term debt. $ 64,727 $ -- $ -- $ -- $ -- $ 64,727
Accounts payable.................. 1,194 2,404 1,193 -- (2,404) 2,387
Customer advances................. 1,208 -- 521 -- 2,002 3,731
Accrued interest and preferred
dividends........................ 4,700 20,840 -- -- (20,840) 4,700
Other current liabilities......... 1,968 -- 35 (2,003) --
Income taxes payable.............. -- 8,123 -- -- (8,123) --
------------- ------------- ------------- ------------- ------------- -------------
Total current liabilities....... 73,797 31,367 1,749 -- (31,368) 75,545
Long-term liabilities.............. 7,743 48,577 11,387 -- (58,942) 8,765
Long-term debt..................... 894,829 350,000 -- -- (350,000) 894,829
6% Series C convertible redeemable
preferred stock................... -- 104,582 -- -- (104,582) --
6% Series D convertible redeemable
preferred stock................... -- 20,499 -- -- (20,499) --
Stockholder's (deficit) equity:
6% Series C convertible redeemable
preferred stock.................. -- 80,171 -- -- (80,171) --
6% Series D convertible redeemable
preferred stock.................. -- 15,125 -- -- (15,125) --
Common stock, par value $.01...... -- 4,293 -- -- (4,293) --
Paid-in capital................... 604,166 3,389,035 -- -- (3,389,035) 604,166
Treasury stock, at cost........... -- (3,360) -- -- 3,360 --
Unearned compensation............. -- (151) -- -- 151 --
Retained deficit.................. (1,012,536) (3,782,107) 37,202 -- 3,754,259 (1,003,182)
Accumulated other comprehensive
income........................... -- (57,233) -- -- 57,233 --
------------- ------------- ------------- ------------- ------------- -------------
Total stockholder's (deficit)
equity......................... (408,370) (354,227) 37,202 -- 326,379 (399,016)
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholder's (deficit)
equity......................... $ 567,999 $ 200,798 $ 50,338 $ -- $ (239,012) $ 580,123
============= ============= ============= ============= ============= =============
13
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ------------ ------------- -------------
Revenues from satellite services... $ 26,836 $ -- $ 12,892 $ -- $ (10,107) $ 29,621
Costs of satellite services........ 25,775 -- 7,098 -- (10,107) 22,766
Selling, general and
administrative expenses.......... 2,704 19 404 -- (19) 3,108
Management fee expense............. -- 291 -- -- (291) --
------------- ------------- ------------- ------------ ------------- -------------
Operating (loss) income............ (1,643) (310) 5,390 -- 310 3,747
Interest and investment income..... 220 5,230 -- -- (5,230) 220
Interest expense................... (3,258) (9,847) -- -- 9,847 (3,258)
------------- ------------- ------------- ------------ ------------- -------------
(Loss) income before income taxes,
equity in net loss of
unconsolidated subsidiaries and
affiliates and cumulative effect
of change in accounting principle (4,681) (4,927) 5,390 -- 4,927 709
Income tax benefit (provision)..... 3,412 (1,549) (1,857) -- 2,301 2,307
------------- ------------- ------------- ------------ ------------- -------------
(Loss) income before equity in
net loss of unconsolidated
subsidiaries and affiliates and
cumulative effect of change in
accounting principle............. (1,269) (6,476) 3,533 -- 7,228 3,016
Equity in net income (loss) of
unconsolidated subsidiaries, net
of taxes......................... 3,533 (874,287) -- -- 870,754 --
Equity in net loss of affiliates,
net of taxes..................... -- (15,597) -- -- 15,597 --
------------- ------------- ------------- ------------ ------------- -------------
(Loss) income before cumulative
effect of change in accounting
principle........................ 2,264 (896,360) 3,533 -- 893,579 3,016
Cumulative effect of change in
accounting principle............. (562,201) -- -- -- -- (562,201)
------------- ------------- ------------- ------------ ------------- -------------
Net (loss) income.................. $ (559,937) $ (896,360) $ 3,533 $ -- $ 893,579 $ (559,185)
============= ============= ============= ============ ============= =============
14
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------ ------------
Operating activities:
(Loss) income from continuing
operations................................. $(559,937) $(896,360) $ 3,533 $ -- $ 893,579 $(559,185)
Non-cash items:
Cumulative effect of change in accounting
Principle.................................. 562,201 -- -- -- -- 562,201
Equity in net losses of
affiliates, net of taxes................... -- 15,597 -- -- (15,597) --
Equity in net losses of
unconsolidated subsidiaries,
net of taxes............................... (3,533) 874,287 -- -- (870,754) --
Deferred taxes.............................. -- 1,536 752 -- (2,288) --
Depreciation and amortization............... 13,570 -- 5,253 -- -- 18,823
Non-cash interest income.................... (141) -- -- -- -- (141)
Provision for bad debts..................... 434 192 626
Changes in operating assets and liabilities:
Accounts receivable, net................... 2,513 -- (1,822) -- -- 691
Prepaid expenses and other
current assets............................ 817 165 800 -- (165) 1,617
Due to (from) unconsolidated
subsidiaries and Loral companies.......... 6,463 (4,300) (9,838) 4,300 (3,375)
Other assets............................... (1,089) 290 -- -- (290) (1,089)
Accounts payable and interest
payable................................... (2,170) (277) -- -- 277 (2,170)
Accrued expenses and other
current liabilities....................... 247 (8,312) -- -- 8,312 247
Customer advances.......................... (487) -- -- -- -- (487)
Income taxes payable....................... -- 13 -- -- (13) --
Deferred revenue........................... (1,686) -- 1,130 -- -- (556)
Other...................................... -- (166) -- -- 166 --
--------- --------- --------- --------- --------- ---------
Net cash (used in) provided by
operating activities........................ 17,202 (17,527) -- -- 17,527 17,202
--------- --------- --------- --------- --------- ---------
Investing activities:
Investments in and advances to
affiliates................................. -- (1,557) -- -- 1,557 --
Investments in and advances to
unconsolidated subsidiaries................ -- 172 -- -- (172) --
--------- --------- --------- --------- --------- ---------
Net cash used in investing activities........ -- (1,385) -- -- 1,385 --
--------- --------- --------- --------- --------- ---------
Financing activities:
Repayments of long-term
obligations............................... (324) -- -- -- -- (324)
Preferred dividends........................ -- (11,963) -- -- 11,963 --
Proceeds from stock issuances.............. -- 2,857 -- -- (2,857) --
--------- --------- --------- --------- --------- ---------
Net cash used in financing
activities.................................. (324) (9,106) -- -- 9,106 (324)
--------- --------- --------- --------- --------- ---------
Increase (decrease) in cash
and cash equivalents........................ 16,878 (28,018) -- -- 28,018 16,878
Cash and cash equivalents--
beginning of period......................... 19,399 46,068 -- -- (46,068) 19,399
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents --
end of period............................... $ 36,277 $ 18,050 $ -- $ -- $ (18,050) $ 36,277
========= ========= ========= ========= ========= =========
15
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters
discussed in the following Management's Narrative Analysis of Results of
Operations of Loral Orion, Inc. ("Loral Orion" or the "Company") are not
historical facts, but are "forward-looking statements," as that term is defined
in the Private Securities Litigation Reform Act of 1995. In addition, the
Company or its representatives have made and may continue to make
forward-looking statements, orally or in writing, in other contexts, such as in
reports filed with the SEC, press releases or statements made with the approval
of an authorized executive officer of the Company. These forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "plans," "may," "will," "would," "could," "should,"
"anticipates," "estimates," "project," "intend," or "outlook" or the negative of
these words or other variations of these words or other comparable words, or by
discussion of strategy that involves risks and uncertainties. These
forward-looking statements are only predictions, and actual events or results
may differ materially as a result of a wide variety of factors and conditions,
many of which are beyond the Company's control. Some of the factors and
conditions that could affect the outcome of forward-looking statements relate to
(i) the Company's financial structure, and (ii) operational matters. For a
detailed discussion of these factors and conditions, please refer to the section
of the Company's latest Annual Report on Form 10-K titled "Certain Factors that
May Affect Future Results" beginning on page 4 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 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
("Loral SpaceCom" or "LSC"), which is a subsidiary of Loral Space &
Communications Corporation, which is in turn a subsidiary of Loral Space and
Communications Ltd. ("Loral"), manages the Company's business. The Company
operates in one segment, Fixed Satellite Services ("FSS").
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).
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 operating
income (loss) before depreciation and amortization ("EBITDA") as a measure of a
segment's profit or loss. The following discusses the results of Loral Orion for
the three months ended March 2003 and 2002.
EBITDA (1) (in millions):
THREE MONTHS ENDED
MARCH 31,
-----------------------
2003 2002
------- -------
Revenues................. $ 25.2 $ 29.6
======= =======
EBITDA................... $ 16.1 $ 22.6
Depreciation and
amortization........... (18.8) (18.8)
------- -------
Operating (loss) income.. $ (2.7) $ 3.8
======= =======
(1) EBITDA (which is equivalent to operating income (loss) before
depreciation and amortization) is provided because it is a measure
commonly used in the communications industry to analyze companies on the
basis of operating performance, leverage and liquidity and is presented
to enhance the understanding of 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.
16
FIRST QUARTER 2003 COMPARED WITH 2002
Revenues were $25.2 million and $29.6 million in the first quarter of 2003
and 2002, respectively. Revenues decreased due to reduced prices and volume
resulting from the global economic downturn, which has caused a delay in demand
for new telecommunications applications and services.
EBIDTA as reported was $16.1 million and $22.6 million in the first quarter
of 2003 and 2002, respectively. This decrease was primarily due to renewing the
insurance on one of the Company's satellites and higher bad debt expense in the
first quarter of 2003.
Depreciation and amortization was $18.8 million in both the first quarter
of 2003 and 2002.
As a result of the above, the Company had an operating loss of $2.7 million
in the first quarter of 2003 as compared to operating income of $3.7 million in
the first quarter of 2002.
Interest income was $40,000 and $200,000 in the first quarter of 2003 and
2002, respectively. The decrease in the first quarter of 2003 as compared to the
first quarter of 2002 was primarily due to a reduction in the balances held for
investment.
Interest expense was $2.9 million, net of capitalized interest of $0.4
million in the first quarter of 2003 as compared to $3.3 million in the first
quarter of 2002.
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 2003 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. The provision (benefit) for income
taxes from continuing operations in the first quarter of 2003 and 2002 was $0.01
million and $(2.3) million on a pre-tax (loss) income of $(5.6) million and $0.7
million, respectively. In the first quarter of 2003, the Company continued to
maintain a full valuation allowance against its deferred tax asset and recorded
no benefit under the tax sharing agreement for its loss. In the first quarter of
2002, the Company recorded a benefit of $2.3 million under the tax sharing
agreement for its loss.
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).
Operational Matters
At March 31, 2003, the Company had contracted backlog of approximately $444
million (which includes $40 million to Loral companies), as compared to $453
million at December 31, 2002 (which included $42 million to Loral companies).
The Company had total long-term debt of $928 million, including current
portion of $65 million, outstanding at March 31, 2003, most of which matures in
2006. In addition to its debt service requirements, the Company's business is
capital intensive and requires substantial investment. Much of this investment
has already been incurred primarily to launch the Company's three satellites. At
March 31, 2003, the Company had incurred costs of approximately $20 million (of
which it has paid $5 million) related to the construction of Telstar 18/Apstar V
which it intends to launch in 2003. The Company will need to incur approximately
$9 million of additional costs to complete the construction, launch and insure
Telstar 18/Apstar V and an additional $58 million to acquire additional
transponders in the future on Telstar 18/Apstar V over the second through fifth
anniversaries of the launch.
At March 31, 2003 the Company had a retained deficit of $1 billion and
stockholder's deficit of $405 million. The Company has generated cash from
operating activities of $8 million and $17 million in the first quarter of 2003
and 2002, respectively. The Company believes its cash and net cash provided by
operating activities will be adequate to meet its expected cash requirements
through at least March 31, 2004. If the Company does not generate sufficient
cash to satisfy its debt service and operating requirements, the Company may be
required to seek alternative financing. Current market conditions present
uncertainty as to the ability of the Company to secure additional financing, if
needed, and there can be no assurances as to the availability of additional
financing or whether the terms of such financing, if it is available, would be
acceptable to the Company. Loral Orion's 10% senior notes are guaranteed by
Loral. If Loral fails to pay interest on its 9.5% senior notes when due, this
will, upon expiration of a 30-day cure period, constitute an event of default
under Loral's senior note indenture, which in turn would result in an event of
default under the Loral SpaceCom Amended Credit Agreement and the Loral
Satellite Credit Agreement. If the holders of the 9.5% senior notes, the lenders
under the Loral SpaceCom credit facility or the lenders under the Loral
Satellite
17
credit facility were to accelerate their related debt following such event of
default, an event of default would also occur with respect to Loral Orion's 10%
senior notes.
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 a significant amount of usable capacity. In such event,
while the Company would be entitled to insurance proceeds of approximately $195
million as of March 31, 2003 and could lease replacement capacity and function
as a reseller with respect to such capacity, the loss of capacity would have a
material adverse effect on the Company.
Telstar 12, 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 Orion
continues to conduct discussions with various administrations regarding Telstar
12's operations at 15 degrees W.L. If these discussions are not successful,
Telstar 12's useable capacity may be reduced.
Telstar 10/Apstar IIR has experienced minor losses of power from its solar
arrays. Although, to date, Telstar 10/Apstar IIR has not experienced any
degradation in performance, there can be no assurance that Telstar 10/Apstar IIR
will not experience additional power loss that could result in performance
degradation, including loss of transponder capacity. In the event of additional
power loss, the extent of the performance degradation, if any, will depend on
numerous factors, including the amount of the additional power loss, when in the
life of Telstar 10/Apstar IIR the loss occurred, and the number and type of uses
being made of transponders then in service. It is also possible that one or more
transponders on a satellite may need to be removed from service to accommodate
the power loss and to preserve full performance capabilities of the remaining
transponders. A complete or partial loss of Telstar 10/Apstar IIR could result
in a loss of revenues and profits. Based upon information currently available,
including design redundancies to accommodate small power losses and the fact
that no pattern has been identified as to the timing or specific location within
the solar arrays of the failures, the Company believes that this matter will not
have a material adverse effect on its consolidated financial position or our
results of operations.
While the Company has in the past, consistent with industry practice and
the requirements of our indenture, 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. 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, the Company does not believe that these anomalies will
affect Telstar 10/Apstar IIR. The insurance coverage for Telstar 10/Apstar IIR
provides for coverage of losses due to solar array failures only in the event of
a capacity loss of 75% or more. One other satellite owned by Loral Orion 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 this satellite in 2004. An uninsured loss of a
satellite would have a material adverse effect on the Company's consolidated
financial position and results of operations. Some of Loral Orion's bondholders
have questioned whether this limitation is in compliance with the insurance
covenant in the Loral Orion indenture. Loral Orion believes that it 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.
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 Telstar 18/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 estimated
project cost of constructing, launching and insuring the Telstar 18/Apstar V
satellite, which purchase price will be adjusted if the actual project cost is
greater or less than $230.2 million. Telstar 18/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 Telstar 18/Apstar V, which capacity will be
18
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
Telstar 18/Apstar V. To be located at 138 degrees East Longitude, Telstar 18/
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 Telstar 18/
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 March 31, 2003. 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 payments thereon. As a result of finalizing the Telstar
18/Apstar V launch arrangements in March 2003, the Company agreed to take two
fewer transponders without any corresponding change to the transponder cost
borne by each of the parties. Loral Orion and APT are in the process of
finalizing the definitive documents to reflect this change. Loral SpaceCom has
agreed to purchase from Loral Orion 4.75 transponders on Telstar 18/Apstar V,
together with a lease of an additional transponder for an approximate two year
period from the Telstar 18/Apstar V in-service date for approximately $29
million.
The Company, like others in the satellite industry, are 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 Company's 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 the Company 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.
Accounting Pronouncements
SFAS 142
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.
SFAS 143
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"). SFAS 143 addresses
19
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 has determined that there was no effect on its
consolidated results of operations or its financial position upon the adoption
of SFAS 143 on January 1, 2003.
FIN 45
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others ("FIN 45"). FIN 45 elaborates on the
disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002; while the provisions of the disclosure
requirements are effective for financial statements of interim or annual reports
ending after December 15, 2002. The Company adopted the recognition provisions
of FIN 45 on January 1, 2003 and has determined that there was no effect on its
consolidated results of operations or its financial position.
FIN 46
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51 ("FIN 46"). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company is
currently evaluating the provisions of FIN 46.
SFAS 149
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivates) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS 149 is effective for contracts entered into or modified after June 30,
2003, except as stated in the statement for hedging relationships designated
after June 30, 2003. The Company is currently evaluating the provisions of SFAS
149.
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.
20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 -- Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Exhibit 99.2 -- Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
DATE OF REPORT DESCRIPTION
---------------------
NONE
21
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: May 15, 2003 /s/ RICHARD J. TOWNSEND
-----------------------
Richard J. Townsend
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Registrant's
Authorized Officer)
22
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 March 31, 2003 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
May 15, 2003
23
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 March 31, 2003 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
Senior Vice President and
Chief Financial Officer
May 15, 2003
24
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ------------ ----------------------------------------------------------------------
Exhibit 99.1 -- Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Exhibit 99.2 -- Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
25