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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 Commission file number 0-22085
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LORAL ORION, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-2008654
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2440 Research Boulevard, Suite 400, Rockville, Maryland 20850
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(Address of principal executive offices )
301-258-8101
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
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None
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Securities registered pursuant to Section 12 (g) of the Act:
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11 1/4% Senior Notes Due 2007
12 1/2% Senior Discount Notes Due 2007
(Title of Class)
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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_
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [Not Applicable]
The number of shares of common stock, par value $.01 per share of the registrant
outstanding as of March 15, 1999 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-K AND IS THEREFORE FILING WITH THE REDUCED DISCLOSURE FORMAT
PURSUANT TO GENERAL INSTRUCTION I (2) OF FORM 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
None
PART I
ITEM 1. BUSINESS.
GENERAL
Loral Orion, Inc. ("Orion" or the "Company"), formerly known as Orion
Network Systems, Inc. prior to its acquisition by Loral Space & Communications
Ltd. ("Loral") on March 20, 1998, is a rapidly growing provider of
satellite-based communications services, providing Satellite Capacity Services,
including video distribution and other satellite transmission services and Data
Network Services, including managed data network services, Internet services and
broadband data services. Orion believes that demand for satellite-based
communications services will continue to grow due to the expansion of businesses
beyond the limit of wide bandwidth terrestrial infrastructure, accelerating
demand for high speed data and broadband multimedia services, and for Internet
and intranet services, especially outside the United States, increased size and
scope of television programming distribution, worldwide deregulation of
telecommunications markets and continuing technological advancement. Satellites
are able to provide reliable, high bandwidth services anywhere in their coverage
areas, and Orion believes that it is well positioned to satisfy market demand
for these services.
Orion commenced operations of Orion 1, a high power Ku-band satellite with
34 Ku-band transponders, in January 1995. Orion 1 provides coverage of 34
European countries, most of the United States and parts of Canada, Mexico and
North Africa. Through arrangements with local ground operators, Orion currently
has the ability to deliver network services to and among points in most European
countries, portions of the United States and a limited number of Latin American
countries. The Orion 1 satellite's coverage reaches all locations within its
footprint, enabling the delivery of high-speed data to customers in emerging
markets and remote locations which lack the necessary infrastructure to support
these services.
Orion 2, which will be a high power satellite with 38 Ku-band transponders
for operation in the Atlantic Ocean Region, will expand Orion's European
coverage and extend coverage to portions of the Commonwealth of Independent
States, Latin America, the Middle East and South Africa. Orion 2 is being
constructed by Space Systems/Loral, Inc., a wholly owned subsidiary of Orion's
parent, Loral Space & Communications Ltd. Orion has established an early market
presence in Latin America in preparation for the launch of Orion 2 scheduled to
occur in the third quarter of 1999.
Orion 3, which will be a high power satellite with 33 Ku-band transponders
and 10 C-band transponders, will cover broad areas of the Asia Pacific region,
including China, Japan, Korea, India, Southeast Asia, Australia, New Zealand,
Eastern Russia and Hawaii. Orion 3's footprint will provide Orion with the
ability to provide its services between the United States via Hawaii and most of
the Asia Pacific region. Orion has also established an early market presence in
Asia, including entering into an $89 million contract with DACOM Corporation
("DACOM") for eight of Orion 3's transponders. Orion 3 is scheduled to be
launched in April 1999.
In the aggregate, the footprints of Orion 1, Orion 2 and Orion 3 will cover
over 85 percent of the world's population.
BUSINESS SEGMENTS
Fixed Satellite Services
Orion provides transmission capacity to cable and television programmers,
news and information networks, telecommunications companies and other carriers
for a variety of applications. A majority of Orion's transmission capacity
services consist of video services. The Company generally offers transmission
capacity services under long term contracts and also offers occasional use
services for periods of up to a few hundred hours.
Data Services
Very Small Aperture Terminal ("VSAT") Services. Orion's Digital Link
service can be designed as a "point-to-point" private network service directly
connecting customer locations or as a "point-to-multipoint" service for
customers seeking to transmit communications from a central location to numerous
remote sites. Dynalink is a service that allows the customer with occasional
bandwidth requirements to control the activation and deactivation of links
within a "point-to-point" or "point-to-multipoint" network. Orion's patented
international data networking service, "Virtual Integrated Sky Network" ("VISN")
is a fully meshed, frame relay-based satellite network service that dynamically
consolidates the full range of voice and data applications through a single
access point. The service provides seamless connectivity, not merely from a
central point to up to 254 remote sites, but also among the remote locations.
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Internet Services. Orion offers a family of innovative Internet/intranet
solutions, responding to international Internet Service Providers' (ISPs) and
multinational corporations' bandwidth and quality of service concerns. Orion's
WorldCast (patent pending) family of services are designed to provide
cost-effective, high-performance connectivity to ISPs, content providers,
carriers and multinational businesses needing access to the North American
Internet backbone. WorldCast is a multicast satellite communications technology
that takes advantage of the broadcast nature of satellites and the asymmetric
nature of Internet traffic. Worldcast can be configured to provide a hybrid
solution of terrestrial connectivity for small requests sent to the Internet and
a satellite connection for the larger, high-bandwidth files sent from the
Internet.
ACQUISITION OF THE COMPANY BY LORAL
On March 20, 1998, Orion was acquired by Loral Space & Communications Ltd.
("Loral"), through the merger (the "Merger") of a wholly owned subsidiary of
Loral, Loral Satellite Corporation, with and into Orion. Loral consummated the
acquisition by issuing 18 million shares of its common stock and assuming
existing Orion vested options and warrants to purchase 1.4 million shares of
Loral common stock representing an aggregate purchase price of $472.5 million.
Orion was the surviving corporation of the Merger and thereby became a
subsidiary of Loral. At the effective date of the Merger, Loral contributed its
investment in Orion to Loral Space & Communications Corporation, a wholly owned
subsidiary of Loral, and Orion changed its name to "Loral Orion Network Systems,
Inc." The name has since been changed to "Loral Orion, Inc."
Following the Merger, the capital stock of Orion ceased to be publicly
traded. However, the Company continues to have registered bonds outstanding and
will continue to have filing requirements with the SEC.
The foregoing description of the Merger does not purport to be complete and
is qualified in its entirety by the terms and conditions of the Merger
Agreement, filed as Exhibits 2.1 and 2.2 to Registration Statement No.
333-46407 on Form S-4.
AGREEMENTS WITH LORAL SKYNET
Orion and Loral Skynet, a division of Loral SpaceCom Corporation, which is
in turn a wholly-owned subsidiary of Loral, have entered into agreements (the
"Loral Skynet Agreements") effective on January 1, 1999, whereby Loral Skynet
provides to Orion (i) marketing and sales of Satellite Capacity Services on the
Orion satellite network and related billing and administration of customer
contracts for those services (the "Sales Services") and (ii) telemetry, tracking
and control services for the Orion satellite network (the "Technical Services",
and together with the Sales Services, the "Services"). Orion will be charged
Loral Skynet's costs for providing these services plus a 5 percent
administrative fee. Loral Skynet currently provides the Services for its own
Telstar satellite network and Technical Services for other third parties. Orion
believes that it will achieve cost savings as a result of the consolidation of
the Services with Loral Skynet pursuant to the Loral Skynet Agreements and allow
Orion to place greater resources and focus on its business of providing Data
Services.
SUMMARY SATELLITE DATA
The following table presents a brief description of the Company's proposed
satellite network. All satellite systems are subject to international frequency
coordination requirements and must obtain appropriate authority to provide
service in a given territory.
ORION 1 ORION 2 ORION 3
------- ------- -------
Region Covered................... Europe, Southeastern Eastern U.S., Southeastern Canada China, Japan, Korea, India,
Canada, U.S., East of the Europe, Commonwealth of Independent Hawaii, Southeast Asia,
Rockies and parts of States, Middle East, North Africa, Latin Australia, New Zealand,
Mexico America and South Africa Eastern Russia and Oceania
Expected Launch.................. Operational(1) Third quarter of 1999 April 1999
Satellite Manufacturer........... MMS Space Systems Space Systems/Loral Hughes Space
(subsidiary of Matra
Marconi Space)
Transponders(2).................. 34 38 43
Ku-Band(3)....................... 28@0054 MHz 38@0054 MHz 23@0054 MHz
6@0036 MHz 2@0027 MHz
8@0036 MHz (4)
C-Band(5)........................ -- -- 10@0036 MHz
Usable Bandwidth(6).............. 1728 MHz 2052 MHz 1944 MHz
EIRP(7).......................... 47 to 52 dBW 47 to 50 dBW 44 to 52
for Ku-Band;
34 to 38
for C-band returns
Total Prime Power(8) ............ 4500 Watts 7000 Watts 8000 Watts
Expected End of Useful Life(9)... 2005 2012 2013
Approximate Percentage of World
Population Covered by
Satellite(10).................... 17.9% 27.0% 57.0%
(1) Orion 1 was launched on November 29, 1994 and commenced commercial
operations on January 20, 1995.
(2) Satellite transponders receive signals up from earth stations and then
convert, amplify and transmit the signals back down to other earth
stations.
(3) Ku-band frequencies are higher than C-band frequencies and are used
worldwide for commercial satellite communications.
(4) Orion has entered into a contract with DACOM under which Orion will provide
eight dedicated transponders on Orion 3 for direct-to-home television
service and other satellite services, provided that Orion 3 is delivered in
orbit and fully operational by June 30, 1999.
(5) C-band frequencies minimize interference from atmospheric conditions such
as rain. C-band satellites share frequencies with terrestrial based
microwave systems and therefore require more on-ground coordination to
avoid interference problems and generally are lower power, requiring the
use of large earth stations to receive signals. A portion of Orion 3 is
designed to transmit over C-band frequencies, since Orion 3 is to cover
areas of Asia where satellite signals experience significant interference
from rain during several months of the year.
(6) Bandwidth is a measure of the transponder resource which determines the
information carrying capacity. The actual information carrying capacity of
a transponder is determined by a combination of the transponder's bandwidth
and radio-frequency ("RF") power.
(7) Equivalent isotropic radiated power ("EIRP") is a measure of the RF power
of each transponder. Smaller and less expensive earth terminal antennas can
be used with higher EIRP transponders.
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(8) Total prime power is the total amount of power that is required to support
all of the communications and electronics functions of the satellite.
(9) The expected end of a satellite's in-orbit useful life is based on the
period during which the satellite's on board fuel permits proper station
keeping maneuvers for the satellite. The information for Orion 1 is based
on 1998 fuel level estimates. The information for Orion 2 and Orion 3 is
based on their expected launch dates and their respective construction and
launch contracts.
(10) The approximate percentages of world population covered or to be covered by
the Orion satellites are not additive. In the aggregate, the footprints of
the Orion satellites would cover over 85 percent of the world's population.
INSURANCE
Orion has obtained satellite in-orbit insurance for Orion 1 covering the
period from August 1998 to August 2003 in an amount of approximately $195
million providing protection against partial or total loss of the satellite's
communications capability, including loss of transponders, power, fuel, or
ability to control the positioning of the satellite. Orion is in the process of
obtaining launch and in-orbit life insurance for Orion 2 and Orion 3 covering
the period from launch to five years after launch in an amount of $261,404,000
for Orion 2 and up to $265,606,000 for Orion 3. This coverage provides
protection against partial or total loss of the satellite's communications
capability, including loss of transponders, power, fuel or ability to control
the positioning of the satellite. Launch and in-orbit insurance for its
satellites will not protect the Company against business interruption, loss or
delay of revenues and similar losses and may not fully reimburse the Company for
its expenditures.
EMPLOYEES
As of December 31, 1998, Orion and its subsidiaries had 305 full-time
employees, none of whom are subject to collective bargaining agreements.
CERTAIN FACTORS THAT MAY EFFECT FUTURE RESULTS
This annual report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
from time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but are not limited to, various filings made by
the Company or Loral with the Securities and Exchange Commission, press releases
or oral statements made by or with the approval of an authorized executive
officer of the Company or Loral. Actual results could differ materially from
those projected or suggested in any forward-looking statements as a result of a
wide variety of factors and conditions, including, but not limited to, the
factors summarized below.
LAUNCH FAILURES MAY DELAY SOME OF OUR OPERATIONS IN THE FUTURE.
Satellite launches are risky. About 15% of launch attempts end in failure.
We ordinarily insure against launch failures, but at considerable cost. The cost
and the availability of insurance vary depending on market conditions and the
launch vehicle used. Our insurance typically does not cover business
interruption, and so both launch failures and in-orbit satellite failures result
in uninsured losses. Replacement of a lost satellite typically requires up to 18
months from the time a contract is executed until the launch date of the
replacement satellite.
Orion 3 is currently scheduled to be launched on the second flight of a
Delta 3 rocket in April 1999. A Delta 3 rocket failed in August 1998 on its
maiden flight. Although the manufacturer has assured us that the cause of that
failure has been identified and corrected, we can't be certain that the second
flight will succeed.
AFTER LAUNCH, OUR SATELLITES REMAIN VULNERABLE TO IN-ORBIT FAILURE.
Random failure of satellite components may result in damage to or loss of a
satellite before the end of its expected life. Satellites are carefully built
and tested and have certain redundant systems in case of failure. However,
in-orbit failure may result from the various causes, including they remain
vulnerable to failure and degradation from hazards in space that include:
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o component failure;
o loss of power or fuel;
o inability to control positioning of the satellite;
o solar and other astronomical events; and
o space debris.
Repair of satellites in space is not feasible. Many factors affect the
useful lives of satellites. These factors include the quality of construction,
gradual degradation of solar panels and the durability of components. Our Orion
2 and Orion 3 are expected to have useful live of approximately 16 years and 15
years, respectively. At December 31, 1998, Orion 1 has a remaining useful life
of 7 years. Although some failures may be covered in part by insurance, they may
result in uninsured losses as well.
In November 1995, a component on Orion 1 malfunctioned, resulting in a
2-hour service interruption. The malfunctioning component supported nine
transponders serving the European portion of Orion 1's footprint. Full service
was restored using a back-up component. If that back-up component fails, Orion 1
would lose a significant amount of usable capacity.
IMPACT OF A DELAY IN THE LAUNCH OR OPERATIONS OF ORION 3
DACOM has agreed to buy eight transponders on Orion 3 for $89 million. If
Orion 3 is not launched by May 31, 1999, or if the related transponders are not
ready for operation by June 30, 1999, DACOM can terminate the agreement. If
DACOM were to terminate its transponder agreement with us due to a delay in the
launch or operation of Orion 3, we will have to refund amounts received from
DACOM ($35.5 million as of December 31, 1998), we may not have enough cash to
pay our debt.
WE HAVE SUBSTANTIAL DEBT.
We have approximately $933 million of outstanding debt. Our debt is
non-recourse to Loral.
If our business plan does not succeed, our operations might not generate
enough cash to pay our obligations.
Our business is capital intensive. We are subject to substantial financial
risks from possible delays or reductions in revenue, unforeseen capital needs or
unforeseen expenses. Our ability to satisfy our obligations will depend upon our
future financial performance which is subject to:
o the successful execution of our business plan;
o general economic conditions; and
o financial, business, regulatory and other factors, including
international conditions.
These factors are to some extent beyond our control.
THERE ARE RISKS IN CONDUCTING BUSINESS INTERNATIONALLY.
Much of our business is conducted outside the United States, which imposes
more risks. We could be harmed financially and operationally by changes in
foreign regulations and telecommunications standards, tariffs or taxes and other
trade barriers. Customers outside of the developed world could have difficulty
in obtaining the U.S. dollars they owe us, as a result of exchange controls.
Additionally, exchange rate fluctuations may adversely affect the ability of our
customers to pay us in U.S. dollars. Moreover, if we ever need to pursue legal
remedies against our foreign customers and business partners, we may have to sue
them abroad, where it could be hard for us to enforce our rights.
OUR BUSINESS IS REGULATED, CAUSING UNCERTAINTY AND ADDITIONAL COSTS.
Our business is regulated by authorities in more than 100 jurisdictions,
including the FCC, the International Telecommunications Union and the European
Union. As a result, some of the activities which are important to our strategy
are beyond our control. The proposed launch and operation of Orion 2 and Orion 3
and our international service offerings are strategically important activities
which are regulated by various government and quasi-government authorities and
organizations.
6
Regulatory authorities in the various jurisdictions in which we operate can
modify, withdraw or impose charges or conditions upon the licenses which we
need, and so increase our cost of doing business. The regulatory process also
requires that we negotiate with third parties operating or intending to operate
satellites at or near orbital locations where we place our satellites so that
the frequencies of the satellites do not interfere. Because we cannot guarantee
the results of negotiations with third parties, "frequency coordination" is an
additional source of uncertainty. We cannot guarantee successful frequency
coordination for our satellites. In particular, we have learned that Eutelsat,
which may claim a priority filing with the International Telecommunications
Union, has recently placed a satellite that is beyond its useful life at 12.5(0)
W.L, near the 12(0) W.L. orbital location intended for Orion 2. If Eutelsat
launches a replacement satellite into the 12.5(0) W.L. orbital location, it
would interfere with the Orion 2 satellite at 12(0) W.L. We have entered into
discussions with Eutelsat to resolve the issues relating to this orbital
location, however, we cannot guarantee a successful resolution.
Failure to successfully coordinate our satellites' frequencies or to
receive other required regulatory approvals could have a material adverse effect
on our financial condition and on our results of operations.
WE HAVE MANY COMPETITORS.
We compete with well-capitalized companies. These companies have
considerable financial resources, which they may use to gain advantages in
marketing and in technological innovation. This could have a material adverse
effect on our financial condition and on our results of operations. Each of our
businesses is subject to intense competition, including from:
o several of the world's largest corporations, such as Hughes
Space & Communications, Inc., a subsidiary of General Motors
Corporation, and Lockheed Martin Corporation;
o governments and quasi-government organizations, such as Intelsat
and Eutelsat;
o companies with competitive services, such as PanAmSat
Corporation; and
o others using alternative technologies, such as terrestrial
telecommunications and cable television, who are constantly
pursuing advanced technologies in order to enhance their
competitive positions.
We compete for customers and for market share. We also compete for local
regulatory approval in places in which both we and a competitor may want to
operate. We also compete for scarce frequency assignments and geosynchromous
orbital positions.
IMPACT OF YEAR 2000
The Company is evaluating the potential effect of the year 2000 on its
information processing systems. It is not known at this time what modifications,
if any, will be required. All costs associated with any modification will be
expensed as incurred.
The Company's Year 2000 Program is proceeding on schedule. The Year 2000
Issue is the result of computer programs which were written using two digits
rather than four to signify a year (i.e., the year 1999 is denoted as "99" and
not "1999"). Computer progra ms written using only two digits may recognize the
year 2000 as the year 1900. This could result in a system failure or
miscalculations causing disruption of operations.
The Company has implemented a Year 2000 program (the "Year 2000 Program")
for its internal products, system and equipment, as well as for key vendor and
customer supplied products, systems and equipment. As part of the Year 2000
Program, the Company is assessing the Year 2000 capabilities of, among other
things, its satellite, ground equipment, research and development activities,
and facility management systems. The Year 2000 Program consists of the following
phases: Inventory of Year 2000 items, Assessment (including prioritization),
Remediation (including modification, upgrading and replacement), Testing and
Auditing. This five-step program is divided into six major sections covering
both information and non-information technology systems: 1) business systems, 2)
technical systems, 3) products and services, 4) imbedded hardware/firmware, 5)
vendor supplied products and 6) customer provided products. As of February 28,
1999, the Company has completed approximately 95 percent of the inventory phase
and approximately 95 percent of its assessment phase. The Company expects to
complete the first four phases, through the testing phase, of the Year 2000
Program during the third quarter of 1999, which is prior to any anticipated
material impact on the operations of the Company. The fifth phase, the audit
phase, commenced in January 1999, and is expected to continue through the third
quarter of 1999 to accommodate re-audits if necessary.
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Both internal and external resources are being utilized to execute the
Company's plan. The program to address Year 2000 has been underway since July
1997. The incremental costs incurred to date for this effort by the Company were
approximately $50,000. Based on the efforts of the Company to date, the Company
anticipates additional incremental expenses of approximately $165,000 will be
incurred to substantially complete the effort.
Based upon the accomplishments to date, no contingency plans are expected
to be needed. As risks are identified, contingency plans will be developed and
implemented as necessary. However, because of the progress achieved to date and
the Company's expectations that its Year 2000 program will be substantially
complete in the third quarter of calendar 1999, the Company believes adequate
time will be available to insure alternatives can be developed, assessed and
implemented prior to a Year 2000 issue having a material negative impact on the
operations of the Company. However, there can be no assurance that such
modifications and conversions, if required, will be completed on a timely basis.
The cost of the program and the dates on which the Company believes it will
substantially complete Year 2000 modifications are based on management's best
estimates. Such estimates were derived using software surveys and programs to
evaluate calendar date exposures and numerous assumptions of future events,
including the continued availability of certain resources, third-party year 2000
readiness and other factors. Because none of these estimates can be guaranteed,
actual results could differ materially and adversely from those anticipated.
Specific factors that might cause an adjustment of costs are: number of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, the ability to validate supplier certification and similar
uncertainties.
The Company's failure to remediate a material Year 2000 problem could
result in an interruption or failure of certain basic business operations. These
failures could materially and adversely effect the Company's results of
operations, liquidity and financial condition. The Company is also assessing the
Year 2000 readiness of key third-party suppliers. Information requests have been
distributed to such suppliers and replies are being evaluated. If the risk is
deemed material, on-site visits to suppliers will be conducted to verify the
adequacy of the information received. However, due to the general uncertainty of
the Year 2000 problem, including uncertainty with regard to third-party
suppliers and customers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have an adverse material impact on
the Company's results of operations, liquidity or financial condition. There can
be no assurance given that the Company's Year 2000 Program will be successful in
avoiding any interruption or failure of certain basic business operations, which
may have a material adverse effect on the Company's results of operations or
financial position.
THERE ARE RISKS REGARDING FORWARD-LOOKING STATEMENTS.
Some statements or information contained in this Form 10-K are not
historical facts but are "forward-looking statements" (as such term is defined
in the Private Securities Litigation Reform Act of 1995). They can be identified
by the use of forward-looking words such as "believes", "expects", "plans",
"may", "will", "should", or "anticipates" or their negatives or other variations
of these words or other comparable words, or by discussions of strategy that
involve risks and uncertainties. Some of the factors which may cause future
results and performance to differ from what we may imply here are:
o the space environment, where our satellites operate, is a harsh
environment;
o governments may change regulations or institute new rules, which
could have an impact on our operations;
o we may not successfully coordinate satellite frequencies with
third parties;
o there is severe competition in our business; and
o we owe significant amounts of money.
We warn you that forward-looking statements are only predictions. Actual
events or results may differ materially as a result of risks that we face,
including those set forth elsewhere in this section. These are representative of
factors that could affect the outcome of the forward-looking statements.
ITEM 2. PROPERTIES.
Loral Orion owns seven acres of land in Mt. Jackson, Virginia and leases
approximately 78,000 square feet for office space and its operations center.
Management believes that the facilities are sufficient for its current
operations.
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ITEM 3. LEGAL PROCEEDINGS.
While Orion is party to legal and regulatory proceedings incident to its
business, there are no material legal proceedings pending or, to the knowledge
of management, threatened against Orion or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to General Instruction I of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the Company's outstanding common stock is owned by Loral Space &
Communications Corporation, a wholly owned subsidiary of Loral. Therefore, there
is no public trading market for the Company's common stock. The Company has
never paid dividends on its common stock. Loral Orion's indentures relating to
its Senior Notes and Senior Discount Notes include certain restrictions on Loral
Orion's ability to pay dividends or make loans to Loral.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Except for the historical information contained herein, the matters
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, and elsewhere in this Form 10-K, are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In
addition, from time to time, Loral Orion, Loral or their representatives have
made or may make forward-looking statements, orally or in writing. Such
forward-looking statements may be included in, but are not limited to, various
filings made by Loral Orion or Loral with the Securities and Exchange
Commission, press releases or oral statements made by or with the approval of an
authorized executive officer of Loral Orion or Loral. Actual results could
differ materially from those projected or suggested in any forward-looking
statements as a result of a wide variety of factors or conditions.
GENERAL
Loral Orion, Inc. (the "Company" or "Loral Orion"), formerly known as Loral
Orion Network Systems, Inc., is a holding company with no assets or operations
other than its investments in its subsidiaries. Through the operations of its
subsidiary Guarantors, the Company's principal business is providing
satellite-based communications services for private communications networks and
video distribution and other satellite transmission services. In 1998, Loral
Orion organized its business into two distinct operating segments as follows
(see Note 8 to the consolidated financial statements):
Fixed Satellite Services: Leasing transponder capacity and providing
value-added services to customers for a wide variety of applications,
including the distribution of broadcast programming, news gathering,
business television, distance learning and direct-to-home ("DTH") services.
The Company's fixed satellite services ("FSS") assets, will be managed by
Loral Skynet effective January 1, 1999, and
Data Services: Business in development, providing managed communications
networks and Internet and intranet services, using transponder capacity on
the Loral Skynet Telstar and Loral Orion fleets.
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).
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LORAL ORION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
OVERVIEW
The Company's revenues are principally generated from two to five year
contracts for delivery of communications services derived principally from
recurring monthly fees from its customers. The revenues from each contract vary,
depending upon the type of service, amount of capacity, data handling ability of
the network, the number of very small aperture terminals ("VSATs") (which
generally are owned by the Company), value-added services and other factors.
Substantially all of the Company's contracts are denominated in U.S. dollars.
The Company begins to record revenues under its contracts upon service
commencement to customers.
The services provided by the Company have been subject to decreasing prices
over recent years due to increased competition. This pricing pressure is
expected to continue (and may accelerate) for the foreseeable future,
particularly if, as expected, capacity continues to increase. The Company will
need to increase its volume of sales in order to compensate for such price
reductions. The Company believes that customers will increase the data speed in
their communications networks to support new applications, and that such
upgrading of customer networks will lead to increased revenues that will
mitigate the effect of price reductions. However, there can be no assurance that
this will occur. The Company expects to continue to incur net losses and have
negative cash flow (after payments for capital expenditures and interest) for
the foreseeable future.
The Company's direct cost of services includes principally (i) costs
relating to the installation, maintenance and licensing of VSAT earth stations
at its customers' premises; (ii) satellite lease payments for transponder
capacity (generally for services outside of the Orion 1 footprint); (iii)
in-orbit insurance premiums; and (iv) personnel costs and travel related to
telemetry, tracking and control facility ("TT&C"), network monitoring, network
design and similar activities. Regarding TT&C costs, the Company and Loral
Skynet, a division of Loral SpaceCom Corporation, which is in turn a
wholly-owned subsidiary of Loral, have entered into agreements (the "Loral
Skynet Agreements") effective on January 1, 1999, whereby Loral Skynet provides
to Orion (i) marketing and sales of satellite capacity services on the Orion
satellite network and related billing and administration of customer contracts
for those services (the "Sales Services") and (ii) telemetry, tracking and
control services for the Orion satellite network (the "Technical Services", and
together with the Sales Services, the "Services"). Orion will be charged Loral
Skynet's costs for providing these services plus a 5 percent administrative fee.
Loral Skynet currently provides the Services for its own Telstar satellite
network and Technical Services for other third parties. Orion believes that it
will achieve cost savings as a result of the consolidation of the Services with
Loral Skynet pursuant to the Loral Skynet Agreements and allow Orion to place
greater resources and focus on the business of providing Data Services, which
will increase as the Company's business grows. Sales and marketing expenses
consist of salaries, sales commissions (including commissions to third party
sales representatives), travel and promotional expenses. The Company commenced a
significant expansion of its marketing program in 1997 which continued in 1998.
Due to the complexity of the Company's services, and the continued expansion of
sales personnel, sales and marketing expenses increased significantly during
1998. Sales and marketing expenses are expected to decrease in 1999 as a result
of the Services agreement with Skynet. General and administrative expenses
consist of personnel costs other than for selling and engineering and include
information systems, professional services, and occupancy costs. These costs
will increase generally as the Company's operations expand. Depreciation and
amortization expenses result mainly from the depreciation of the Orion 1
satellite, amortization of goodwill and other intangibles and the depreciation
of VSATs and the related equipment to service the expansion of the private
network communication services business. Interest income is primarily the result
of interest earned on the proceeds from the Company's debt and equity offerings.
Interest costs stem primarily from the Company's outstanding Senior Notes and
Senior Discount Notes.
ORION 2 AND ORION 3
Orion 2. During the second quarter of 1998, the Company entered into a
satellite procurement contract with Space Systems/Loral ("SS/L"), a wholly owned
subsidiary of Loral SpaceCom Corporation for the construction and launch of the
Orion 2 satellite for operation in the Atlantic Ocean region at 12(degree) W.L.
(the "SS/L Contract"). The SS/L Contract provides for delivery in-orbit of the
Orion 2 aboard an Ariane 44L launch vehicle in the third quarter of 1999. The
SS/L satellite design provides for 38 Ku-band transponders with a footprint
covering the Eastern United States, Southeastern Canada, Europe, the
Commonwealth of Independent States, the Middle East, North and South Africa and
South America. The Company also notified Matra Marconi Space ("Matra") that it
cancelled its satellite procurement contract with Matra for the construction and
launch of a satellite for operation in the Atlantic Ocean region at 12(degree)
W.L. (the "Matra Contract"). As a result of the cancellation of the Matra
Contract, the Company will have no obligation to make further payments to Matra,
but Matra retained amounts previously paid by the Company of $49.1 million.
10
LORAL ORION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
The Company believes that the Orion 2 satellite being procured from SS/L
offers significant benefits compared to the Matra satellite. Orion's cash will
be used to fund the SS/L Contract up to an amount that when added to the amounts
previously paid to Matra, will not exceed $202 million, the total amount that
would otherwise have been due to Matra if the Matra Contract had not been
canceled. Any requirements to SS/L in excess of $202 million for Orion 2 will be
funded with additional equity contributed from Loral. Moreover, the
SS/L-designed satellite is both larger and more powerful than the Matra-designed
satellite. The SS/L satellite will have 8 additional transponders and will
provide greater transmitted power to Orion's customers. The expected in-orbit
life of the SS/L satellite is approximately 16 years compared to 13 years for
the Matra satellite. The SS/L satellite is designed to provide enhanced
transponder switching capabilities as compared to the Matra satellite and also
allows for both uplinking and downlinking of transmissions from South Africa,
while the Matra satellite would not have allowed for uplinking.
Orion 3. The Company entered into a satellite contract with Hughes Space
and Communications International, Inc. in 1997 for the construction and launch
of Orion 3. The contract provides for delivery in orbit of Orion 3 for a firm
fixed price of $203 million excluding launch insurance. Orion 3 will cover broad
areas of the Asia Pacific region including China, Japan, Korea, Southeast Asia,
Australia, New Zealand, Eastern Russia and Hawaii.
Pre-Construction Sale of Transponders on Orion 3. The Company has entered
into a contract with DACOM Corporation, a Korean communications company
("DACOM"), under which DACOM will, subject to certain conditions, purchase eight
dedicated transponders on Orion 3 for 13 years, in return for approximately $89
million, payable over a period from December 1996 through seven months following
the lease commencement date for the transponders. Payments are subject to refund
if Orion 3 fails to commence commercial operation by June 30, 1999. Through
December 31, 1998, the Company has received $35.5 million from DACOM, including
interest earned on the investment of these payments of $1.5 million.
Satellite Launch and Operation Risk. There can be no assurance that Orion 2
or Orion 3 will be successfully launched or operate in accordance with their
design. While the Company intends to procure launch insurance for the
satellites, a total or partial loss of either satellite will involve delays and
loss of revenue which will impair the Company's ability to service its
indebtedness and such insurance will not protect the Company against business
interruption, loss or delay of revenues or similar losses and may not fully
reimburse the Company for its expenditures.
RESULTS OF OPERATIONS
On March 20, 1998, Orion Network Systems, Inc. ("Orion") was acquired by
Loral Space & Communications Ltd. ("Loral"), through the merger (the "Merger")
of a wholly owned subsidiary of Loral, Loral Satellite Corporation ("Merger
Sub"), with and into Orion. Loral consummated the acquisition by issuing 18
million shares of its common stock and assuming existing Orion vested options
and warrants to purchase 1.4 million shares of Loral common stock representing
an aggregate purchase price of $472.5 million. Orion was the surviving
corporation (the "Surviving Corporation") of the Merger and thereby became a
wholly owned subsidiary of Loral. At the effective date of the Merger, Loral
contributed its investment in Orion to Loral Space & Communications Corporation,
a wholly owned subsidiary of Loral, and Orion changed its name to "Loral Orion
Network Systems, Inc." The name has since been changed to "Loral Orion, Inc."
Following the Merger, the capital stock of Loral Orion ceased to be
publicly traded. However, the Company continued to have registered bonds
outstanding and will continue to have filing requirements with the SEC.
For accounting purposes, the Merger was accounted for as of March 31, 1998
using the purchase method. Accordingly, the consolidated balance sheet at
December 31, 1998 reflects the push-down of the purchase price allocations. The
purchase price represented $447.7 million in excess of Orion's net book value,
which was primarily allocated to costs in excess of net assets acquired of
$619.7 million and a fair value adjustment of $153.4 million to increase the
carrying value of Orion's senior notes and senior discount notes.
11
LORAL ORION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
Acquisition of Teleport Europe GmbH. On March 26, 1997, the Company
acquired German-based Teleport Europe GmbH (a communications company
specializing in private satellite networks for voice and data services), whose
name was subsequently changed to Loral Orion-Europe GmbH ("Orion Europe"). The
Company has consolidated the operations of Orion Europe for the year ended
December 31, 1997, retroactively to January 1, 1997. The effect of this
consolidation on operations prior to acquisition was to increase consolidated
revenues by approximately $4.1 million, increase total operating expenses by
approximately $4.0 million and other expenses by approximately $0.7 million. The
preacquisition loss of Orion Europe of $0.6 million has been deducted from the
consolidated statement of operations for the year ended December 31, 1997.
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 discussion of revenues and EBITDA
reflects the results of Loral Orion's operating segments for the two years
ending December 31, 1998 and 1997, on a pro forma basis. Also see Note 8 to the
consolidated financial statements for additional information on segment results.
In order to provide an understanding of the Company, the results of
operations discusses the results for the year ended December 31, 1998 and
December 31, 1997, on a pro forma basis. The following pro forma results of
operations for the years ended December 31, 1998 and 1997 have been presented to
give the effect as of January 1, 1997, of the Merger with Loral, and the
Exchange, the Orion Merger, and the Financings (the "Transactions") all as
described in Note 1 to the Company's financial statements. The pro forma results
of operations does not purport to present the actual results of operations of
the Company had the Transactions in fact occurred on January 1, 1997, nor is it
indicative of the results of operations that may be achieved in the future.
As a result of these Transactions, the pro forma adjustments resulted in an
increase in depreciation and amortization expenses of approximately $3.9 million
and $17.6 million for the years ended December 31, 1998 and 1997, respectively.
This increase primarily relates to the step up in the book value of Orion 1 and
increased amortization expenses for cost in excess of net assets acquired
associated with the Loral Merger. The pro forma results for 1998 include a $12.8
million adjustment to eliminate merger costs. Pro forma interest expense for the
years ended December 31, 1998 and 1997 was $67.1 million and $77.8 million, a
decrease of $0.4 million and $6.0 million from historical amounts, respectively.
The decrease in interest expense is primarily attributable to the additional
capitalized interest costs attributable to two satellites under construction,
amortization of bond premium relating to the fair value adjustments and the
elimination of the debentures, as a result of the Loral Merger.
12
LORAL ORION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
OPERATING REVENUES (IN MILLIONS):
PRO FORMA
YEAR ENDED
PRO FORMA DECEMBER 31,
YEAR ENDED 1997
DECEMBER 31, PREDECESSOR
1998 COMPANY
------------ -------------
Fixed satellite services ................ $ 33.1 $ 31.3
Data services ........................... 50.3 41.4
------------ -------------
Operating revenues ....................... $ 83.4 $ 72.7
============= =============
EBITDA (1) (IN MILLIONS):
PRO FORMA
YEAR ENDED
PRO FORMA DECEMBER 31,
YEAR ENDED 1997
DECEMBER 31, PREDECESSOR
1998 COMPANY
------------- ------------
Fixed satellite services ................. $ 27.9 $ 26.5
Data services ........................... (18.9) (21.4)
------------ -------------
EBITDA.................................... $ 9.0 $ 5.1
============= =============
- - ------------------------
(1) Pro forma EBITDA (which is equivalent to operating income (loss) before
depreciation and amortization) is provided because it is used as the measure of
segment profit or loss and 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 Loral Orion'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.
13
LORAL ORION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
Revenue and Backlog. Pro forma revenues for the year ended December 31,
1998 and 1997 were $83.4 million and $72.7 million, respectively, an increase of
$10.7 million or 15 percent. This increase is primarily attributable to private
communications network services operations, which added 159 customer sites
during 1998.
At December 31, 1998, the Company had a contracted backlog (representing
future revenues under customer contracts) of approximately $308.5 million
compared to $269.5 million at December 31, 1997, an increase of 14 percent.
Revenue from contracted backlog is typically earned over two to five years.
Direct Expenses. Direct expenses on a pro forma basis for 1998 were $26.3
million, or 32 percent of sales compared to $26.5 million, or 36 percent of
sales for the same period in 1997. This decrease was primarily attributable to
reduced Internet access and terrestrial link charges during the fourth quarter
of 1998. These costs support the Worldcast Internet access product
("Worldcast"), which provides international internet connectivity through Orion
1.
Sales and Marketing Expenses. Sales and marketing expenses on a pro forma
basis were $25.1 million for the year ended December 31, 1998, as compared to
$19.4 million for the same period in 1997, an increase of $5.7 million or 29
percent. This increase primarily relates to additional sales salaries and
commissions, independent contractor fees and advertising associated with the
growth in the private communications network service business and Worldcast.
Engineering and Technical Services Expenses. Engineering and technical
services expenses on a pro forma basis for the year ended December 31, 1998 were
$8.4 million compared to $7.8 million for the same period in 1997, an increase
of $0.6 million or 8 percent. These increases are primarily due to additional
salaries associated with support of Worldcast.
General Administrative Expenses. General and administrative expenses on a
pro forma basis were $14.5 million for the year ended December 31, 1998,
compared to $14.0 million for the same period in 1997, an increase of $0.5
million or 4 percent.
Depreciation and Amortization. Depreciation and amortization expense on a
pro forma basis for the years ended December 31, 1998 and 1997 were $67.8
million and $65.8 million, respectively, an increase of $2.0 million or 3
percent. The increase was primarily a result of depreciation of ground equipment
to service the expansion of the private network communication services business.
Merger Costs. Merger costs associated with the acquisition of the Company
by Loral were $12.8 million for the year ended December 31, 1998, which were
eliminated in the pro forma adjustments.
Interest. Pro forma interest income was $14.7 million for the year ended
December 31, 1998, compared to $24.7 million for the same period in 1997. The
decrease in interest income is due to a reduction in the balance held in the
Company's segregated and restricted funds, which were used for the construction
of satellites and to fund interest payments on the Company's senior notes. Pro
forma interest expense for the years ended December 31, 1998 and 1997 was $67.1
million and $77.8 million, respectively. The decrease in interest expense is
primarily attributable to the additional capitalized interest costs attributable
to two satellites under construction, amortization of bond premium relating to
the fair value adjustments and the elimination of the debentures, as a result of
the Loral Merger.
Income Taxes. The Company is included in the consolidated U.S. federal
income tax return of Loral. Pursuant to a tax sharing agreement for 1998 with
Loral, the Company is entitled to reimbursement for the use of its tax losses
when such losses are utilized by Loral. For the year ended December 31, 1998,
the Company recorded a receivable under this tax sharing agreement of
approximately $4.9 million and a deferred tax provision of $3.8 million. The
deferred tax asset of $53.9 million on the accompanying balance sheet arises
primarily from the tax effect of the temporary differences between the carrying
amount of the senior notes and the senior discount notes payable for financial
and income tax purposes.
Net Loss. As a result of the above, the Company's pro forma net losses for
the years ended December 31, 1998 and 1997 were $110.3 million and $113.7
million, respectively.
14
LORAL ORION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
RESULTS BY OPERATING SEGMENT
Fixed Satellite Service
Revenues and EBITDA for the fixed satellite services segment increased 6
percent and 5 percent, respectively, in 1998 versus 1997. FSS revenue for 1998
was $33.1 million versus $31.3 million in 1997. EBITDA on the same basis was
$27.9 million in 1998, or 84 percent of revenues, versus EBITDA of $26.5
million, or 85 percent of revenues, in 1997. Funded backlog for the fixed
satellite services segment totaled $164.3 million at the end of 1998, versus
$163.2 million in backlog at year end 1997. Capital expenditures for 1998 were
approximately $286.9 million. In 1999, capital expenditures are expected to
decrease due to the expected launches of the Orion 2 and Orion 3 satellites.
During the fourth quarter of 1998, Loral completed its integration plan for
Loral Orion and transferred management of Loral Orion's satellite capacity
leasing and satellite operations to Loral Skynet, effective January 1, 1999. In
addition to increasing the operational efficiency, the realignment permits Loral
Orion to focus on and leverage its experience in the global data services
market.
Data Services
Revenues for the data services segment in 1998 were approximately $50.3
million versus $41.4 million in 1997, primarily from Loral Orion's corporate
data networking and Internet and Intranet services businesses. EBITDA for 1998
was a loss of approximately $18.9 million in 1998 versus a loss of $21.4 million
in 1997. At December 31, 1998, funded backlog for the segment was $144.2
million, at the end of 1998, versus $106.3 at year end 1997, which was all from
external sources. Approximately 40 percent of 1998 external funded backlog is
expected to be realized in 1999. Capital expenditures in 1998 were approximately
$15.6 and are estimated to increase in 1999.
OTHER MATTERS
IMPACT OF YEAR 2000
The Company is evaluating the potential effect of the year 2000 on its
information processing systems. It is not known at this time what modifications,
if any, will be required. All costs associated with any modification will be
expensed as incurred.
The Company's Year 2000 Program is proceeding on schedule. The Year 2000
Issue is the result of computer programs which were written using two digits
rather than four to signify a year (i.e., the year 1999 is denoted as "99" and
not "1999"). Computer programs written using only two digits may recognize the
year 2000 as the year 1900. This could result in a system failure or
miscalculations causing disruption of operations.
The Company has implemented a Year 2000 program (the "Year 2000 Program")
for its internal products, system and equipment, as well as for key vendor and
customer supplied products, systems and equipment. As part of the Year 2000
Program, the Company is assessing the Year 2000 capabilities of, among other
things, its satellite, ground equipment, research and development activities,
and facility management systems. The Year 2000 Program consists of the following
phases: Inventory of Year 2000 items, Assessment (including prioritization),
Remediation (including modification, upgrading and replacement), Testing and
Auditing. This five-step program is divided into six major sections covering
both information and non-information technology systems: 1) business systems, 2)
technical systems, 3) products and services, 4) imbedded hardware/firmware, 5)
vendor supplied products and 6) customer provided products. As of February 28,
1999, the Company completed approximately 95 percent of the inventory phase and
approximately 95 percent of its assessment phase. The Company expects to
complete the first four phases, through the testing phase, of the Year 2000
Program during the third quarter of 1999, which is prior to any anticipated
material impact on the operations of the Company. The fifth phase, the audit
phase, commenced in January 1999, and is expected continue through the third
quarter of 1999 to accommodate re-audits if necessary.
15
LORAL ORION, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
Both internal and external resources are being utilized to execute the
Company's plan. The program to address Year 2000 has been underway since July
1997. The incremental costs incurred to date for this effort by the Company was
approximately $50,000. Based on the efforts of the Company to date, the Company
anticipates additional incremental expenses of approximately $165,000 will be
incurred to substantially complete the effort.
Based upon the accomplishments to date, no contingency plans are expected
to be needed. As risks are identified, contingency plans will be developed and
implemented as necessary. However, because of the progress achieved to date and
the Company's expectations that its Year 2000 program will be substantially
complete in the third quarter of calendar 1999, the Company believes adequate
time will be available to insure alternatives can be developed, assessed and
implemented prior to a Year 2000 issue having a material negative impact on the
operations of the Company. However, there can be no assurance that such
modifications and conversions, if required, will be completed on a timely basis.
The cost of the program and the dates on which the Company believes it will
substantially complete Year 2000 modifications are based on management's best
estimates. Such estimates were derived using software surveys and programs to
evaluate calendar date exposures and numerous assumptions of future events,
including the continued availability of certain resources, third-party year 2000
readiness and other factors. Because none of these estimates can be guaranteed,
actual results could differ materially and adversely from those anticipated.
Specific factors that might cause an adjustment of costs are: number of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, the ability to validate supplier certification and similar
uncertainties.
The Company's failure to remediate a material Year 2000 problem could
result in an interruption or failure of certain basic business operations. These
failures could materially and adversely effect the Company's results of
operations, liquidity and financial condition. The Company is also assessing the
Year 2000 readiness of key third-party suppliers. Information requests have been
distributed to such suppliers and replies are being evaluated. If the risk is
deemed material, on-site visits to suppliers will be conducted to verify the
adequacy of the information received. However, due to the general uncertainty of
the Year 2000 problem, including uncertainty with regard to third-party
suppliers and customers, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have an adverse material impact on
the Company's results of operations, liquidity or financial condition. The
Company's Year 2000 Program is expected to have considerably reduced the
Company's level of exposure in regard to third-party supplier Year 2000
problems. There can be no assurance given that the Company's Year 2000 Program
will be successful in avoiding any interruption or failure of certain basic
business operations, which may have a material adverse effect on the Company's
results of operations or financial position.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings or financial position. The
Company is required to adopt SFAS 133 on January 1, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
As of December 31, 1998, the fair value of the Company's long-term debt is
estimated to be $761 million using quoted market prices, for the Company's
Senior Notes and Senior Discount Notes. The long-term debt carrying value
exceeded fair value by $173 million. Market risk on debt is estimated as the
potential increase in annual interest expense resulting from a hypothetical one
percent increase in the interest rates and amounts to $9 million.
16
ITEM 8.
INDEPENDENT AUDITORS' REPORT
To the Shareholder of Loral Orion, Inc.:
We have audited the accompanying consolidated balance sheet of Loral Orion, Inc.
and its subsidiaries (collectively, the Successor Company), a wholly-owned
subsidiary of Loral Space & Communications Corporation, as of December 31, 1998
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the nine months ended December 31, 1998. We have also
audited the consolidated statements of operations, changes in stockholders'
equity and cash flows of Orion Network Systems, Inc. and its subsidiaries
(collectively, the Predecessor Company) for the three months ended March 31,
1998. These financial statements are the responsibility of the Successor and
Predecessor Companies' management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidences supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Loral
Orion, Inc. and its subsidiaries as of December 31, 1998, and the results of
their operations and their cash flows for the nine months ended December 31,
1998 in conformity with generally accepted accounting principles. Further, in
our opinion, the Predecessor Company's consolidated financial statements
referred to above present fairly, in all material respects, the results of their
operations and their cash flows for the three months ended March 31, 1998 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Successor
Company adopted a new accounting basis effective March 31, 1998 in connection
with a change of ownership and recorded net assets as of that date at the new
owner's acquisition cost. Accordingly, the book values of assets and liabilities
and related depreciation, amortization and interest charges in the accompanying
consolidated balance sheet as of December 31, 1998 and consolidated statement of
operations for the nine months ended December 31, 1998, are not comparable to
those of earlier periods presented.
DELOITTE & TOUCHE LLP
Washington, DC
February 16, 1999
17
ITEM 8 (CONTINUED).
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors of Loral Orion, Inc. (formerly Orion Network Systems,
Inc.):
We have audited the accompanying consolidated balance sheet of Loral Orion,
Inc. (formerly Orion Network Systems, Inc.) as of December 31, 1997, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the two years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Loral Orion,
Inc. at December 31, 1997, and the consolidated results of its operations and
its cash flows for each of the two years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Washington, DC
February 20, 1998
18
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31,
--------------------------------------------
1997
PREDECESSOR
1998 COMPANY
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 35,861 $ 70,009
Restricted assets 50,180 50,064
Accounts receivable (less allowance for doubtful
accounts of $1,019 and $734
at December 31, 1998 and 1997,
respectively) 15,292 11,781
Prepaid expenses and other current assets 4,299 6,846
-------------- ---------------
Total current assets 105,632 138,700
Restricted and segregated assets 22,675 306,826
Property and equipment, at cost:
Land 74 74
Satellite and related equipment 263,188 322,159
Telecommunications equipment 35,630 40,654
Furniture and computer equipment 8,693 8,627
307,585 371,514
-------------- ---------------
Less accumulated depreciation (38,706) (77,080)
Satellite construction in progress, including capitalized
interest of $20,198 and $7,346 at December 31, 1998
and 1997,
respectively 331,861 106,843
-------------- ---------------
Net property and equipment 600,740 401,277
Due from Loral 3,619 --
Deferred financing costs, net -- 22,510
Cost in excess of net assets acquired associated
with the Loral merger, net 608,015 --
Deferred income taxes 53,915 --
Other assets, net 22,908 27,179
-------------- ---------------
Total assets $ 1,417,504 $ 896,492
============== ===============
See notes to consolidated financial statements.
19
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par amounts)
(continued)
DECEMBER 31,
--------------------------------------------
1997
PREDECESSOR
1998 COMPANY
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 1,826 $ 6,406
Accounts payable 2,035 5,231
Accrued and other current liabilities 16,162 11,604
Customer deposits 7,897 2,801
Deferred revenue 35,841 3,320
Interest payable 22,842 24,771
-------------- --------------
Total current liabilities 86,603 54,133
Long-term debt 931,669 790,671
Other long-term liabilities 141 21,803
Series A 8% Cumulative Redeemable Convertible Preferred Stock,
$.01 par value; 15,000 shares authorized; 0 and 6,933 shares
issued and outstanding at December 31, 1998 and 1997, respectively,
plus accrued dividends --
Series B 8% Cumulative Redeemable Convertible Preferred Stock,
$.01 par value; 5,000 shares authorized; 0 and 2,059 shares issued
and outstanding at December 31, 1998 and 1997, respectively,
plus accrued dividends -- 2,467
Series C 6% Cumulative Redeemable Convertible Preferred Stock,
$.01 par value; 150,000 shares authorized; 0 and 82,641 shares issued
and outstanding at December 31, 1998 and 1997,
respectively, plus accrued dividends and accretion -- 65,654
Commitments and contingencies:
Stockholders' equity (deficit):
Common stock, $.01 par value; 1,000 and 40,000,000 shares
authorized; 100 and 15,959,089 outstanding at December 31,
1998 and 1997, respectively -- 160
Capital in excess of par value 481,791 153,294
Treasury stock, 0 and 269,274 shares at December 31, 1998
and 1997, respectively -- (91)
Unearned compensation (3,347) --
Accumulated other comprehensive income (loss) 616 (956)
Accumulated deficit (79,969) (199,256)
-------------- --------------
Total stockholders' equity (deficit) 399,091 (46,849)
-------------- --------------
Total liabilities and stockholders' equity (deficit) $ 1,417,504 $ 896,492
============== ==============
See notes to consolidated financial statements.
20
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
PREDECESSOR COMPANY
------------------------------------------------------
NINE MONTHS THREE MONTHS YEARS ENDED DECEMBER 31,
ENDED ENDED ----------------------------------
DECEMBER 31, 1998 MARCH 31, 1998 1997 1996
------------------- --------------- --------------- ----------------
Service revenue $ 64,608 $ 18,790 $ 72,741 $ 41,847
Operating expenses:
Direct 19,906 6,406 26,531 15,457
Sales and marketing 19,365 5,790 19,424 11,465
Engineering and technical services 6,486 1,898 7,750 5,191
General and administrative 10,834 3,707 13,956 9,139
Depreciation and amortization 51,434 12,483 48,161 36,948
Merger costs 612 12,145 -- --
------------------- --------------- --------------- ----------------
Total operating expenses 108,637 42,429 115,822 78,200
------------------- --------------- --------------- ----------------
Loss from operations (44,029) (23,639) (43,081) (36,353)
Interest (income) (9,299) (5,425) (24,711) (2,314)
Interest expense 46,439 21,190 83,769 27,764
Other (income) expense (167) 287 507 23
------------------- --------------- --------------- ----------------
Loss before income taxes, extraordinary loss
on extinguishment of debt, minority interest and
preacquisition loss of acquired subsidiary (81,002) (39,691) (102,646) (61,826)
Income tax benefit 1,033 -- -- --
Extraordinary loss on extinguishment
of debt -- -- (15,763) --
Limited Partners' interest in the net loss of
Orion Atlantic -- -- 12,043 34,631
Preacquisition loss of acquired subsidiary -- -- 626 --
------------------- --------------- --------------- ----------------
Net loss (79,969) (39,691) (105,740) (27,195)
Preferred stock dividend, net of forfeitures -- (1,387) 6,034 1,370
------------------- --------------- --------------- ----------------
Net loss attributable to common stockholders $ (79,969) $ (38,304) $ (111,774) $ (28,565)
=================== =============== =============== ================
See notes to consolidated financial statements.
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
COMMON STOCK
-------------- CAPITAL IN
NUMBER EXCESS OF ACCUMULATED TREASURY
OF SHARES AMOUNT PAR VALUE DEFICIT STOCK 1
--------- ------ --------- ------- -------
Balance December 31, 1995
(Predecessor Company) 11,116 $ 111 $ 85,486 $ (58,917) $ --
Conversion of preferred stock 91 1 804 -- --
Issuance of stock warrants -- -- 300 -- --
Exercise of stock options and warrants 38 -- 342 -- --
Preferred stock dividend, net of -- -- -- (1,370) --
forfeitures
1996 net loss -- -- -- (27,195) --
------------ -------------- -------------- ---------------- ------------
Balance December 31, 1996
(Predecessor Company) 11,245 112 86,932 (87,482) --
Issuance of common stock 11 -- 142 -- --
Conversion of preferred stock 3,352 34 38,812 -- --
Conversion of debentures 735 7 10,285 -- --
Issuance of common stock for the
purchase of APSC 86 1 1,199 -- --
Issuance of common stock for
interest payments 205 2 2,623 -- --
Issuance of common stock for preferred 121 1 2,069
stock dividend payments -- --
Issuance of warrants relating to Senior
Notes and Senior -- -- 9,224 -- --
Discount Notes, net
Exercise of stock options and warrants 176 2 1,764 -- --
Employee stock purchase plan 28 1 244 -- --
Preferred stock dividend and
accretion, net of forfeitures -- -- -- (6,034) --
Purchase of treasury stock -- -- -- -- (91)
1997 net loss -- -- -- (105,740) --
Other comprehensive loss -- -- -- -- --
Comprehensive loss -- -- -- -- --
Balance December 31, 1997
(Predecessor Company) 15,959 $ 160 $ 153,294 $ (199,256) $ (91)
============ ============== ============== ================ ============
ACCUMULATED
OTHER TOTAL
UNEARNED COMPREHENSIVE STOCKHOLDERS'
COMPENSATION INCOME (LOSS) EQUITY (DEFICIT)
------------ ------------- -------------------
Balance December 31, 1995
(Predecessor Company) $ -- $ -- $ 26,680
Conversion of preferred stock -- -- 805
Issuance of stock warrants -- -- 300
Exercise of stock options and warrants -- -- 342
Preferred stock dividend, net of -- -- (1,370)
forfeitures
1996 net loss -- -- (27,195)
-------------- -------------- --------------
Balance December 31, 1996
(Predecessor Company) -- -- (438)
Issuance of common stock -- -- 142
Conversion of preferred stock -- -- 38,846
Conversion of debentures -- -- 10,292
Issuance of common stock for the
purchase of APSC -- -- 1,200
Issuance of common stock for
interest payments -- -- 2,625
Issuance of common stock for preferred 2,070
stock dividend payments -- --
Issuance of warrants relating to Senior
Notes and Senior -- -- 9,224
Discount Notes, net
Exercise of stock options and warrants -- -- 1,766
Employee stock purchase plan -- -- 245
Preferred stock dividend and
accretion, net of forfeitures -- -- (6,034)
Purchase of treasury stock -- -- (91)
1997 net loss -- --
Other comprehensive loss -- (956)
Comprehensive loss -- -- (106,696)
Balance December 31, 1997
(Predecessor Company) $ -- $ (956) $ (46,849)
=============== ============== ===============
See notes to consolidated financial statements. (continued on next page)
22
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(continued)
(in thousands)
COMMON STOCK
-------------- CAPITAL IN
NUMBER EXCESS OF ACCUMULATED TREASURY
OF SHARES AMOUNT PAR VALUE DEFICIT STOCK (1)
--------- ------ --------- ------- ---------
Balance December 31, 1997
(Predecessor Company) 15,959 $ 160 $ 153,294 $ (199,256) $ (91)
Issuance of common stock 14 -- 246 -- --
Conversion of preferred stock 5,739 57 69,831 -- --
Conversion of debentures 3,572 36 49,964 -- --
Issuance of common stock for interest
payments 184 2 2,577 -- --
Issuance of common stock for
preferred stock dividend payments 316 3 5,455 -- --
Exercise of stock options and warrants 165 2 1,638 -- --
Employee stock purchase plan 20 -- 292 -- --
Preferred stock dividends and
accretion, net of forfeiture -- -- -- 1,387 --
Recapitalization related to purchase by (25,969) (260) 195,215 237,560 91
Loral
Increase purchase price -- -- 3,491 -- --
Net loss for the three months ended
March 31, 1998 -- -- (39,691) --
Other comprehensive loss -- -- -- -- --
Comprehensive Loss
------------ ------------ -------------- --------------- ------------
Balance March 31, 1998 -- $ -- $ 482,003 $ -- $ --
============ ============ ============== =============== ============
Amortization of unearned compensation -- -- -- -- --
Stock option forfeitures -- -- (212) -- --
Net loss for the nine months ended
December 31, 1998 -- -- -- (79,969) --
Other comprehensive income -- -- -- -- --
Comprehensive loss -- -- -- -- --
------------ ------------ -------------- --------------- ------------
Balance December 31, 1998 -- $ -- $ 481,791 $ (79,969) $ --
============ ============ ============== =============== ============
ACCUMULATED
OTHER TOTAL
UNEARNED COMPREHENSIVE STOCKHOLDERS'
COMPENSATION INCOME (LOSS) EQUITY (DEFICIT)
------------ ------------- ----------------
Balance December 31, 1997
(Predecessor Company) ) $ -- $ (956) $ (46,849)
Issuance of common stock -- -- 246
Conversion of preferred stock -- -- 69,888
Conversion of debentures -- -- 50,000
Issuance of common stock for interest
payments -- -- 2,579
Issuance of common stock for
preferred stock dividend payments -- -- 5,458
Exercise of stock options and warrants -- -- 1,640
Employee stock purchase plan -- -- 292
Preferred stock dividends and
accretion, net of forfeiture -- -- 1,387
Recapitalization related to purchase by (4,512) 1,473 429,567
Loral
Increase purchase price -- -- 3,491
Net loss for the three months ended
March 31, 1998 -- --
Other comprehensive loss -- (517)
Comprehensive Loss (40,208)
--------------- --------------- --------------
Balance March 31, 1998 $ (4,512) $ -- $ 477,491
=============== =============== ==============
Amortization of unearned compensation 953 -- 953
Stock option forfeitures 212 -- --
Net loss for the nine months ended
December 31, 1998 -- --
Other comprehensive income -- 616
Comprehensive loss -- -- (79,353)
--------------- --------------- --------------
Balance December 31, 1998 $ (3,347) $ 616 $ 399,091
=============== =============== ==============
- - --------
(1) Includes 269,274 treasury shares of which 259,515 were carried at no cost
through March 31, 1998.
See notes to consolidated financial statements.
23
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
PREDECESSOR COMPANY
-----------------------------------------------------
NINE MONTHS THREE MONTHS YEARS ENDED DECEMBER 31,
----------- ----------- ------------------------
ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1998 1997 1996
---------------- --------------- --------------- ----------------
OPERATING ACTIVITIES:
Net loss $ (79,969) $ (39,691) $ (105,740) $ (27,195)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary loss on extinguishment of debt -- -- 15,763 --
Amortization of deferred taxes 3,771 -- -- --
Depreciation and amortization 51,434 12,483 48,161 36,948
Amortization of deferred financing costs -- 609 2,410 2,131
Provision for bad debts 1,325 150 1,022 919
Non-cash interest expense 24,606 11,048 34,347 2,371
Interest earned on restricted assets (6,896) (4,629) (18,203) --
Other (291) 1,644 -- (55)
Limited Partners' interest in net loss of Orion Atlantic -- -- (12,043) (34,631)
Changes in operating assets and liabilities:
Accounts receivable (3,578) (1,408) (2,923) (2,203)
Prepaid expenses and other current assets (502) 693 (2,277) (286)
Other assets (1,352) 201 (3,640) (69)
Accounts payable, accrued liabilities and other
current liabilities (1,367) (2,186) (2,393) (3,163)
Interest payable 12,403 (12,510) 16,180 579
Customer deposits 5,071 23 1,612 177
Deferred revenue 10,768 297 11,935 12,562
Due from Loral (3,619) -- -- --
-------------- -------------- --------------- ---------------
Net cash provided by (used in) operating activities 11,804 (33,276) (15,789) (11,915)
Investing activities:
Increase in restricted and segregated assets (12,000) -- (419,187) (10,000)
Uses of and transfers from restricted and segregated 273,960 35,938 90,500 --
assets
Satellite construction costs (270,429) (14,575) (102,282) (3,750)
Capital expenditures (13,667) (3,805) (11,062) (12,625)
Purchase of Teleport Europe GmbH, net of cash acquired -- -- (8,375) --
Other -- -- -- (38)
-------------- -------------- --------------- ---------------
Net cash provided by (used in) investing activities (22,136) 17,558 (450,406) (26,413)
Financing activities:
Limited Partners' capital contributions -- -- -- 30,135
Debt and equity financing costs -- -- (26,122) (2,265)
Proceeds from issuance of common stock, net of
issuance costs -- 2,117 2,153 343
Treasury stock purchase -- -- (91) --
Proceeds from issuance of debt -- -- 770,397 --
Repayment of senior notes and notes payable (2,815) (254) (216,723) (27,802)
Swap termination fee -- -- (5,288) --
Payment of satellite incentives (5,861) (1,302) (18,621) --
Other 1,068 (1,051) (1,689) 14,993
-------------- -------------- --------------- ---------------
Net cash provided by (used in) financing activities (7,608) (490) 504,016 15,404
-------------- -------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (17,940) (16,208) 37,821 (22,924)
Cash and cash equivalents at beginning of period 53,801 70,009 32,188 55,112
-------------- -------------- --------------- ---------------
Cash and cash equivalents at end of period $ 35,861 $ 53,801 $ 70,009 $ 32,188
============== ============== =============== ===============
See notes to consolidated financial statements.
24
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands unless otherwise indicated)
1. ORGANIZATION AND BUSINESS
Loral Orion, Inc. (the "Company" or "Loral Orion"), formerly known as Loral
Orion Network Systems, Inc., is a holding company with no assets or operations
other than its investments in its subsidiaries. Through the operations of its
subsidiary Guarantors, the Company's principal business is providing
satellite-based communications services for private communications networks and
video distribution and other satellite transmission services. In 1998, Loral
Orion organized its business into two distinct operating segments as follows
(see Note 8):
Fixed Satellite Services: Leasing transponder capacity and providing
value-added services to customers for a wide variety of applications,
including the distribution of broadcast programming, news gathering,
business television, distance learning and direct-to-home ("DTH")
services. The Company's fixed satellite services ("FSS") assets, will be
managed by Loral Skynet effective January 1, 1999, and
Data Services: Business in development, providing managed communications
networks and Internet and intranet services, using transponder capacity
on the Loral Skynet Telstar and Loral Orion fleets.
ACQUISITION OF THE COMPANY BY LORAL
On March 20, 1998, Orion Network Systems, Inc. ("Orion" or the "Predecessor
Company") was acquired by Loral Space & Communications Ltd. ("Loral"), through
the merger (the "Merger") of a wholly owned subsidiary of Loral, Loral Satellite
Corporation ("Merger Sub"), with and into Orion. Loral consummated the
acquisition by issuing 18 million shares of its common stock and assuming
existing Orion vested options and warrants to purchase 1.4 million shares of
Loral common stock representing an aggregate purchase price of $472.5 million.
Orion was the surviving corporation (the "Surviving Corporation") of the Merger
and thereby became a subsidiary of Loral. At the effective date of the Merger,
Loral contributed its investment in Orion to Loral Space & Communications
Corporation, a wholly owned subsidiary of Loral, and Orion changed its name to
"Loral Orion Network Systems, Inc." The name has since been changed to "Loral
Orion, Inc."
The consolidated financial statements for the three months ended March 31,
1998 and as of and for the two years ended December 31, 1997 and 1996,
respectively, reflect the results of operations of the Predecessor Company. The
consolidated financial statements as of and for the nine months ended December
31, 1998 reflect the results of operations of Loral Orion, Inc. Hereafter,
references to the "Company" include both Loral Orion, Inc and its predecessor,
Orion Network Systems, Inc.
Following the Merger, the capital stock of Loral Orion ceased to be
publicly traded. However, the Company continues to have registered bonds
outstanding.
For accounting purposes, the Merger was accounted for as of March 31, 1998,
using the purchase method. Accordingly, the consolidated balance sheet at
December 31, 1998 reflects the push-down of the purchase price allocations to
the assets and liabilities. The purchase price represented $447.7 million in
excess of Orion's net book value, which was primarily allocated to costs in
excess of net assets acquired of $619.7 million, and a fair value adjustment of
$153.4 million to increase the carrying value of Orion's senior notes and senior
discount notes. In addition, Loral agreed to assume Orion's unvested employee
stock options, which resulted in a new measurement date and an unearned
compensation charge of $4.3 million, to be amortized over the vesting period of
the options.
Had the acquisition of the Company occurred on January 1, 1997, the
unaudited pro forma sales, operating loss and net loss for the years ended
December 31, 1998 and 1997 would have been $83.4 million and $72.7 million;
$58.8 million and $60.7 million; and $110.3 million and $113.7 million,
respectively. These results, which are based on various assumptions are not
necessarily indicative of what would have occurred had the acquisition been
consummated on January 1, 1997.
25
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. ORGANIZATION AND BUSINESS - (CONTINUED)
LORAL ORION SUBSIDIARIES
All subsidiaries of Loral Orion ("Subsidiary Guarantors"), other than
inconsequential subsidiaries, have unconditionally guaranteed the Notes (as
defined below) on a joint and several basis. No restrictions exist on the
ability of Subsidiary Guarantors to pay dividends or make other distributions to
Loral Orion, except to the extent provided by law generally (e.g., adequate
capital to pay dividends under state corporate laws).
Jurisdiction of Organization
Subsidiary Name or Incorporation
- - --------------------------------------------------------------- ----------------------------
Asia Pacific Space and Communications, Ltd. Delaware
(merged with Loral Orion-Asia Pacific, Inc.)
International Private Satellite Partners, L.P. Delaware
(doing business as Orion Atlantic, L.P.)
(merged with Loral Orion Services, Inc.)
Loral Global Services, Inc. Delaware
Loral Orion-Americas, Inc. Delaware
Loral Orion-Asia Pacific, Inc. Delaware
(formerly known as Orion Asia Pacific Corporation)
Loral Orion-Europe, Inc. Delaware
(formerly known as Orion Atlantic Europe, Inc.)
Loral Orion Global Services, Inc. Delaware
Orion Oldco Services, Inc. Delaware
(formerly known as Orion Network Systems, Inc.)
OrionNet Finance Corporation Delaware
OrionNet, Inc. Delaware
Loral Orion Services, Inc. Delaware
(formerly known as Orion Satellite Corporation)
Loral Orion-Europe GmbH Federal Republic of Germany
(formerly known as Teleport Europe GmbH)
Each of the Subsidiary Guarantors is a wholly owned subsidiary of the
Company. The Subsidiary Guarantors comprise all of the direct and indirect
subsidiaries of the Company (other than inconsequential subsidiaries). Separate
financial statements of the Subsidiary Guarantors are not required to be
presented.
ACQUISITION OF ORION ATLANTIC LIMITED PARTNERSHIP INTERESTS IN THE EXCHANGE
Through January 31, 1997, Orion Satellite Corporation (whose name was
previously changed to Loral Orion Services, Inc.) was the sole general partner
in Orion Atlantic L.P. ("Orion Atlantic") and Loral Orion had a combined 41 2/3
percent equity interest in Orion Atlantic. As a result of Loral Orion's control
of Orion Atlantic, Loral Orion's consolidated financial statements include the
accounts of Orion Atlantic. All of Orion Atlantic's revenues and expenses are
included in Loral Orion's consolidated financial statements, with appropriate
adjustment to reflect the interests of the Limited Partners in Orion Atlantic's
losses prior to the Exchange as described below. Loral Orion acquired all the
remaining interests in Orion Atlantic
26
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. ORGANIZATION AND BUSINESS - (CONTINUED)
on January 31, 1997 during the Exchange as described below. Loral Orion's
consolidated financial statements also include the accounts of all other
subsidiaries of Loral Orion.
On January 31, 1997, the Company acquired all of the limited partnership
interests which it did not already own in the Company's former operating
subsidiary, Orion Atlantic, that owned the Orion 1 satellite prior to its merger
with Loral Orion Services, Inc. Specifically, the Company acquired the Orion
Atlantic limited partnership interests and other rights relating thereto held by
British Aerospace Communications, Inc., COM DEV Satellite Communications
Limited, Kingston Communications International Limited, Lockheed Martin
Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate of Matra
Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho Iwai Corp.
(collectively, the "Exchanging Partners"). The Company accounted for this
transaction as an acquisition of minority interest, and as a result,
approximately $34.3 million was allocated to the cost of the Orion 1 satellite
and related equipment.
Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the
"Exchange Agreement"), the Exchanging Partners exchanged their Orion Atlantic
limited partnership interests for 123,172 shares of a newly created class of the
Company's Series C Preferred Stock (the "Exchange"). In addition, the Company
acquired certain rights held by certain of the Exchanging Partners to receive
repayment of various advances (aggregating approximately $41.6 million at
January 31, 1997. The 123,172 shares of Series C Preferred Stock issued in the
Exchange were convertible into approximately 7 million shares of the Company's
common stock. As a result of the Exchange, certain of the Exchanging Partners
became principal stockholders of the Company. The exchange is described in
greater detail under the caption "The Merger, the Exchange and the Debenture
Investments" in the Company's Registration Statement on Form S-4 (Registration
No. 333-19795).
The Exchange and the acquisition by the Company of the only outstanding
minority interest in the Company's subsidiary Asia Pacific Space and
Communications, Ltd. from British Aerospace Satellite Investments, Inc. on
January 8, 1997 (in exchange for approximately 86,000 shares of the Company's
common stock) resulted in the Company owning 100 percent of Orion Atlantic and
its other significant subsidiaries and, therefore, a greatly simplified
corporate structure.
THE ORION MERGER
The Exchange was conducted on a tax-free basis by means of an Orion Merger
(defined below) that was consummated on January 31, 1997. Pursuant to the
Exchange Agreement, Orion Oldco Services, Inc., formerly known as Orion Network
Systems, Inc. ("Old Orion"), formed the Company as a new Delaware corporation
with a certificate of incorporation, bylaws and capital structure substantially
identical in all material respects with those of Old Orion. Also pursuant to the
Exchange Agreement, the Company formed a wholly-owned subsidiary, Orion Merger
Company, Inc. ("Orion Merger Subsidiary"). Pursuant to an Agreement and Plan of
Merger, Orion Merger Subsidiary was merged with and into Old Orion, and Old
Orion became a wholly-owned subsidiary of the Company (the "Orion Merger"). On
January 31, 1997, the effective time of the Orion Merger, all of the
stockholders of Old Orion received stock in the Company with substantially
identical rights to the Old Orion stock they held prior to the effective time of
the Orion Merger. Following the Orion Merger, the Company changed its name from
Orion Newco Services, Inc. to Orion Network Systems, Inc. and the Company's
wholly-owned subsidiary Orion Network Systems, Inc. changed its name to Orion
Oldco Services, Inc. The Exchange and Orion Merger are described in greater
detail under the caption "The Merger, the Exchange and Debenture Investments" in
the Company's Registration Statement on Form S-4 (Registration No. 333-19795).
FINANCINGS
On January 31, 1997, the Company completed a $710 million bond offering
(the "Bond Offering") comprised of approximately $445 million of Senior Note
Units, each of which consists of one 11.25 percent Senior Note due 2007 (a
"Senior Note") and one Warrant to purchase 0.8463 shares of common stock, par
value $.01 per share ("Common Stock") of the Company (a "Senior Note Warrant"),
and approximately $265.4 million of Senior Discount Note Units, each of which
consists of one 12.5 percent Senior Discount Note due 2007 (a "Senior Discount
Note," and together with the Senior Notes, the "Notes") and one Warrant to
purchase 0.6628 shares of Common Stock of the Company (a "Senior Discount Note
Warrant, and together with Senior Note Warrants, the "Warrants"). Interest on
the Senior Notes will be payable semi-annually in cash on January 15 and July 15
of each year, with the first payment made on July 15, 1997. The Senior Discount
Notes will not pay cash interest prior to July 15, 2002. Thereafter, cash
interest will accrue until maturity at an annual rate of 12.5 percent payable
semi-annually on January 15 and July 15 of each year, commencing July 15, 2002.
The exercise price
27
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1. ORGANIZATION AND BUSINESS - (CONTINUED)
for the Warrants will be $.01 per share of common stock. There were 697,400
Warrants issued in connection with the Notes (see Note 6).
In addition, on January 31, 1997, the Company also completed the sale of
$60 million of its convertible junior subordinated debentures (the "Debentures")
to two investors, British Aerospace Holdings, Inc. ("British Aerospace") and
Matra Marconi Space UK Limited ("Matra Marconi Space"). British Aerospace
purchased $50 million of the Debentures and Matra Marconi Space purchased $10
million of the Debentures (collectively, the "Debentures Offering", and together
with the Bond Offering, the "Financings"). The Convertible Debentures were to
mature in 2012, and bore interest at a rate of 8.75 percent per annum payable
semi-annually in arrears solely in Common Stock of the Company. The Convertible
Debentures were subordinated to all other indebtedness of the Company, including
the Notes. Prior to the acquisition of the Company by Loral, all of the
debentures had been converted to common stock.
The net proceeds of the Bond Offering and Debentures Offering were used by
the Company to repay the Orion 1 credit facility, pre-fund the first three years
of interest payments on certain of the Notes, and will be used to build and
launch two additional satellites, Orion 2 and Orion 3.
The extraordinary loss on extinguishment of debt of $15.8 million in 1997
was the result of expensing unamortized deferred financing costs associated with
the Orion 1 credit facility which was refinanced with the proceeds from the Bond
Offering and termination of a interest rate cap agreement.
ACQUISITION OF TELEPORT EUROPE GMBH
On March 26, 1997, the Company acquired German-based Teleport Europe GmbH
(now known as Loral Orion-Europe GmbH) ("Loral Orion Europe") a communications
company specializing in private satellite networks for voice and data services.
The Company purchased the shares of Loral Orion Europe held by the German
companies, Vebacom GmbH and RWE Telliance AG, now known as o.tel.o for
approximately $9 million. In addition, the Company acquired Loral Orion Europe's
licenses and operating agreements to provide satellite network services in 40
countries, including 17 countries in which the Company previously did not
provide service. The net purchase price of Orion Europe was $8.4 million and was
allocated as follows:
(in thousands)
Working capital deficit, net of cash acquired.... $ (683)
Property and equipment ........................... 9,346
Other, net ...................................... (288)
-----------
$ 8,375
===========
The pro forma effect on net loss assuming the acquisition took place January 1,
1997 was not material.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements for the nine months ended December
31, 1998, for the three months ended March 31, 1998, and for the year ended
December 31, 1997, include the accounts of Loral Orion, Inc., its wholly-owned
subsidiaries and Orion Financial Partnership (OFP), in which Loral Orion holds a
50 percent interest. The consolidated financial statements for the year ended
December 31, 1996, include the accounts of Orion, its two wholly-owned
subsidiaries OrionNet, Inc. (OrionNet) and Orion Network Services, Inc., its
former 83 percent owned subsidiary, Asia Pacific Space and Communications Ltd.
(Asia Pacific), the OFP, in which Orion holds a 50 percent interest, and Orion
Atlantic, in which Orion held a 41 2/3 percent ownership interest. Orion Network
Services, Inc. as the general partner of Orion Atlantic, exercised control of
Orion Atlantic through the provisions of the partnership agreement. All
significant intercompany accounts and transactions have been eliminated. In
January 1997, all of the outside interest in these entities, except for outside
interests of OFP, were acquired.
28
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
CASH AND CASH EQUIVALENTS
Orion considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. Cash and cash equivalents includes
(in thousands):
DECEMBER 31,
--------------------------
1997
PREDECESSOR
1998 COMPANY
----------- --------------
Cash .................. $ 3,919 $ 2,256
Money market funds .... 4,985 2,544
Commercial paper ...... 26,957 65,209
-------------- --------------
$ 35,861 $ 70,009
============== ==============
RESTRICTED AND SEGREGATED ASSETS
Restricted and segregated assets are classified as held to maturity and are
recorded at cost and consist of the following (in thousands):
DECEMBER 31,
--------------------------
1997
PREDECESSOR
1998 COMPANY
----------- --------------
U.S. treasury notes .................... $ 72,855 $ 117,800
Commercial paper ....................... -- 216,697
Time deposits........................... -- 22,393
Total restricted and segregated assets . 72,855 356,890
Less current portion ................... (50,180) (50,064)
-------------- --------------
Long-term portion ...................... $ 22,675 $ 306,826
============== ===============
Included in restricted and segregated assets is $2.1 million and $3.7
million of accrued interest at December 31, 1998 and 1997, respectively. The
balance at December 31, 1998 is restricted for use for interest payments on the
Senior Notes through January 2000. The U.S. treasury notes held at December 31,
1998 mature between January 1999 and January 2000.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject Loral Orion to
concentrations of credit risk consist principally of cash and cash equivalents,
restricted and segregated assets and accounts receivable. The Company's cash and
cash equivalents and restricted and segregated assets are maintained with
high-credit-quality financial institutions. Management believes that its credit
evaluation, approval and monitoring processes combined with negotiated billing
arrangements mitigate potential credit risks with regard to the Company's
current customer base.
29
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost except for the Orion 1 satellite
which is recorded at estimated fair market value as of March 31, 1998, the date
of the Loral Merger. Depreciation expense is calculated using the straight-line
method over the estimated useful lives as follows:
Satellite and related equipment.............. 10.5 years
Telecommunications equipment................. 2-7 years
Furniture and computer equipment............. 2-7 years
Costs incurred in connection with the construction and successful
deployment of the Orion 1 satellite and related equipment are capitalized. Such
costs include direct contract cost, allocated indirect costs, launch costs,
launch insurance, construction period interest and the present value of
satellite incentive payments. Similar costs for Orion 2 and Orion 3 are included
in "Satellite construction in progress." Orion began depreciating the Orion 1
satellite over its estimated useful life commencing on the date of operational
delivery in orbit, January 1995.
VALUATION OF LONG-LIVED ASSETS AND COSTS IN EXCESS OF NET ASSETS ACQUIRED
The carrying value of Loral Orion's long-lived assets and costs in excess
of net assets acquired is reviewed for impairment whenever events or changes in
circumstances indicate that an asset may not be recoverable. The Company looks
to current and future profitability, as well as current and future undiscounted
cash flows, excluding financing costs, as primary indicators of recoverability.
If an impairment is determined to exist, any related impairment loss is
calculated based on fair value.
DEFERRED FINANCING COSTS
Deferred financing costs related to a debt financing that was being
amortized over the period the debt was expected to be outstanding. The net
deferred financing costs outstanding at March 31, 1998 were written off to costs
in excess of net assets acquired associated with the Loral Merger. Accumulated
amortization at December 31, 1998 and 1997 was $0 and $2.3 million,
respectively. Deferred financing costs of $10.5 million relating to the Orion 1
Credit Facility were expensed in January 1997 in connection with the Financings
and are included in the caption "Extraordinary loss on extinguishment of debt"
for 1997.
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired associated with the Merger with Loral
amounted to $619.7 million, which is being amortized over 40 years using the
straight-line method. Accumulated amortization relating to cost in excess of net
assets acquired at December 31, 1998 was $11.7 million.
OTHER ASSETS
Intangibles assets associated with the Loral Merger in 1998 are primarily
amortized over the remaining useful life of Orion 1, which was approximately
seven years at December 31, 1998. The net goodwill at December 31, 1997 was
written off to costs in excess of net assets acquired associated with the Loral
Merger. Accumulated amortization relating to other assets at December 31, 1998
and 1997 was $2.6 million and $6.2 million, respectively. The Company amortizes
the FCC License application costs related to Orion 1 over the estimated useful
life of the satellite.
30
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Other assets, net of amortization as of December 31, 1998 and 1997, was as
follows (in thousands):
DECEMBER 31,
------------------------------
1997
PREDECESSOR
1998 COMPANY
----------- ------------------
Goodwill (related to prior acquisition).................. $ -- $ 20,332
Note receivable ......................................... 2,476 3,039
FCC license application costs ........................... 1,767 1,781
Intangible assets ....................................... 15,261 --
Other .................................................. 3,404 2,027
-------------- ---------------
$ 22,908 $ 27,179
============== ===============
FOREIGN CURRENCY TRANSLATION
Results of operations for foreign entities, primarily the Company's Loral
Orion-Europe GmbH subsidiary, are translated using average exchange rates during
the period. Assets and liabilities are translated to U.S. dollars using the
exchange rate in effect at the balance sheet date. The resulting translation
adjustments are reflected in stockholders' equity (deficit) as accumulated other
comprehensive income (loss).
INTEREST RATE MODIFICATION AGREEMENT
Orion entered into an interest-rate swap and cap agreement to modify the
interest characteristics of the Orion 1 Credit Facility from a floating to a
fixed-rate basis. This agreement involved the receipt of floating rate amount in
exchange for fixed-rate interest payments over the life of the agreement without
an exchange of the underlying principal amount. The differential paid or
received was accrued as interest rates changed and was recognized as an
adjustment to interest expense. The fair value of the swap agreement was not
recognized in the financial statements. This agreement was terminated in January
1997 in connection with the Financings discussed in Note 1. The Company had no
such agreements in place at December 31, 1998 or 1997.
REVENUE RECOGNITION
Revenue is recognized as earned in the period in which telecommunications
and related services are provided.
The following summarizes the Company's domestic and foreign revenues (in
thousands):
PREDECESSOR COMPANY
-----------------------------------------------
NINE MONTHS THREE MONTHS YEARS ENDED DECEMBER 31,
ENDED ENDED -----------------------------
DECEMBER 31, MARCH 31,
1998 1998 1997 1996
------------ ------------ ------------- ------------
Revenues from unaffiliated customers:
United States....................... $ 24,001 $ 6,895 $ 30,927 $ 21,262
Germany ........................... 14,617 4,517 15,437 --
Other foreign ...................... 25,990 7,378 22,284 14,572
Revenues from related parties........... -- -- 4,093 6,013
------------- ------------- ------------ ------------
Total services revenue.................. $ 64,608 $ 18,790 $ 72,741 $ 41,847
============= ============= ============ ============
31
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future consequences of temporary differences between financial reporting and tax
bases of assets and liabilities using enacted tax rates that will be in effect
when the differences are expected to reverse.
Following is a summary of components of the net deferred asset balance at
December 31, 1998 and 1997 (in thousands):
DECEMBER 31,
--------------------------------
1997
PREDECESSOR
1998 COMPANY
-------------- ----------------
Deferred tax assets:
Net operating loss carryforward ................. $ 78,642 $ 61,648
Amortization of premium and discount on
Senior Notes and Senior Discount Notes ........ 69,203 11,917
Amortization of intangibles ..................... (928) 2,947
Other ........................................... 4,560 3,385
-------------- --------------
151,477 79,897
Deferred tax liabilities:
Depreciation .................................... (3,678) (16,289)
Other ........................................... (351) (741)
-------------- --------------
(4,029) (17,030)
-------------- --------------
Net deferred tax asset .......................... 147,448 62,867
Valuation allowance.............................. (93,533) (62,867)
-------------- --------------
Net deferred tax asset, after
valuation allowance............................ $ 53,915 $ --
============== ==============
At December 31, 1998, Loral Orion had approximately $225.9 million in net
operating loss carryforwards which expire at varying dates from 2004 through
2013. The use of these loss carryforwards, may be limited under the Internal
Revenue Code as a result of ownership changes experienced by Loral Orion. Due to
uncertainty regarding its ability to realize the benefits of such net operating
loss carryforwards and certain other net deferred tax assets, the Company
established a valuation allowance against deferred tax assets of $93.5 million.
In 1998, the Company is included in the U.S. federal income tax return for
Loral. Pursuant to a tax sharing agreement for 1998 with Loral, the Company is
entitled to reimbursement for the use of its tax losses when such losses are
utilized by Loral. For the nine months ended December 31, 1998, the Company
recorded a receivable under this tax sharing agreement of approximately $4.9
million and a deferred tax provision of approximately $3.8 million, resulting in
a net tax benefit of approximately $1.1 million. The Company's effective tax
benefit rate (1%) differs from the federal statutory rate (35%), due to the
valuation allowance established for the carryforward of the current year tax
loss (29%) and the non-deductible amortization of cost in excess of net assets
acquired (5%). The deferred tax asset of $53.9 million on the accompanying
balance sheet primarily arises from the tax effect of the temporary differences
between the carrying amount of the Senior Notes and the Senior Discount Notes
payable for financial and income tax purposes.
32
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
STATEMENTS OF CASH FLOWS
Non-cash investing and financing activities and supplemental cash flow
information is (in thousands):
PREDECESSOR COMPANY
---------------------------------------------------
NINE MONTHS THREE MONTHS YEARS ENDED DECEMBER 31,
ENDED ENDED -------------------------------
DECEMBER 31, MARCH 31,
1998 1998 1997 1996
------------ ----------- ------------- -----------
Property and equipment financed by
capital leases $ -- $ -- $ -- $ 482
Preferred stock dividend, net of forfeitures -- (1,387) 6,034 1,370
Conversion of redeemable preferred stock to
common stock -- 69,888 38,846 805
Conversion of subordinated debentures,
accrued interest and deferred financing
costs to common stock -- 50,000 10,292 --
Conversion of Company common stock to
Loral common stock as the result of the
Loral Merger -- 469,000 -- --
Issuance of Series C preferred stock -- -- 94,000 --
Issuance of common stock for preferred
stock dividend -- 5,458 2,070 --
Issuance of common stock and warrants -- 4,757 13,407 300
Interest paid 25,551 25,237 35,573 20,619
Acquisition of Teleport Europe, net of
cash acquired -- -- 8,375 --
Included in accounts receivable and other current liabilities at December
31, 1998 and March 31, 1998 are customer deposits and up front fees of $3.4
million and in $1.1 million, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
EARNINGS PER SHARE
Earnings per share is not presented since it is not considered
meaningful due to the Loral Merger and the recapitalization of the Company.
33
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"), which
established rules for the reporting and disclosure of comprehensive income and
its components. SFAS 130 requires unrealized gains or losses on the Company's
foreign currency translation adjustments to be included in other comprehensive
income (loss). Prior years amounts have been restated. The components of
accumulated other comprehensive income (loss) are as follows (in thousands):
PREDECESSOR COMPANY
-------------------------------
NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED
DECEMBER 31, MARCH 31, DECEMBER 31,
1998 1998 1997
-------------- ------------- -------------
Cumulative translation adjustment ....... $ 616 $ -- $ (956)
-------------- -------------- --------------
Accumulated other comprehensive
income (loss) ......................... $ 616 -- $ (956)
============== ============== ==============
ACCOUNTING PRONOUNCEMENTS
For the year ended 1998 the Company adopted Statement of Financial
Accounting Standards No. 131, Disclosures About Segments of an Enterprise and
Related Information ("SFAS 131"), see Note 8.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings or financial position. The
Company is required to adopt SFAS 133 on January 1, 2000.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
34
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. ORION ATLANTIC
Orion Atlantic was a Delaware limited partnership formed to provide
international private communications networks and basic transponder capacity and
capacity services (including ancillary ground services) to businesses and
institutions with trans-Atlantic and intra-European needs. As of December 31,
1998, Orion Atlantic merged with Loral Orion Services, Inc. The business was
organized by Orion Network Services, the general partner of Orion Atlantic. The
principal purposes of Orion Atlantic was to finance the construction, launch and
operation of up to two telecommunications satellites in geosynchronous orbit
over the Atlantic Ocean and to establish a multinational sales and service
organization. Eight international corporations, including Orion, invested a
total of $90 million in equity as limited partners in Orion Atlantic. Orion
Atlantic through January 1997, was financed by a credit facility which provided
up to $251 million for the first satellite from a syndicate of major
international banks led by Chase Manhattan Bank, N.A. In addition to their
equity investments, the Limited Partners had agreed to lease capacity on the
satellites up to an aggregate $155 million and had entered into additional
contingent capacity lease contracts ("contingent call") up to an aggregate $271
million, as support for repayment of the senior debt. The firm capacity leases
and contingent calls were payable over a seven-year period after the Orion 1
satellite was placed in service. In July 1995, January and July 1996 the Limited
Partners (excluding the Company) paid $7.6 million, $18.0 million and $12.1
million, respectively, pursuant to the contingent calls. As discussed in Note 1,
in January 1997, the Company acquired all of the limited partnership interests
it did not already own in Orion Atlantic.
Orion 1 -- The fixed base price of Orion 1, excluding obligations relating
to satellite performance, aggregated $227 million. In addition to the fixed base
price, the contract required payments in lieu of a further contract price
increase, aggregating approximately $44 million through 2007. Such payments are
due, generally, if 24 out of 34 satellite transponders are operating
satisfactorily. Shortly after acceptance of the satellite in January 1995, the
Company filed a warranty claim with the satellite manufacturer relating to one
transponder that was not performing in accordance with contract specifications.
In August 1995, Orion Atlantic received a one time refund of $2.75 million which
was applied as a mandatory prepayment to the senior notes payable -- banks. The
Company believes that since Orion 1 is properly deployed and operational, based
upon industry data and experience, payment of the satellite performance
obligation is highly probable and the Company capitalized the present value of
this obligation of approximately $14.8 million as part of the cost of the
satellite. The present value was estimated by discounting the obligation at 14
percent. As of March 31, 1998, in association with the Loral Merger, the
obligation was revalued and recorded at approximately $16.2 million using a 12
percent discount rate over the remaining expected term.
Redemption of STET Partnership Interest; Issuance of New Interest to Orion.
- - -- In November 1995 Orion Atlantic redeemed the limited partnership interest
held by STET (the "STET Redemption") for $11.5 million, including $3.5 million
of cash and $8 million in 12 percent promissory notes due through 1997. STET's
firm and contingent capacity leases remained in place until released by the
Banks under the Orion 1 Credit Facility. STET's existing contractual
arrangements with Orion Atlantic were modified in a number of respects,
including (i) a reduction of approximately $3.5 million in amounts due by Orion
Atlantic to Telespazio S.p.A., an affiliate of STET, over a ten-year period
under contracts relating to the construction of Orion 2, back-up tracking,
telemetry and command services through a facility in Italy and engineering
consulting services, (ii) the establishment of ground operations and
distribution agreements between Orion Atlantic and Telecom Italia, a subsidiary
of STET, relating to Italy, and the granting to Telecom Italia of exclusive
marketing rights relating to Italy for a period ending December 1998 conditioned
upon Telecom Italia achieving certain sales quotas, and (iii) canceling
exclusive ground operations and sales representation agreements between Orion
Atlantic and STET (or its affiliates) relating to Eastern Europe.
Orion Atlantic funded the STET Redemption by selling a new limited
partnership interest to Orion for $8 million (including $3.5 million in cash and
$4.5 million in 12 percent promissory notes due through 1997). In connection
with the STET redemption, Orion agreed to indemnify Telecom Italia for payments
which were made in July 1995 of $950,000 and which would be made in the future
under its firm and contingent capacity agreements with Orion Atlantic and posted
a $10 million letter of credit to support such indemnity. The Company accounted
for this transaction as an acquisition of a minority interest and, as a result,
approximately $3.1 million was allocated to the cost of the Orion 1 satellite
and related equipment.
35
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. ORION ATLANTIC - (CONTINUED)
During 1995, Orion Atlantic entered into agreements with certain Limited
Partners (including the Company) under which the participating Limited Partners
voluntarily gave up their rights to receive capacity under their firm capacity
agreements through January 1996. The participating Limited Partners continued to
make payments for such capacity but have the right to receive refunds from Orion
Atlantic out of cash available after operating costs and payments under the
Credit Facility. In addition, services revenue included $4.1 million and $6.0
million in 1997 and 1996 from Limited partners pursuant to the firm capacity
commitments, not subject to refund. In connection with the Exchange described in
Note 1, such rights were acquired by the Company.
4. COMMITMENTS AND CONTINGENCIES
Orion 1 -- In November 1995, a portion of the Orion 1 satellite experienced
an anomaly that resulted in a temporary service interruption, lasting
approximately two hours, in the dedicated capacity serving the European portion
of Orion Atlantic's services. Full service to all affected customers was
restored using redundant equipment on the satellite. The Company believes, based
on the data and the Telesat Report, that, because the redundant component is
functioning fully in accordance with specifications and the performance record
of similar components is strong, the anomalous behavior is unlikely to affect
the expected performance of the satellite over its useful life. Furthermore,
there has been no effect on the Company's ability to provide services to
customers. However, in the event that the currently operating component fails,
Orion 1 would experience a significant loss of usable capacity. In such event,
while the Company would be entitled to insurance proceeds of approximately $47
million as of December 1998, 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.
Orion 2 -- In July 1996, the Company signed a contract with Matra Marconi
Space ("Matra") for the construction and launch of Orion 2 (which was amended
and restated in January 1997) and in February 1997 Matra commenced construction
of that satellite. During the second quarter of 1998, the Company entered into a
satellite procurement contract with Space Systems/Loral ("SS/L"), a wholly owned
subsidiary of Loral, for the construction and launch of the Orion 2 satellite
for the operation in the Atlantic Ocean region at 12(0) W.L. (the "SS/L
Conract"). The SS/L Contract provides for delivery in-orbit of the Orion 2
satellite aboard an Ariane 44L launch vehicle in the third quarter of 1999. The
SS/L satellite design provides for 38 Ku-band transponder with a footprint
covering the Eastern United States, Southeastern Canada, Europe, the
Commonwealth of Independent States, the Middle East, North and South Africa and
South America.
During 1998, the Company notified Matra that it cancelled its satellite
procurement contract with Matra for the construction and launch of a satellite
for operation in the Atlantic Ocean region at 12(0) W.L. (the "Matra Contract").
As a result of the cancellation of the Matra Contract, the Company will have no
obligation to make further payments to Matra, but Matra retained amounts
previously paid by the Company of $49.1 million. As of March 31, 1998, in
association with the Loral Merger, these costs and other internal direct costs,
totaling approximately $62 million, capitalized in connection with the
construction of the Orion 2 satellite, were written off to costs in excess of
net assets acquired.
The Company believes that the Orion 2 satellite being procured from SS/L
offers significant benefits compared to the Matra satellite. Loral Orion's cash
will be used to fund the SS/L Contract up to an amount that, when added to the
amounts previously paid to Matra, will not exceed $202 million, the total amount
that would otherwise have been due to Matra if the Matra Contract had not been
canceled. Any requirements to SS/L in excess of $202 million for Orion 2 will be
funded with additional equity contributed by Loral. Through December 31, 1998,
$128.4 million has been paid to SS/L for Orion 2. Moreover, the SS/L-designed
satellite is both larger and more powerful than the Matra-designed satellite.
The SS/L satellite will have 8 additional transponders and will provide greater
transmitted power to Loral Orion's customers. The expected in-orbit life of the
SS/L satellite is approximately 16 years compared to 13 years for the Matra
satellite. The SS/L satellite is designed to provide enhanced transponder
switching capabilities as compared to the Matra satellite and also allows for
both uplinking and downlinking of transmissions from South Africa, while the
Matra satellite would not have allowed for uplinking.
Orion 3 -- In January 1997, the Company entered into a satellite
procurement contract with Hughes Space for the construction and launch of Orion
3, for which construction commenced in December 1996. The contract provides for
delivery in orbit of Orion 3, for a firm fixed price of $203 million, excluding
launch insurance and $8 million of incentive payments. Orion 3 will cover broad
areas of the Asia Pacific region including China, Japan, Korea, Southeast Asia,
Australia, New Zealand, Eastern Russia and Hawaii.
36
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES - (CONTINUED)
In November 1996, Orion entered into a contract with DACOM Corp. ("DACOM"),
a Korean communications company, under which, subject to certain conditions,
DACOM will purchase eight dedicated transponders on Orion 3 for 13 years, in
return for approximately $89 million, payable over a period from December 1996
through seven months following the lease commencement date for the transponders.
DACOM has deposited funds with Orion in accordance with the contract. As of
December 31, 1998, Loral Orion had received $35.5 million from DACOM including
interest of $1.5 million. As of December 31, 1997, Loral Orion had received
$22.3 million from DACOM. Loral Orion maintained a $22.3 million letter of
credit which was released on August 1, 1998. Orion had an obligation to maintain
a letter of credit for seven months beginning on the lease commencement date in
the amount of $44.8 million. Payments are subject to refund pending the
successful launch and commencement of commercial operation of Orion 3.
Agreements with Loral Skynet - During the fourth quarter of 1998, Loral
completed its integration plan for Loral Orion and transferred management of
Loral Orion's satellite capacity leasing and satellite operations to Loral
Skynet, effective January 1, 1999. Orion and Loral Skynet, a division of Loral
SpaceCom Corporation, which in turn is a wholly-owned subsidiary of Loral, have
entered into agreements (the "Loral Skynet Agreements") effective January 1,
1999, whereby Loral Skynet provides to Orion (i) marketing and sales of
satellite capacity services on the Orion satellite network and related billing
and administration of customer contracts for those services (the "Sales
Services") and (ii) telemetry, tracking and control services for the Orion
satellite network (the "Technical Services", and together with the Sales
Services, the "Services"). Orion will be charged Loral Skynet's costs for
providing these services plus a 5 percent administrative fee.
Litigation -- On November 9, 1996, Orion and Skydata Corporation
("Skydata") executed a letter with respect to the settlement in full of pending
litigation and arbitration related to a patent dispute. As part of the
settlement, Skydata granted Orion (and its affiliates) an unrestricted,
world-wide paid-up license to make, have made, use or sell products or methods
under the patent and all other corresponding continuation and reissue patents.
Orion has paid Skydata $437,000 during 1997 and 1998 as part of this settlement.
Loral Orion 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 Loral Orion's
financial position or results of operations.
Other -- Orion has entered into operating leases, principally for office
space. Rent expense was $1.9 million, $0.4 million, $1.3 million and $0.9
million for the nine months ended December 31, 1998, three months ended March
31, 1998 and years ended December 31, 1997 and 1996, respectively.
Future minimum lease payments are as follows (in thousands):
1999............................ $ 2,244
2000............................ 416
2001............................ 46
2002............................ 46
2003............................ 46
Thereafter...................... 506
------------
$ 3,304
------------
37
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
---------------------------
1997
PREDECESSOR
1998 COMPANY
----------- ----------------
Senior notes (net of premium of $64.6 at December 31,
1998 and unamortized discount of $4.9 million at
December 31, 1997) .................................. $ 507,573 $ 440,100
Senior discount notes (maturity value of $484 million). 408,812 292,337
Convertible junior subordinated debentures........... -- 50,000
Notes payable - TT&C Facility.......................... 4,953 6,022
Satellite incentive obligations........................ 11,376 6,479
Other.................................................. 781 2,139
-------------- ---------------
Total long-term debt.............................. 933,495 797,077
Less: current portion.................................. (1,826) (6,406)
-------------- ---------------
Long-term debt less current portion............... $ 931,669 $ 790,671
============== ===============
Total interest (including commitment fees, capitalized interest and
amortization of deferred financing costs) incurred for the nine months ended
December 31, 1998, three months ended March 31, 1998 and years ended December
31, 1997 and 1996 was $62.8 million, $24.5 million, $91.1 million and $27.8
million, respectively. Capitalized interest for the nine months ended December
31, 1998, three months ended March 31, 1998 and year ended December 31, 1997,
was $16.4 million, $3.3 million and $7.3 million, respectively. No capitalized
interest was recorded in 1996. Aggregate annual maturities of long-term debt
consist of the following (in thousands):
1999....................... $ 1,826
2000....................... 1,985
2001....................... 2,382
2002....................... 2,891
2003....................... 1,728
Thereafter................. 922,683
---------------
$ 933,495
===============
Senior Notes and Senior Discount Notes -- On January 31, 1997, the Company
completed a $710 million bond offering (the "Bond Offering") comprised of
approximately $445 million of Senior Note Units, each of which consists of one
11.25 percent Senior Note due 2007 (a "Senior Note") and one Warrant to purchase
0.8463 shares of common stock, par value $.01 per share ("Common Stock") of the
Company (a "Senior Note Warrant"), and approximately $265.4 million of Senior
Discount Note Units, each of which consists of one 12.5 percent Senior Discount
Note due 2007 (a "Senior Discount Note," and together with the Senior Notes, the
"Notes") and one Warrant to purchase 0.6628 shares of Common Stock of the
Company (a "Senior Discount Note Warrant and together with the Senior Note
Warrants, the "Warrants"). Interest on the Senior Notes is payable semi-annually
in cash on January 15 and July 15 of each year, commencing July 15, 1997. The
Senior Discount Notes do not pay cash interest prior to January 15, 2002.
Thereafter, cash interest accrues until maturity at an annual rate of 12.5
percent payable semi-annually on January 15, and July 15 of each year,
commencing July 15, 2002. The exercise price for the Warrants is $.01 per share
of common stock of the Company. These warrants were assumed by Loral as a result
of the Loral Merger. The Company made cash interest payments of $25.0 million
and $24.9 million in January 1998 and July 1998 on the Senior Notes. The
indentures supporting the Senior Notes and the Senior Discount Notes contain
certain covenants which, among other things, restrict distributions to
stockholders of the Company, the repurchase of equity interests in the Company
and the making of certain other investments and restricted payments, the
incurrence of additional indebtedness by the Company and its restricted
subsidiaries, the creation of liens, certain asset sales, transaction with
affiliates and related parties, and mergers and consolidations. The Company is
in compliance with the requirements of such
38
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. LONG-TERM DEBT - (CONTINUED)
indentures. The exercise price for the Warrants will be $.01 per share of common
stock. There were 697,400 Warrants issued in connection with the Notes (see Note
6). On May 27, 1998, $2 million of Senior Notes were redeemed at 101 percent of
the principal amount of the notes plus accrued interest to the payment date, and
resulted in a gain on retirement of debt of approximately $.3 million.
Convertible Junior Subordinated Debentures -- On January 31, 1997, in
connection with the Financings discussed in Note 1, the Company completed the
sale of $60 million of its convertible junior subordinated debentures (the
"Convertible Debentures") to two investors, British Aerospace Holdings, Inc.
("British Aerospace") and Matra Marconi Space UK Limited ("Matra Marconi
Space"). British Aerospace purchased $50 million of the Convertible Debentures
and Matra Marconi Space purchased $10 million of the Convertible Debentures. The
Convertible Debentures were to mature in 2012, and bore interest at a rate of
8.75 percent per annum that was to be paid semi-annually in arrears solely in
Common Stock of the Company. The Convertible Debentures were subordinated to all
other indebtedness of the Company, including the Notes. Matra Marconi Space
converted their $10 million of Convertible Debentures and accrued interest into
735,292 shares of common stock in December 1997. In March 1998, British
Aerospace converted their $50 million of Convertible Debentures and accrued
interest into approximately 3.6 million shares of common stock. As of December
31, 1998, all of the debentures had been converted to common stock.
The net proceeds of the Bond Offering and Debentures Offering were used by
the Company to repay the Orion 1 credit facility, pre-fund the first three years
of interest payments on certain of the Notes, and will be used to build and
launch two additional satellites, Orion 2 and Orion 3.
The extraordinary loss on extinguishment of debt of $15.8 million in 1997
was the result of expensing, unamortized deferred financing costs associated
with the Orion 1 credit facility which was refinanced with the proceeds from the
Bond Offering and termination of a interest rate cap agreement.
Note Payable - TT&C Facility -- In June 1995 upon acceptance of the TT&C
Facility, the Company refinanced $9.3 million from General Electric Credit
Corporation as a seven-year term loan, payable monthly. The interest rate is
fixed at 13.5 percent. The TT&C debt is secured by the TT&C Facility, the
Satellite Control System Contract and Orion Atlantic's leasehold interest in the
TT&C Facility land. The TT&C financing agreement contains customary
representations, warranties and covenants regarding certain activities of the
Company. The Company is in compliance with the requirements of the financing
agreement.
Satellite Incentive Obligations --The obligations relating to satellite
performance have been recorded at the present value (discounted at 14 percent
for the Predecessor Company and 12 percent after the Loral Merger, the Company's
estimated incremental borrowing rate for unsecured financing) of the required
payments commencing at the originally scheduled maturity of the senior notes
payable to banks and continuing through 2007. Under the terms of the
construction contract, payment of the obligation is delayed until such time as
payment is permitted under the senior notes payable to banks. During 1998,
payments aggregating $7.2 million were made pursuant to this obligation.
Notes Payable - STET -- In connection with the STET Redemption, the Company
issued $8 million of promissory notes bearing interest at 12 percent per annum.
Payments were due as follows: $2.5 million plus accrued interest paid on
December 31, 1996; $3.5 million plus accrued interest on the earlier of December
31, 1997 or the refinancing of the senior notes payable-banks; and the remaining
$2.0 million in monthly installments of $0.2 million plus accrued interest
beginning January 1997. At December 31, 1997, the $8 million promissory notes
issued in connection with the STET Redemption had been repaid.
Notes Payable - Limited Partners -- In January 1997, the Company issued
Series C Convertible Preferred Stock in exchange for the Preferred Participation
Units (PPUs) aggregating $8.1 million due to certain former Limited Partners for
development of Orion Atlantic's network services business. Holders of PPUs
earned interest on aggregate amounts drawn at the rate of 30 percent per annum.
As of March 31, 1998, the Series C Convertible Preferred Stock issued in
exchange for the PPUs have been converted to common stock.
39
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
As of March 31, 1998, all of the redeemable convertible preferred stock
outstanding at December 31, 1997, including accrued dividends on Series C
Preferred Stock were converted to approximately 6.1 million shares of common
stock at prices ranging from $8.50 to $17.80 per share.
Redeemable Preferred Stock
In June 1994, Orion issued 11,500 shares of Series A 8 percent Cumulative
Redeemable Convertible Preferred Stock at $1,000 per share and granted an option
to purchase an additional 3,833 shares of similar preferred stock at $1,000 per
share. Dividends on preferred stock accrued at 8 percent per year and were
payable as and when declared. Orion could redeem the preferred stock at the
amount invested plus accrued and unpaid dividends. Upon such a redemption, the
preferred stockholders were to receive a warrant to acquire at $8.50 per share
the number of shares of common stock into which the preferred stock was
convertible. The 11,500 shares issued were convertible into 1,352,941 shares of
common stock ($8.50 per share). Upon conversion accrued and unpaid dividends
were forfeited. After Orion issued preferred stock (along with warrants and
options to make an additional investment) in June 1994, the Directors and
affiliates of Directors who purchased common stock in December 1993 and the
institutions and other investors who purchased common stock in June 1994 each
exercised its right to receive preferred stock (along with warrants and options
to make an additional investment) in exchange for the common stock previously
acquired and Orion issued an aggregate of 3,000 shares of Series A Preferred
Stock and related options for 1,000 shares to such persons and entities. The
3,000 shares issued were convertible into 352,941 shares of common stock ($8.50
per share). Through December 31, 1997, 7,567 shares of preferred stock were
converted into 890,235 shares of common stock. The remaining 6,933 shares
outstanding were convertible into 815,647 shares of common stock at December 31,
1997. All Series A Preferred Stock outstanding was converted into common stock
in connection with the Loral Merger.
In June 1995, certain Directors, affiliates of Directors, and certain
holders of Series A Preferred Stock purchased 4,483 shares of Series B Preferred
Stock for approximately $4.5 million. This purchase was pursuant to an option
granted in June 1995 to purchase $1 of preferred stock similar to the Series A
Preferred Stock for each $3 of Series A Preferred Stock purchased in June 1994,
except that such similar preferred stock would be convertible at any time with
Common Stock at a price within a range of $10.20 to $17.00 per share of common
stock based upon when the option is exercised. The Series B Preferred Stock had
rights, designations and preferences substantially similar to those of the
Series A Preferred Stock, and was subject to similar covenants, except that the
Series B Preferred Stock was convertible into 439,510 shares of Common Stock at
an initial price of $10.20 per share, subject to certain anti-dilution
adjustments, and purchases of Series B Preferred Stock did not result in the
purchaser receiving any rights to purchase additional preferred stock. Through
December 31, 1997, 2,424 shares of preferred stock were converted into 237,647
shares of common stock. The remaining 2,059 shares outstanding were convertible
into 201,862 shares of common stock at December 31, 1997. All Series B Preferred
Stock outstanding was converted into common stock in connection with the Loral
Merger.
In January 1997, Orion issued 123,172 shares of Series C Cumulative
Redeemable Preferred Stock to British Aerospace Communications, Inc., COM DEV
Satellite Communications Limited, Kingston Communications International Limited,
Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., and
Trans-Atlantic Satellite, Inc. in exchange for their Orion Atlantic partnership
interests. Dividends on the preferred stock accrued at 6 percent per year and
were distributable in the Company's common stock calculated based on the market
price of such stock under a formula provided in the Certificate of Designations.
The shares were convertible into approximately 7 million shares ($17.50 per
share) of the Company's common stock. Through December 31, 1997, 40,531 shares
of preferred stock, including dividends, were converted into approximately 2.4
million shares of common stock. Series C Cumulative Preferred Stock was recorded
net of deferred offering costs of approximately $3.3 million. The Series C
Cumulative Preferred Stock was subject to mandatory redemption at par value in
25 years. The difference between the carrying value and par value was being
accreted over such period.
The preferred stock had a liquidation preference equal to the amount
invested plus accrued and unpaid dividends. Preferred stockholders were entitled
to vote on an as-converted basis and had the right to put the stock to Loral
Orion upon a merger, change of control or sale of substantially all assets at
the greater of liquidation value or fair value. All Series C Preferred Stock was
converted into common stock in connection with the Loral Merger.
40
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED)
Stockholders' Equity
1987 Employee Stock Option Plan - Under the 1987 Employee Stock Option
Plan, 1,470,588 shares of common stock were reserved for issuance upon exercise
of options granted. Shares of common stock were generally purchased under this
plan at prices not less than the fair market value, as determined by the Board
of Directors, on the date the option was granted.
Stock options outstanding at:
PREDECESSOR COMPANY
-----------------------------------------------
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------- --------------- ---------------
Range of exercise price.............. $8.16 - $12.29 $8.16 - $12.29 $8.16 - $12.24
Outstanding at beginning of year ... 1,174,310 911,663 971,469
Granted during year.................. -- 400,670 122,750
Exercised............................ (157,041) (81,383) (37,629)
Canceled (1,250) (56,640) (144,927)
Converted to options to acquire
Loral common stock ................ (1,016,019) -- --
------------- ------------- --------------
Outstanding at end of year........... -- 1,174,310 911,663
============= ============= ==============
In November 1993, stock options for 95,588 shares of common stock were
granted to key executives which may be exercised only upon the achievement of
certain business and financial objectives. At December 31, 1995, the executives
had earned the right to exercise 40,441 of these options based on the
achievement of such objectives. The remaining options were canceled during 1996.
Stock options vested annually over a one to five-year period. All options
were exercisable up to seven years from the date of grant. The Company's 1987
Employee Stock Option Plan expired in 1997. No further shares are available for
grant under this plan. There were 506,803 and 429,265 options exercisable at
December 31, 1997 and 1996, respectively.
In July 1996, the Company granted, subject to shareholder approval, the
Chairman of the Executive Committee 100,000 options at $9.83 per share. These
options vested as follows, 50,000 on January 17, 1997 and 50,000 upon successful
completion of either a refinancing of the Orion 1 satellite, financing for
construction, launch and insurance for Orion 2 or Orion 3 or a substantial
acquisition or relationship with a strategic partner. These requirements were
met in January 1997.
In March 1998, the 1997 Employee Stock Option Plan was assumed by Loral and
all outstanding options were converted to options to acquire Loral common stock.
Non-Employee Director Stock Option Plan - In 1996, Orion adopted a
Non-Employee Director Stock Option plan. Under this plan, 380,000 shares of
common stock were reserved for issuance. During 1997, there were 80,000 options
granted pursuant to this plan at $9.60 per share. At December 31, 1997,
aggregate options outstanding pursuant to this plan totaled 270,000, of which,
180,000 were exercisable at prices ranging from $8.49 to $12.53 per share.
In March 1998, the Non-Employee Director Stock Option Plan was assumed by
Loral and all outstanding options were converted to options to acquire Loral
common stock.
1997 Employee Stock Option Plan - In 1997, Orion adopted a second stock
option plan. Under this plan, as amended, 1,300,000 shares of common stock were
reserved for issuance upon exercise of options granted. Shares of common stock
could be purchased under this plan at prices not less than the fair value as
determined by the Board of Directors, on the date the option were granted.
41
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED)
Compensation expense relating to these plans was not significant.
Stock options outstanding at:
PREDECESSOR COMPANY
----------------------------
MARCH 31, DECEMBER 31,
1998 1997
---------------- ---------------
Range of exercise price............. $9.30 - $17.06 $9.30 - $17.06
================ ================
Outstanding at beginning of year.... 552,000 --
Granted during year................. -- 556,000
Exercised ......................... (5,000) --
Canceled ......................... (80,000) (4,000)
Converted to options to acquire
Loral common stock ............... (467,000) --
------------- -------------
Outstanding at end of year.......... $ -- $ 552,000
============= ==============
There were 62,500 options exercisable at December 31, 1997.
In March 1998, the 1997 Employee Stock Option Plan was assumed by Loral and
all outstanding options were converted to options to acquire Loral common stock.
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related
Interpretations in accounting for its employee stock based award programs,
because the alternative fair value accounting provided for under FASB Statement
No. 123, Accounting for Stock Based Compensation ("SFAS 123") which is effective
for awards after January 1, 1996, requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25, when
the exercise price of the employee award equals the market price of the
underlying stock on the date of grant, as has been the case historically with
the Company's awards, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share required
by SFAS 123, has been determined as if the Company had accounted for its stock
options under the fair value method of that statement. The fair value of these
options was estimated at the date of the grant using a Black-Scholes valuation
model with the following assumptions:
PREDECESSOR COMPANY
----------------------------------------
MARCH 31,
1998 1997 1996
------------- ------------- ----------
Risk-free interest rate ............. 6.5% 6.5% 6.5%
Expected dividend yields ............ 0.0% 0.0% 0.0%
Expected life of option ............. 6.5 years 6.5 years 5.8 years
Volatility of the Company's stock ... 69% 69% 68%
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the option's vesting period. The effect
of applying SFAS 123 on pro forma net loss is not necessarily representative of
the effects on reported net loss for future years due to, among other things,
(1) the vesting period of the stock options and the (2) fair value of additional
stock options in future years. The Company's adjusted pro forma information are
as follows (in thousands, except per share information):
42
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED)
PREDECESSOR COMPANY
-------------------------------------------
THREE MONTHS
ENDED
MARCH 31,
1998 1997 1996
-------------- ------------ ----------
Adjusted pro forma net loss ................ $ (40,777) $ (110,703) $ (28,031)
=============== ============ =============
Adjusted pro forma net loss per share ...... $ -- $ (10.03) $ (2.68)
=============== ============ =============
401(k) Profit Sharing Plan -- In September 1996, Orion amended the 401(k)
profit sharing plan. Under this plan, 100,000 shares of common stock are
reserved for issuance as the Company's discretionary match of employee
contributions. The Company's matching contributions may be made in either cash
or in the equivalent amount of the Company's common stock. For the four months
ended April 30, 1998 and the year ended December 31, 1997, the Company's
matching contribution was 3,341 and 10,480 shares of the Company's common stock
with a value of approximately $60,000 and $180,000, respectively.
Effective May 1, 1998, the 401(k) Profit Sharing Plan was merged into the
Loral Space and Communications, Ltd. Savings Plan and $0.8 million of matching
contributions were incurred in this plan for the period May 1, 1998 through
December 31, 1998.
Stock Purchase Plan -- In September 1996, Orion adopted an employee stock
purchase plan. Under this plan, 500,000 shares of common stock are reserved for
issuance. Shares of common stock were purchased under this plan through payroll
deduction. The purchase price of each share of common stock purchased under the
plan was 85 percent of the fair market value of the common stock on the
measurement date. During 1998 and 1997 the Company issued 20,180 and 27,731
shares, respectively, pursuant to the Plan. In March 1998 the Stock Purchase
Plan was terminated.
Stock Warrants - In November 1996, Orion granted 50,000 warrants to DACOM
to purchase shares of common stock at $14 per share. The warrants are
exercisable for a six month period beginning six months after the commencement
date, as defined in the Joint Investment Agreement, and ending one year after
the commencement date and will terminate at that time or at any time the Joint
Investment Agreement is terminated. The fair value of the warrants at the date
of issue was $300,000 and was estimated using a Black Scholes valuation model.
Warrants outstanding at:
PREDECESSOR COMPANY
---------------------------------------------------
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
--------------- -------------- -----------------
Range of exercise price............. $0.01 - $14.00 $0.01 - $14.00 $9.79 - $14.00
=============== ============== ==============
Outstanding at beginning of year.... 740,550 142,115 553,768
Granted during year................. -- 697,400 50,000
Exercised ......................... (2,518) (96,159) --
Canceled ......................... -- (2,806) (461,653)
Converted to warrants to acquire
Loral common stock ............... (738,032) -- --
-------------- ------------- --------------
Outstanding at end of year.......... -- 740,550 142,115
============== ============= ==============
There were 690,550 and 92,115 warrants exercisable at December 31, 1997 and
1996, respectively.
43
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED)
The holders of preferred stock also hold warrants to purchase 1,017,509
shares of common stock at the conversion price of such preferred stock. These
warrants do not become exercisable unless Orion exercises its right to
repurchase the preferred stock at the liquidation value, plus accrued and unpaid
dividends. As of March 31, 1998, these warrants were forfeited as a result of
the conversion of all preferred stock to common stock.
In January 1997, the Company issued Senior Note Warrants and Senior
Discount Note Warrants to acquire 376,608 and 320,792 shares of common stock,
respectively at $.01 per share in connection with the Bond Offering. The
warrants were not exercisable prior to six months after the closing date of the
Bond Offering and became separately transferable from the Notes six months from
date of issuance. The estimated fair value of the warrants aggregating $9.6
million was allocated $5.2 million to Senior Notes and $4.4 million to Senior
Discount Notes as debt discount. At December 31, 1997, 6,850 warrants were
converted into 5,797 shares of common stock. In March 1998, the warrants were
converted to warrants to purchase Loral common stock.
Shares Reserved for Issuance - The Company had 0 shares and 14,036,809
shares of common stock at December 31, 1998 and 1997, respectively, reserved for
issuance upon conversion of debentures and preferred stock, exercise of
outstanding stock options and warrants, and common stock issued under the stock
purchase and 401(k) profit sharing plans.
Loral's 1996 Stock Option Plan - Certain employees of Loral Orion
participate in Loral's 1996 Stock Option Plan. Under this plan, options are
granted at the discretion of Loral's Board of Directors to employees of Loral
and its affiliates. Such options become exercisable as determined by the Board,
generally over five years, and generally expire no more than 10 years from the
date of grant. For the nine months ended December 31, 1998, Loral granted
certain key employees of Loral Orion options to purchase shares of Loral common
stock at a weighted average price of $24.55 per share (weighted average fair
value of $5.88 per share). No options were exercised, and at December 31, 1998,
options to purchase 513,420 shares were outstanding, 1,200 of which were
exercisable.
As described above, Loral Orion accounts for its stock-based awards using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
interpretations. SFAS No. 123, "Accounting for Stock-Based Compensation"
requires the disclosure of pro forma net income (loss). Loral Orion adopted the
fair value method. SFAS No. 123 requires that equity instruments granted to an
employee by a principal stockholder be included as part of the disclosure. The
pro forma incremental effect on net loss required to be disclosed under SFAS No.
123 is approximately $1.9 million for the nine months ended December 31, 1998.
7. FAIR VALUES OF FINANCIAL INSTRUMENTS
Other than amounts due under the Senior Notes and Senior Discount Notes,
Orion believes that the carrying amount reported in the balance sheet of its
other financial assets and liabilities approximates their fair value at December
31, 1998. The fair value of the Company's Senior Notes and Senior Discount Notes
was estimated based on quoted market prices, at December 31, 1998 and 1997, to
be approximately $438.6 million and $304.9 million, and $511.8 million and
$377.5 million, respectively.
44
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. SEGMENTS
The Company has two reportable business segments: Fixed Satellite Services
and Data Services (see Note 1).
In evaluating financial performance, management uses revenues and earnings
before interest, taxes and depreciation and amortization ("EBITDA") as the
measure of a segment's profit or loss. The accounting policies of the reportable
segments are the same as those described in Note 2.
Summarized financial information concerning the reportable segments is as
follows:
NINE MONTHS ENDED DECEMBER 31, 1998
SEGMENT INFORMATION
(IN MILLIONS)
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS CONSOLIDATED
--------------- --------------- -------------- -------------
Revenue from external customers ...... $ 25.2 $ 39.4 $ 64.6 $ 64.6
=============== =============== ============== =============
EBITDA (1)............................ $ 21.2 $ (13.2) $ 8.0 $ 8.0
Depreciation and amortization ........ 41.6 9.8 51.4 51.4
Merger costs ......................... -- -- -- .6
--------------- --------------- -------------- -------------
Income (loss) from operations ........ $ (20.4) $ (23.0) $ (43.4) $ (44.0)
=============== =============== ============== =============
Capital expenditures ................. $ 272.1 $ 12.0 $ 284.1 $ 284.1
=============== =============== ============== =============
Total assets ......................... $ 1,355.4 $ 56.3 $ 1,411.7 $ 1,417.5
=============== =============== ============== =============
THREE MONTHS ENDED MARCH 31, 1998
SEGMENT INFORMATION
PREDECESSOR COMPANY
(IN MILLIONS)
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS CONSOLIDATED
--------------- --------------- -------------- -------------
Revenue from external customers ...... $ 7.9 $ 10.9 $ 18.8 $ 18.8
=============== =============== ============== =============
EBITDA (1)............................ $ 6.7 $ (5.7) $ 1.0 $ 1.0
Depreciation and amortization ........ 9.6 2.9 12.5 12.5
Merger costs ......................... -- -- -- 12.2
--------------- --------------- -------------- -------------
Income (loss) from operations......... $ (2.9) $ (8.6) $ (11.5) $ (23.7)
=============== =============== ============== =============
Capital expenditures ................. $ 14.8 $ 3.6 $ 18.4 $ 18.4
=============== =============== ============== =============
Total assets ......................... $ 1,381.8 $ 49.4 $ 1,431.2 $ 1,431.2
=============== =============== ============== =============
With the exception of the Company's satellite in orbit, the Company's
long-lived assets are primarily located in the United States, Germany and other
foreign countries, and at December 31, 1998, amounted to approximately, $979
million, $6 million and $13 million, respectively.
45
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. SEGMENTS - (CONTINUED)
1997
SEGMENT INFORMATION
PREDECESSOR COMPANY
(in millions)
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS CONSOLIDATED
--------------- --------------- -------------- -------------
Revenue from external customers ...... $ 31.3 $ 41.4 $ 72.7 $ 72.7
=============== =============== ============== =============
EBITDA (1)............................ 21.3 (16.2) 5.1 5.1
Depreciation and amortization ........ 34.1 14.1 48.2 48.2
--------------- --------------- -------------- -------------
Income (loss) from operations......... $ (12.8) $ (30.3) $ (43.1) $ (43.1)
=============== =============== ============== =============
Capital expenditures ................. $ 102.3 $ 11.0 $ 113.3 $ 113.3
=============== =============== ============== =============
Total assets ......................... $ 849.0 $ 47.5 $ 896.5 $ 896.5
=============== =============== ============== =============
1996
SEGMENT INFORMATION
PREDECESSOR COMPANY
(IN MILLIONS)
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS CONSOLIDATED
--------------- --------------- -------------- -------------
Revenue from external customers ...... $ 24.9 $ 17.0 $ 41.9 $ 41.9
=============== =============== ============== =============
EBITDA 1.............................. 13.4 (12.8) 0.6 0.6
Depreciation and amortization ........ 30.3 6.6 36.9 36.9
--------------- --------------- -------------- -------------
Income (loss) from operations ........ $ (16.9) $ (19.4) $ (36.3) $ (36.3)
=============== =============== ============== =============
Capital expenditures ................. $ 3.8 $ 12.6 $ 16.4 $ 16.4
=============== =============== ============== =============
Total assets ......................... $ 327.8 $ 30.5 $ 358.3 $ 358.3
=============== =============== ============== =============
- - ----------------------------
(1) EBITDA (which is equivalent to operating income (loss) before depreciation
and amortization and merger costs) is provided because it is a measure commonly
used in the communication industry to analyze companies on the basis of
operating performance, leverage and liquidity and is presented to enhance the
understanding of Loral Orion'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.
46
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. CONDENSED FINANCIAL INFORMATION OF LORAL ORION, INC.
Presented below are condensed balance sheets of Loral Orion, Inc. (parent
company only basis) at December 31, 1998 and 1997. All material contingencies,
obligations and guarantees of Loral Orion, Inc. have been separately disclosed
in the preceding notes to the financial statements.
CONDENSED BALANCE SHEETS OF LORAL ORION, INC.
(PARENT COMPANY ONLY BASIS)
DECEMBER 31,
----------------------------------
1997
PREDECESSOR
1998 COMPANY
-------------- ---------------
ASSETS
Current assets:
Restricted assets ..................................... $ 50,180 $ 50,064
Receivable from subsidiaries .......................... 489,384 --
------------- --------------
Total current assets.............................. 539,564 50,064
Restricted and segregated assets ........................ 22,675 284,433
Investment in and advances to subsidiaries .............. 591,421 460,572
Deferred income taxes ................................... 53,915 --
Due from Loral .......................................... 3,619 --
Costs in excess of net asset acquired associated
with the Loral merger, net ............................
Other assets, net ....................................... 15,261 42,021
------------- --------------
Total assets...................................... $ 1,834,470 $ 837,090
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Payables to subsidiaries .............................. $ 490,984 $ --
Accrued liabilities ................................... 5,166 --
Other current liabilities ............................. -- --
Interest payable senior notes and debentures .......... 22,842 24,768
------------- --------------
Total current liabilities......................... 518,992 24,768
Long term debt .......................................... 916,387 782,437
Redeemable preferred stock............................... -- 76,734
Stockholders' equity (deficit)........................... 399,091 (46,849)
------------- --------------
Total liabilities and stockholders' equity (deficit) $ 1,834,470 $ 837,090
============= ==============
47
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. CONDENSED FINANCIAL INFORMATION OF LORAL ORION, INC. - (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS OF LORAL ORION, INC.
(PARENT COMPANY ONLY BASIS)
PREDECESSOR COMPANY
----------------------------------------------------
NINE MONTHS THREE MONTHS YEARS ENDED DECEMBER 31,
ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1998 1997 1996
---------------- ---------------- ---------------- --------------------
Services revenue ................................... $ -- $ -- $ -- $ 34
Operating expenses and other income:
General and administrative ....................... 40 -- 2,170 3,832
Interest expense (income), net.................... 54,644 18,285 57,069 (1,884)
Depreciation and amortization .................... 14,375 -- -- --
Other (income), net .............................. (274) -- -- --
Merger costs ................................... -- 12,145 -- --
---------------- ---------------- ---------------- ---------------
Total operating expenses and other income......... 68,785 30,430 59,239 1,948
Equity in net losses of subsidiaries ................ 12,289 9,261 46,501 25,281
Income tax benefit .................................. (1,105) -- -- --
---------------- ---------------- ---------------- ---------------
Net loss ............................................ (79,969) (39,691) (105,740) (27,195)
Preferred dividends ................................. -- (1,387) -- --
---------------- ---------------- ---------------- ---------------
Net loss attributable to common stockholders ....... $ (79,969) $ (38,304) $ (105,740) $ (27,195)
=============== =============== ================ ===============
48
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
9. CONDENSED FINANCIAL INFORMATION OF LORAL ORION, INC. - (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS OF LORAL ORION, INC.
(PARENT COMPANY ONLY BASIS)
PREDECESSOR COMPANY
------------------------------------------------------
NINE MONTHS THREE MONTHS YEARS ENDED DECEMBER 31,
ENDED ENDED
DECEMBER 31, MARCH 31,
1998 1998 1997 1996
---------------- ---------------- ---------------- ----------------
NET CASH PROVIDED BY (USED IN) OPERATIONS............ $ (24,320) $ (37,300) $ (22,806) $ (4,047)
INVESTING ACTIVITIES:
Advances to subsidiaries........................... (247,640) (755) (407,093) (15,529)
Increase in restricted and segregated assets ...... -- -- (406,938) --
Release of restricted and segregated assets ....... 273,960 35,938 90,501 --
Capital expenditures............................... -- -- -- (504)
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in) investing
activities...................................... 26,320 35,183 (723,530) (16,033)
FINANCING ACTIVITIES:
Proceeds from issuance of debt, net ............... -- -- 744,275 --
Proceeds from issuance of redeemable
preferred stock.................................. -- -- 2,152 --
Proceeds from issuance of common stock............. -- 2,117 -- 343
Purchase of treasury stock ........................ -- -- (91) --
Repayment of senior notes payable.................. (2,000) -- -- (2,496)
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in) financing
activities ...................................... (2,000) 2,117 746,336 (2,153)
---------------- ---------------- ---------------- ----------------
Net (decrease) increase in cash and cash
equivalents...................................... -- -- -- (22,233)
Cash and cash equivalents at beginning of year....... -- -- -- 48,798
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents at end of year............. $ -- $ -- $ -- $ 26,565
================ ================ ================ ================
Basis of presentation -- In these parent company-only condensed financial
statements, Orion's investment in subsidiaries is stated at cost less equity in
the losses of subsidiaries since date of inception or acquisition.
Loral Orion , Inc. ("Loral Orion"), a Delaware company, is a holding
company which is the ultimate parent of all Loral Orion subsidiaries. The
accompanying financial statements reflect the financial position, results of
operations and cash flows of Loral Orion on a separate company basis. All
subsidiaries of Loral Orion are reflected as investments accounted for under the
equity method of accounting. Accordingly intercompany payables and receivables
have not been eliminated.
Loral Orion's significant transactions with its subsidiaries other than the
investment account and related equity in net loss of unconsolidated subsidiaries
are intercompany payables and receivables resulting primarily from the funding
of operations and the construction of Loral Orion satellites.
No cash dividends were paid to Loral Orion by its affiliates during nine
months ended December 31, 1998, the three months ended March 31, 1998 and the
years ended December 31, 1997 and 1996.
49
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1998 and 1997 (in thousands):
PREDECESSOR
COMPANY
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
1998
Revenues................................... $ 18,790 $ 20,243 $ 21,153 $ 23,212
Loss from operations....................... (23,639) (15,296) (13,951) (14,782)
Loss before income taxes, extraordinary loss
on extinguishment of debt, minority
interest and preacquisition loss of (39,691) (28,000) (26,301) (26,701)
acquired subsidiary.....................
Net loss .................................. (39,691) (19,755) (29,614) (30,600)
PREDECESSOR COMPANY
-----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
1997
Revenues................................... $ 20,233 $ 16,687 $ 17,619 $ 18,202
Loss from operations....................... (8,317) (10,915) (11,270) (12,579)
Loss before income taxes, extraordinary loss
on extinguishment of debt, minority
interest and preacquisition loss of (22,889) (24,745) (27,510) (27,501)
acquired subsidiary.....................
Net loss................................... (25,984) (24,745) (27,510) (27,501)
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURES.
As a result of the Merger, the Board of Directors of the Company appointed
Deloitte & Touche LLP ("Deloitte & Touche") as independent auditors, effective
May 13, 1998. Deloitte & Touche replaced Ernst & Young LLP ("Ernst & Young"),
which served as the Company's independent auditors for the fiscal years ended
December 31, 1997 and December 31, 1996 and was dismissed, effective May 13,
1998.
The reports issued by Ernst & Young on the Company's financial statements
for the fiscal years ended December 31, 1997 and December 31, 1996 did not
contain any adverse opinion or disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting principles.
During the fiscal years ended December 31, 1997 and December 31, 1996, and
during the interim period preceding May 13, 1998, (i) there were no
disagreements with Ernst & Young on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure and
which, if not resolved to the satisfaction of Ernst & Young, would have caused
Ernst & Young to make reference to these matters in their report and (ii) there
were no "reportable events" (as that term is described in Item 304(a)(i)(v) of
Regulation S-K).
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to General Instruction I of Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) and (2) List of Financial Statements and Financial Statement
Schedules
The following consolidated financial statements of Loral Orion, Inc. are
included in Item 8:
Consolidated Balance Sheets - December 31, 1998 and 1997 (Predecessor
Company)
Consolidated Statements of Operations - Nine months ended December 31,
1998, and for the Predecessor Company the three months ended March 31,
1998, and the years ended December 31, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity (Deficit) -
Nine months ended December 31, 1998, and for the Predecessor Company
the three months ended March 31, 1998, and the years ended December
31, 1997 and 1996
Consolidated Statements of Cash Flows - Nine months ended December 31,
1998, and for the Predecessor Company the three months ended March 31,
1998, and the years ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements
51
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted, except
for Schedule I, condensed financial information which is presented in Note 9 in
the Company's consolidated financial statements.
(b) Reports on Form 8-K filed in the fourth quarter of 1998:
None.
(c) Exhibits
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- - ------ -------------------
2.1 Agreement and Plan of Merger, dated as of October 7, 1997, by
and among Orion, Loral and Loral Satellite Corporation.
(Incorporated by reference to exhibit number 2.1 in Current
Report on Form 8-K dated October 9, 1997).
2.2 Principal Stockholder Agreement among Orion, Loral, Loral
Satellite Corporation and the stockholders that are
signatories thereto, dated as of October 7, 1997.
(Incorporated by reference to exhibit number 2.2 in Current
Report on Form 8-K dated October 9, 1997).
2.3 Amendment No. 1 Agreement and Plan of Merger, dated as of
February 11, 1998, by and among Orion, Loral and Loral
Satellite Corporation. (Incorporated by reference to exhibit
number 2.2 in Registration Statement No. 333-46407 on Form
S-4).
2.4 Amendment No. 1 to Principal Stockholder Agreement among
Orion, Loral, Loral Satellite Corporation and the stockholders
that are signatories thereto, dated as of December 1, 1997.
(Incorporated by reference to Exhibit number 2.4 in Annual
Report on Form 10-K for fiscal year ended December 31, 1997).
3.1 Certificate of Merger of Loral Satellite Corporation into
Orion dated March 20, 1998 and Exhibit A thereto, Restated
Certificate of Incorporation of the Company.*
3.2 Certificate of Amendment to Certificate of Incorporation of
the Company.*
3.3 Amended and Restated Bylaws of the Company.*
4.1 Form of Senior Note Indenture and Form of Note included
therein. (Incorporated by reference to Exhibit number 4.1 to
Registration Statement No. 333-19167 on Form S-1).
4.2 Form of Senior Discount Note Indenture and Form of Note
included therein. (Incorporated by reference to Exhibit number
4.2 to Registration Statement No. 333-19167 on Form S-1).
4.3 Form of Collateral Pledge and Security Agreement.
(Incorporated by reference to Exhibit number 4.3 to
Registration Statement No. 333-19167 on Form S-1).
10.1 Second Amended and Restated Purchase Agreement, dated
September 26, 1991 ("Satellite Contract") by and between Loral
Orion Services, Inc. (formerly known as Orion Satellite
Corporation) and British Aerospace PLC and the First
Amendment, dated as of September 15, 1992, Second Amendment,
dated as of November 9, 1992, Third Amendment, dated as of
March 12, 1993, Fourth Amendment, dated as of April 15, 1993,
Fifth Amendment, dated as of September 22, 1993, Sixth
Amendment, dated as of April 6, 1994, Seventh Amendment, dated
as of August 9, 1994, Eighth Amendment, dated as of December
8, 1994, and Amendment No. 9 dated October 24, 1995, thereto.
[CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THESE
DOCUMENTS.] (Incorporated by reference to exhibits number
10.13 and 10.14 in Registration Statement No. 33-80518 on Form
S-1).
52
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- - ------ -------------------
10.2 Restated Amendment No. 10 dated December 10, 1996, between
LOSI and Matra Marconi Space to the Second Amended and
Restated Purchase Agreement, dated September 16, 1991 by and
between OrionServ and British Aerospace PLC (which contract
and prior exhibits thereto were incorporated by reference as
exhibit number 10.1). (Incorporated by reference to exhibit
number 10.2 in Registration Statement No. 333-19795 on Form
S-4).
10.3 Contract for a Satellite Control System, dated December 7,
1992, by and between Loral Orion Services, Inc., Telespazio
S.p.A. and Martin Marietta Corporation. [CONFIDENTIAL
TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.]
(Incorporated by reference to exhibit number 10.31 in
Registration Statement No. 33-80518 on Form S-1).
10.4 Credit Agreement, dated as of November 23, 1993, by and
between Loral Orion Services, Inc. (as successor in interest
to Orion Atlantic, L.P.) and General Electric Capital
Corporation (`GECC'). [CONFIDENTIAL TREATMENT HAS BEEN GRANTED
FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to
exhibit number 10.32 in Registration Statement No. 33-80518 on
Form S-1).
10.5 Security Agreement, dated as of November 23, 1993, by and
between Loral Orion Services, Inc. and GECC. (Incorporated by
reference to exhibit number 10.33 in Registration Statement
No. 33-80518 on Form S-1).
10.6 Assignment and Security Agreement, dated as of November 23,
1993, by and between Loral Orion Services, Inc. and GECC.
(Incorporated by reference to exhibit number 10.34 in
Registration Statement No.
33-80518 on Form S-1).
10.7 Consent and Agreement, dated as of November 23, 1993, by and
between Loral Orion Services, Inc., Martin Marietta
Corporation and GECC. (Incorporated by reference to exhibit
number 10.35 in Registration Statement No. 33-80518 on Form
S-1).
10.8 Deed of Trust, dated as of November 23, 1993, by and between
Loral Orion Services, Inc., W. Allen Ames, Jr. and Michael J.
Schwel, as Trustees, and GECC. (Incorporated by reference to
exhibit number 10.37 in Registration Statement No. 33-80518 on
Form S-1).
10.9 Lease Agreement, dated as of November 23, 1993, by and between
OrionNet, Inc. and Loral Orion Services, Inc. (as successor in
interest to Orion Atlantic, L.P.), as amended by an Amendment,
dated January 3, 1995. [CONFIDENTIAL TREATMENT HAS BEEN
GRANTED FOR PORTIONS OF THESE DOCUMENTS. (Incorporated by
reference to exhibit number 10.38 in Registration Statement
No. 33-80518 on Form S-1).
10.10 Note for Interim Loans, dated as of November 23, 1993, by and
between Loral Orion Services, Inc. (as successor in interest
to Orion Atlantic, L.P.) and GECC. (Incorporated by reference
to exhibit number 10.42 in Registration Statement No. 33-80518
on Form S-1).
10.11 Lease Agreement, dated as of October 2, 1992, by and between
OrionNet and Research Grove Associates, as amended by
Amendment No. 1 dated March 26, 1993. Amendment No. 2 dated
August 23, 1993, and Amendment No. 3 dated December 20, 1993.
(Incorporated by reference to exhibit number 10.39 in
Registration Statement No. 33-80518 on Form S-1).
10.12 Restated Definitive Agreement, dated October 29, 1998, by and
between Orion and Republic of the Marshall Islands.
[CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF
THIS DOCUMENT.]*
10.13 TT&C Earth Station Agreement, dated as of November 11, 1996,
by and between Loral Orion Services, Inc. (by assignment from
Loral Orion-Asia Pacific, Inc., formerly known as Orion Asia
Pacific Corporation and DACOM Corp. [CONFIDENTIAL TREATMENT
HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated
by reference to exhibit number 10.39 in Registration Statement
No. 333-19795 on Form S-4).
53
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- - ------ -------------------
10.14 Joint Investment Agreement, dated as of November 11, 1996, by
and between Loral Orion Services, Inc. (by assignment from
Loral Orion-Asia Pacific, Inc., formerly known as Orion Asia
Pacific Corporation) and DACOM Corp. [CONFIDENTIAL TREATMENT
HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated
by reference to exhibit number 10.40 in Registration Statement
No. 333-19795 on Form S-4).
10.15 Orion 3 Spacecraft Purchase Contract, dated January 15, 1997,
by and among Hughes Space and Communications International,
Inc., Loral Orion Services, Inc. (by assignment from Loral
Orion-Asia Pacific, Inc., formerly known as Orion Asia
Pacific, Inc.) and Orion. [CONFIDENTIAL TREATMENT HAS BEEN
GRANTED FOR PORTIONS OF THIS DOCUMENT.]. (Incorporated by
reference to Exhibit number 10.52 to Registration Statement
No. 333-19167 on Form S-1).
10.16 Letter Agreement, effective as of May 20/21, 1997, by and
between Orion and Morgan Stanley & Co. (Incorporated by
reference to Exhibit number 10.53 to Annual Report on Form
10-K for the fiscal year ended December 31, 1997).
10.17 Orion-Z Spacecraft Purchase Contract, dated May 15, 1998, by
and between Loral Orion Services, Inc. and Space
Systems/Loral, Inc. and Amendment No. 1 dated December 29,
1998. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS
OF THIS DOCUMENT.]*
10.18 Agreement, dated January 1, 1999, by and between Loral Orion
Services, Inc. and Loral Skynet.*
10.19 Agreement, dated January 1, 1999, by and between Loral Orion
Services, Inc. and Loral Skynet.*
23 None
27 Financial Data Schedule.*
* Filed herewith.
(d) Financial statement schedule
Schedule I, see Note 9 in the Company's Consolidated Financial
Statements
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LORAL ORION, INC.
/s/ Benard L. Schwartz
By: Bernard L. Schwartz
(Chairman of the Board and
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- - --------- ----- ----
/s/ Bernard L. Schwartz Chairman of the Board March 30, 1999
- - --------------------------- and Chief Executive Officer
Bernard L. Schwartz
/s/ George Baker Director March 30, 1999
- - ---------------------------
George Baker
/s/ Gregory J. Clark Chief Operating Officer and March 30, 1999
- - --------------------------- Director
Gregory J. Clark
/s/ Michael P. DeBlasio First Senior Vice President March 30, 1999
- - --------------------------- and Director
Michael P. DeBlasio
/s/ Daniel Hirsch Director March 30, 1999
- - ---------------------------
Daniel Hirsch
/s/ Eric J. Zahler Senior Vice President March 30, 1999
- - ---------------------------- Secretary and Director
Eric J. Zahler
/s/ Richard J. Townsend Senior Vice President March 30, 1999
- - ---------------------------- and Chief Financial Officer
Richard J. Townsend (Principal Financial Officer)
/s/ Harvey B. Rein Vice President and March 30, 1999
- - ---------------------------- Controller
Harvey B. Rein (Principal Accounting Officer)
55