SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
Commission file number 0-22085
LORAL ORION, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-2008654
- ------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2440 Research Boulevard, Suite 400, Rockville, Maryland 20850
- ------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
301-258-8101
- --------------------------------------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING WITH THE REDUCED DISCLOSURE FORMAT
PURSUANT TO GENERAL INSTRUCTION H (2) OF FORM 10-Q.
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(Unaudited) Note
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,520 $ 35,861
Restricted and segregated cash 197,472 50,180
Accounts receivable (less allowance for doubtful accounts of $2,556
and $1,019 at September 30, 1999 and December 31, 1998, respectively) 15,541 15,292
Prepaid expenses and other current assets 10,121 4,299
---------------- ----------------
Total current assets 239,654 105,632
Restricted and segregated cash -- 22,675
Property and equipment at cost:
Land 74 74
Satellite and related equipment 536,060 263,188
Telecommunications equipment 42,640 35,630
Furniture and computer equipment 9,565 8,693
---------------- ----------------
588,339 307,585
Less accumulated depreciation (71,498) (38,706)
Satellite construction in progress, including capitalized
interest of $17,350 and $20,198 at September 30, 1999
and December 31, 1998, respectively 252,121 331,861
---------------- ----------------
Net property and equipment 768,962 600,740
Due from Loral -- 3,619
Costs in excess of net assets acquired associated
with the Loral Merger, net 597,112 608,015
Deferred income taxes 50,747 53,915
Other assets, net 22,578 22,908
---------------- ----------------
TOTAL ASSETS $ 1,679,053 $ 1,417,504
================ ================
</TABLE>
- ----------
Note: The December 31, 1998 balance sheet has been derived from the
audited consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
2
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR AMOUNTS)
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(Unaudited) Note
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,049 $ 1,826
Accounts payable 26,710 2,035
Satellite purchase price payable 194,430 --
Accrued and other current liabilities 20,577 16,162
Customer deposits 6,775 7,897
Deferred revenue 2,867 35,841
Interest payable 10,386 22,842
---------------- -----------------
Total current liabilities 263,794 86,603
Long-term debt 955,155 931,669
Other long-term liabilities 150 141
Due to Loral 92,628 --
Commitments and contingencies:
Stockholders' equity:
Common stock, $.01 par value, 1,000 shares authorized; 100 shares
outstanding at September 30, 1999 and December 31, 1998 -- --
Capital in excess of par value 533,352 481,791
Unearned compensation (2,207) (3,347)
Accumulated other comprehensive income (loss) (479) 616
Accumulated deficit (163,340) (79,969)
---------------- -----------------
Total stockholders' equity 367,326 399,091
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,679,053 $ 1,417,504
================ =================
</TABLE>
- ----------
Note: The December 31, 1998 balance sheet has been derived from the
audited consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
3
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
NINE MONTHS SIX MONTHS MARCH 31,
THREE MONTHS ENDED SEPTEMBER 30, ENDED ENDED 1998
--------------------------------- SEPTEMBER 30, SEPTEMBER 30, PREDECESSOR
1999 1998 1999 1998 COMPANY
---------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Service revenue $ 25,168 $ 21,153 $ 71,778 $ 41,396 $ 18,790
Operating expenses:
Direct 9,900 7,265 24,097 14,277 6,406
Sales and marketing 5,581 5,186 17,798 11,986 5,790
Engineering and technical services 2,436 2,779 6,817 4,328 1,898
General and administrative 3,482 3,351 10,793 7,308 3,707
Depreciation and amortization 17,741 16,327 51,644 32,443 12,483
Merger costs -- 196 -- 301 12,145
--------------- -------------- -------------- ------------ -------------
Total operating expenses 39,140 35,104 111,149 70,643 42,429
--------------- -------------- -------------- ------------ -------------
Loss from operations (13,972) (13,951) (39,371) (29,247) (23,639)
Interest income 2,182 2,427 4,253 7,574 5,425
Interest expense (19,434) (14,996) (50,853) (32,748) (21,190)
Other income (expense) 88 219 446 120 (287)
--------------- -------------- -------------- ------------ -------------
Loss before income taxes (31,136) (26,301) (85,525) (54,301) (39,691)
Income tax benefit (expense) (486) (3,313) 2,153 4,932 --
--------------- -------------- -------------- ------------ -------------
Net loss (31,622) (29,614) (83,372) (49,369) (39,691)
Preferred stock dividend, net of -- -- -- -- 1,387
forfeitures --------------- -------------- -------------- ------------ -------------
Net loss attributable to common
stockholders $ (31,622) $ (29,614) $ (83,372) $ (49,369) $ (38,304)
=============== ============== ============== ============ =============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
NINE MONTHS SIX MONTHS MARCH 31,
ENDED ENDED 1998
SEPTEMBER 30, SEPTEMBER 30, PREDECESSOR
1999 1998 COMPANY
---------------- -------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (83,372) $ (49,369) $ (39,691)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Deferred income tax provision 3,168 2,231 --
Depreciation and amortization 51,644 32,443 12,483
Amortization of deferred financing costs -- 1,303 609
Provision for bad debts 1,969 650 150
Non-cash interest expense 25,088 12,943 10,070
Other 795 264 1,644
Changes in operating assets and liabilities:
Accounts receivable (5,164) (1,934) (1,408)
Prepaid expenses and other current assets (5,341) 881 693
Other assets (5,028) 188 201
Accounts payable, accrued liabilities and other
current liabilities (2,014) 19,890 (2,186)
Interest payable (12,456) (52) (12,510)
Customer deposits 1,984 811 23
Deferred revenue (142) 552 297
---------------- --------------- ---------------
Net cash provided by (used in) operating activities (28,869) 20,801 (29,625)
INVESTING ACTIVITIES
Increase in restricted and segregated assets (2,890) (5,825) (4,629)
Uses of and transfers from restricted and
segragated cash (see Note G) 143,879 269,791 35,938
Satellite construction costs (190,035) (261,394) (14,575)
Capital expenditures, net (see Note G) (86,943) (10,794) (3,805)
---------------- --------------- ---------------
Net cash provided by (used in) investing activities (135,989) (8,222) 12,929
FINANCING ACTIVITIES
Equity contributed from Loral 51,561 -- --
Due to Loral 96,247 (6,366) --
Proceeds from issuance of common stock, net of
issuance costs -- -- 2,117
Repayment of senior notes and notes payable (902) (534) (254)
Payment of satellite incentive obligations (181) (3,128) (324)
Other (1,208) 653 (1,051)
---------------- --------------- ---------------
Net cash provided by (used in) financing activities 145,517 (9,375) 488
Net decrease in cash and cash equivalents (19,341) 3,204 (16,208)
Cash and cash equivalents at beginning of period 35,861 53,801 70,009
---------------- --------------- ---------------
Cash and cash equivalents at end of period $ 16,520 $ 57,005 $ 53,801
================ ================ ===============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
(IN THOUSANDS)
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
NINE MONTHS SIX MONTHS MARCH 31,
ENDED ENDED 1998
SEPTEMBER 30, SEPTEMBER 30, PREDECESSOR
1999 1998 COMPANY
------------- ------------- --------------
<S> <C> <C> <C>
Preferred stock dividend, net of forfeitures $ -- $ -- $ (1,387)
============= ============= ==============
Conversion of redeemable preferred stock
to common stock -- -- 69,888
============= ============= ==============
Conversion of Company common stock and
stock options to Loral common stock as the
result of the Loral Merger -- -- 469,000
============= ============= ==============
Conversion of subordinated debentures, accrued
interest, and deferred financing costs to
common stock -- -- 50,000
============= ============= ==============
Issuance of common stock for preferred
stock dividend -- -- 5,458
============= ============= ==============
Issuance of common stock and warrants -- -- 4,757
============= ============= ==============
Interest paid $ 54,159 $ 15,614 $ 25,237
============= ============= ==============
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A. BASIS OF PRESENTATION
ORGANIZATION AND BUSINESS
Loral Orion, Inc. (the "Company" or "Loral Orion"), is a holding company with no
assets or operations other than its investments in its subsidiaries. Through the
operations of its subsidiaries, 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:
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. As of
January 1, 1999, the Company's fixed satellite services ("FSS") assets are
managed by Loral Skynet, a division of Loral SpaceCom Corporation;
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 and third party satellites.
GENERAL
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules of the Securities and Exchange
Commission ("SEC") and, in the opinion of the Company, include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the results of operations, financial position and cash flows. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to SEC rules. The Company believes that the
disclosures made are adequate to keep the information presented from being
misleading. The results of operations for the three and nine months ended
September 30, 1999 are not necessarily indicative of the results to be expected
for the full year. It is suggested that these financial statements be read in
conjunction with the Company's latest Annual Report on Form 10-K.
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, 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."
The consolidated financial statements for the three months ended March 31, 1998,
reflect the results of operations of the Predecessor Company. The consolidated
financial statements subsequent to March 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.
The Merger was accounted for as of March 31, 1998, using the purchase method.
Accordingly, the consolidated balance sheet at September 30, 1999 and 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 $620.4 million, and a fair value
7
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 remaining
vesting period of the options.
Had the acquisition of the Company occurred on January 1, 1998, the unaudited
pro forma sales, operating loss and net loss for the nine months ended September
30, 1998 would have been $60.2 million, $45.1 million, and $78.1 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, 1998.
COMPREHENSIVE INCOME
The Company follows Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130") 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). Total comprehensive loss is as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
NINE MONTHS SIX MONTHS MARCH 31,
ENDED ENDED 1998
SEPTEMBER 30, SEPTEMBER 30, PREDECESSOR
1999 1998 COMPANY
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net loss $ 83,372 $ 49,369 $ 39,691
Cumulative translation adjustment 1,095 350 --
---------------- ---------------- ----------------
Total comprehensive loss $ 84,467 $ 49,719 $ 39,691
================ ================ ================
</TABLE>
EARNINGS PER SHARE
Earnings per share is not presented since it is not considered meaningful due to
the Merger with Loral and recapitalization of the Company.
NOTE B. RESTRICTED AND SEGREGATED CASH
As of September 30, 1999, the Company had approximately $50 million of
restricted cash for interest payments on its Senior Notes and $147 million of
segregated cash expected to be used for the final payment on the purchase of
Apstar IIR (see Note G).
8
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE C. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Senior notes (net of premium of $60.2 million and $64.6 million
at September 30, 1999 and December 31, 1998, respectively) $ 503,230 $ 507,573
Senior discount notes (maturity value of $484 million) 438,242 408,812
Notes payable - TT&C Facility 4,051 4,953
Satellite incentive obligations 11,195 11,376
Other 486 781
--------------- ---------------
Total long-term debt 957,204 933,495
Less: current portion (2,049) (1,826)
--------------- ---------------
Long-term debt, less current portion $ 955,155 $ 931,669
=============== ===============
</TABLE>
In connection with the Merger, Loral did not assume the Company's outstanding
debt. Such debt remains outstanding and is non-recourse to Loral. The carrying
value of the Company's Senior Notes and Senior Discount Notes was increased to
reflect a fair value adjustment of $153.4 million in connection with the Merger,
based on quoted market prices at March 31, 1998.
NOTE D. NOTE DUE TO LORAL
During 1999, Loral Orion entered into an intercompany note with Loral Space &
Communications Corporation for a revolving credit facility. The interest rate on
the borrowings is Libor plus 275 basis points. Borrowings can be for periods of
1, 2, 3, or 6 months. The total amount outstanding at September 30, 1999 was
$92.6 million. The proceeds are being used to fund Orion 2 and Orion 3 or their
replacements and for general corporate purposes. This note is due on demand and
can be prepaid at any time without penalty. Interest expense through September
30, 1999 was $2.6 million.
NOTE E. INCOME TAXES
The Company is included in the consolidated U.S. Federal income tax return of
Loral Space & Communications Corporation. Pursuant to a tax sharing agreement
for 1998 and 1999 with Loral Space & Communications Corporation, the Company is
entitled to reimbursement for the use of its tax losses when such losses are
utilized by the consolidated group. The Company recorded a net receivable under
this tax sharing agreement of approximately $0.8 million and $5.4 million and a
deferred tax provision of $1.3 million and $3.2 million, resulting in a net tax
provision of $0.5 million for the three months and a net tax benefit of $2.2
million for the nine months ended September 30, 1999. The Company's effective
tax benefit rate of 2.5% for the nine months ended September 30, 1999 differs
from the federal statutory rate of 35%, due to the valuation allowance
established for the carryforward of the current year tax loss and the
non-deductible amortization of costs in excess of net asset acquired. The
deferred tax asset of $50.7 million as of September 30, 1999 on the accompanying
balance sheet arises from the tax effect of the temporary differences between
the carrying amount of the Senior Notes and the Senior Discount Notes payable
for financial and income tax purposes.
9
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE F. SEGMENTS
The Company's two operating segments are fixed satellite services and data
services (see Note A).
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. Beginning January 1, 1999, the Company's
fixed satellite services ("FSS") assets are managed by Loral Skynet. As a
result, in 1999 the FSS segment began leasing satellite capacity to the data
services segment for its use of Orion 1 (see Note G).
Summarized financial information concerning the Company's operating segments is
as follows (in millions):
THREE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FIXED TOTAL
SATELLITE DATA REPORTABLE INTERSEGMENT
SERVICES SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers ...... $ 8.1 $ 17.1 $ 25.2 $ -- $ 25.2
Intersegment revenue ................. 1.8 -- 1.8 (1.8) --
------------- ------------ ------------ ------------- -----------
Gross revenue ........................ $ 9.9 $ 17.1 $ 27.0 $ (1.8) $ 25.2
------------- ------------ ------------ ------------- -----------
EBITDA 1 ............................. $ 6.1 $ (2.4) $ 3.7 $ -- $ 3.7
Depreciation and amortization ........ 13.7 4.0 17.7 -- 17.7
------------- ------------ ------------ ------------- -----------
Loss from operations ................. $ (7.6) $ (6.4) $ (14.0) $ -- $ (14.0)
------------- ------------ ------------ ------------- -----------
Total assets ........................ $ 1,608.5 $ 71.4 $ 1,679.9 $ -- $ 1,679.9
------------- ------------ ------------ ------------- -----------
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS CONSOLIDATED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue from external customers ...... $ 8.1 $ 13.1 $ 21.2 $ 21.2
------------- ------------ ------------ ------------
EBITDA 1 ............................. $ 6.9 $ (4.4) $ 2.5 $ 2.5
Depreciation and amortization ........ 13.7 2.6 16.3 16.3
Merger costs ......................... -- -- -- 0.2
------------- ------------ ------------ ------------
Loss from operations.................. $ (6.8) $ (7.0) $ (13.8) $ (14.0)
------------- ------------ ------------ ------------
Total assets ........................ $ 1,310.7 $ 111.6 $ 1,422.3 $ 1,422.3
------------- ------------ ------------ ------------
</TABLE>
(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 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.
10
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FIXED TOTAL
SATELLITE DATA REPORTABLE INTERSEGMENT
SERVICES SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers ...... $ 22.9 $ 48.9 $ 71.8 $ -- $ 71.8
Intersegment revenue ................. 5.3 -- 5.3 (5.3) --
-------------- ------------- ------------ ------------- -----------
Gross revenue ........................ $ 28.2 $ 48.9 $ 77.1 $ (5.3) $ 71.8
-------------- ------------- ------------ ------------- -----------
EBITDA .............................. $ 17.4 $ (5.1) $ 12.3 $ -- $ 12.3
Depreciation and amortization ........ 40.6 11.0 51.6 -- 51.6
-------------- ------------- ------------ ------------- -----------
Loss from operations ................. $ (23.2) $ (16.1) $ (39.3) $ -- $ (39.3)
-------------- ------------- ------------ ------------- -----------
Total assets ........................ $ 1,608.5 $ 71.4 $ 1,679.9 $ -- $ 1,679.9
-------------- ------------- ------------ ------------- -----------
</TABLE>
SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS CONSOLIDATED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue from external customers ...... $ 16.4 $ 25.0 $ 41.4 $ 41.4
------------- ----------- ------------ ------------
EBITDA .............................. $ 10.4 $ (6.9) $ 3.5 $ 3.5
Depreciation and amortization ........ 26.4 6.0 32.4 32.4
Merger costs ......................... -- -- -- 0.3
------------- ----------- ------------ ------------
Loss from operations.................. $ (16.0) $ (12.9) $ (28.9) $ (29.2)
------------- ----------- ------------ ------------
Total assets ........................ $ 1,310.7 $ 111.6 $ 1,422.3 $ 1,422.3
------------- ----------- ------------ ------------
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998
PREDECESSOR COMPANY
(UNAUDITED)
<TABLE>
<CAPTION>
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS CONSOLIDATED
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue from external customers ...... $ 7.9 $ 10.9 $ 18.8 $ 18.8
------------- ----------- ------------ ------------
EBITDA ............................... $ 5.1 $ (4.1) $ 1.0 $ 1.0
Depreciation and amortization ........ 9.6 2.9 12.5 12.5
Merger costs ......................... -- -- -- 12.1
------------- ----------- ------------ ------------
Loss from operations.................. $ (4.5) $ (7.0) $ (11.5) $ (23.6)
------------- ----------- ------------ ------------
</TABLE>
11
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE G. 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 1'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 $53 million as of September
1999, 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 -- During the second quarter of 1998, the Company entered into a
satellite procurement contract with Space Systems/Loral, Inc. ("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 (the "SS/L Contract").
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. Loral Orion's cash will be used to fund the SS/L Contract up to
an amount that, will not exceed $202 million. Any requirements to SS/L in excess
of $202 million (estimated to be approximately $60 million) for Orion 2 will be
funded with additional equity contributed by Loral. Loral has funded $51.6
million of equity for Orion 2 through September 30, 1999.
Orion 2 was launched aboard an Ariane 44L launch vehicle on October 19, 1999,
into the orbital slot located at 15(degree) W.L. where in-orbit testing is being
conducted. The Company is currently in negotiations with Eutelsat to complete
coordination of Orion 2 with the Eutelsat satellite in the region. Orion 2 is
expected to enter service in January 2000, after orbit raising and in-orbit
testing are completed. Loral Skynet will manage the leasing of Orion 2's
capacity.
Orion 3 -- In January 1997, the Company entered into a satellite procurement
contract with Hughes Space and Communications Corporation for the construction
and launch of Orion 3, for which construction commenced in December 1996. The
contract provided for delivery in orbit of Orion 3, for a firm fixed price of
$203 million, excluding launch insurance and $8 million of incentive payments.
The orbital slot for Orion 3 covers broad areas of the Asia Pacific region
including China, Japan, Korea, Southeast Asia, Australia, New Zealand, Eastern
Russia and Hawaii.
On May 4, 1999, the Company's Orion 3 broadcast video and data communications
satellite was placed into a lower-than-expected orbit after its launch on a
Boeing Delta III rocket from Cape Canaveral Air Station, Florida. According to
Boeing, the Delta III's second stage apparently failed to complete its second
stage burn, and, as a result, the satellite achieved an orbit well below the
planned final altitude. The satellite cannot be used for the company's intended
purpose as a result.
The satellite and launch were fully insured for approximately $266 million,
which was received in the third quarter of 1999. DACOM Corporation, a Korean
communications company which had purchased eight transponders on Orion 3 for a
total of $89 million, had made prepayments of approximately $34 million to the
Company. Under Loral Orion's agreement with DACOM, the amount prepaid was
refunded in July 1999. Loral Orion's debt covenants require that the insurance
proceeds be used to acquire a replacement satellite within 15 months of receipt
of such proceeds, or to pay down debt (see Note B).
12
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
On September 28, 1999, Loral Asia Pacific Satellite (HK) Limited ("Loral Orion
HK"), a subsidiary of Loral Orion, purchased from APT Satellite Company Limited
("APT") all transponder capacity on the Apstar IIR satellite, (except for one
C-band transponder retained by APT) for approximately $273 million. Apstar IIR,
which was manufactured by SS/L, was launched in October 1997 and has an expected
mission life of 15 years. Loral Orion HK will have full use of 27 C-band and 16
Ku-band transponders aboard Apstar IIR for the remaining life of the satellite.
Located at 76.5 degrees East, Apstar IIR covers a region that includes Asia,
Europe, Africa and Australia, which represents over 75% of the world's
population. Under the purchase agreement, Loral Orion HK will also have the
option to lease from APT replacement satellites upon the end of life of Apstar
IIR.
On September 28, 1999, Loral Orion HK made an initial payment of approximately
$79 million to APT and agreed to pay approximately $194 million in cash to APT
over the next six months as follows: approximately $12 million on December 31,
1999 and approximately $182 million on March 27, 2000. Insurance proceeds from
the Orion 3 failure were used to fund the initial payment and will be used to
fund a portion of the remaining payments. Loral has agreed to guarantee Loral
Orion HK's obligations to APT under the purchase agreement.
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. Loral 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 is charged Loral Skynet's costs for providing
these services plus a 5 percent administrative fee.
Litigation -- 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.
NOTE H. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
13
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the matters
discussed in the following Management's Discussion and Analysis of Results of
Operations and Financial Condition of the Company, are not historical facts, but
are "forward-looking statements," as that term is defined in the Private
Securities Litigation Reform Act of 1995. In addition, the Company or its
representatives have made and may continue to make forward-looking statements,
orally or in writing, in other contexts, such as in reports filed with the SEC,
press releases or statements made with the approval of an authorized executive
officer of the Company. These forward-looking statements can be identified by
the use of forward-looking terminology such as "believes," "expects," "plans,"
"may," "will," "would," "could," "should," "anticipates," "estimates,"
"project," "intend," or "outlook" or the negative of these words or other
variations of these words or other comparable words, or by discussion of
strategy that involve risks and uncertainties. These forward-looking statements
are only predictions, and actual events or results may differ materially as a
result of a wide variety of factors and conditions, many of which are beyond the
Company's control. Some of these factors and conditions include: (i) the
harshness of the space environment in which the Company's satellites operate;
(ii) governmental or regulatory changes; (iii) access to scarce launch vehicle
resources and risk of launch failures; (iv) severe competition in our industry;
and (v) the Company and its subsidiaries owe significant amounts of money. For a
detailed discussion of these factors and conditions, please refer to the
periodic reports that the Company files with the SEC. In addition,the Company
operates in an industry sector where securities values may be volatile and may
be influenced by economic and other factors beyond the Company's control.
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
subsidiaries, 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:
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. As of
January 1, 1999, the Company's fixed satellite services ("FSS") assets are
managed by Loral Skynet, a division of Loral SpaceCom Corporation;
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 and third party satellites.
No restrictions exist on the ability 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).
ORION 2
During the second quarter of 1998, the Company entered into a satellite
procurement contract with Space Systems/Loral, Inc. ("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 (the "SS/L Contract"). 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.
Loral Orion's cash will be used to fund the SS/L Contract up to an amount that,
will not exceed $202 million. Any requirements to SS/L in excess of $202 million
(estimated to be approximately $60 million) for Orion 2 will be funded with
additional equity contributed by Loral. Loral has funded $51.6 million of equity
for Orion 2 through September 30, 1999.
14
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
Orion 2 was launched aboard an Ariane 44L launch vehicle on October 19, 1999,
into the orbital slot located at 15(degree) W.L. where in-orbit testing is being
conducted. The Company is currently in negotiations with Eutelsat to complete
coordination of Orion 2 with the Eutelsat satellite in the region. Orion 2 is
expected to enter service in January 2000, after orbit raising and in-orbit
testing are completed. Loral Skynet will manage the leasing of Orion 2's
capacity
ORION 3
On May 4, 1999, the Company's Orion 3 broadcast video and data communications
satellite was placed into a lower-than-expected orbit after its launch on a
Boeing Delta III rocket from Cape Canaveral Air Station, Florida. According to
Boeing, the Delta III's second stage apparently failed to complete its second
stage burn, and, as a result, the satellite, manufactured by Hughes Space and
Communications Corporation, achieved an orbit well below the planned final
altitude. As a result, the satellite cannot be used for the Company's intended
purpose.
The satellite and launch were fully insured for approximately $266 million,
which was received in the third quarter of 1999. DACOM Corporation, a Korean
communications company which had purchased eight transponders on Orion 3 for a
total of $89 million, had made prepayments of approximately $34 million to the
Company. Under Loral Orion's agreement with DACOM, the amount prepaid was
refunded in July 1999. Loral Orion's debt covenants require that the insurance
proceeds be used to acquire a replacement satellite within 15 months of receipt
of such proceeds, or to pay down such debt (see Note B to the unaudited
condensed consolidated financial statements).
On September 28, 1999, Loral Asia Pacific Satellite (HK) Limited ("Loral Orion
HK"), a subsidiary of Loral Orion, purchased from APT Satellite Company Limited
("APT") all transponder capacity on the Apstar IIR satellite, (except for one
C-band transponder retained by APT) for approximately $273 million. Apstar IIR,
which was manufactured by SS/L, was launched in October 1997 and has an expected
mission life of 15 years. Loral Orion HK will have full use of 27 C-band and 16
Ku-band transponders aboard Apstar IIR for the remaining life of the satellite.
Located at 76.5 degrees East, Apstar IIR covers a region that includes Asia,
Europe, Africa and Australia, which represents over 75% of the world's
population. Under the purchase agreement, Loral Orion HK will also have the
option to lease from APT replacement satellites upon the end of life of Apstar
IIR. During 1999, expected earnings from Orion 3, which will now not be
received, will be offset, in part, by earnings from Aptstar IIR.
On September 28, 1999, Loral Orion HK made an initial payment of approximately
$79 million to APT and agreed to pay approximately $194 million in cash to APT
over the next six months as follows: approximately $12 million on December 31,
1999 and approximately $182 million on March 27, 2000. Insurance proceeds from
the Orion 3 failure were used to fund the initial payment and will be used to
fund a portion of the remaining payments. Loral has agreed to guarantee Loral
Orion HK's obligations to APT under the purchase agreement.
Satellite Launch and Operation Risk. There can be no assurance that the
Company's satellites will be successfully launched or operate in accordance with
their design. While the Company intends to procure launch insurance for its
satellites, a total or partial loss of a satellite will involve delays and loss
of revenue, which may 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 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. (See Note A to the
unaudited condensed consolidated financial statements.) In order to provide an
understanding of the Company,
15
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
the results of operations discusses the actual results for the three months
ended September 30, 1999 and September 30, 1998; and the actual results of
operation for the nine months ended September 30, 1999 and pro forma results of
operation for the nine months ended September 30, 1998. The pro forma results of
operations have been presented to give the effect as of January 1, 1998, of the
Merger with Loral, and the Exchange, the Orion Merger, and the Financings (the
"Transactions"), as described in Note 1 in the Company's latest Annual Report on
Form 10-K. 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, 1998 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 $4.4 million
for the nine months ended September 30, 1998. This increase primarily relates to
amortization expense for cost in excess of net assets acquired associated with
the Loral Merger. The pro forma results for 1998 also include a $12.1 million
adjustment to eliminate merger costs. Pro forma interest expense for the nine
months ended September 30, 1998 includes an adjustment to decrease expense by
$3.2 million. The decrease in interest expense is primarily attributable to the
amortization of bond premium relating to the fair value adjustments and the
elimination of interest expense on the debentures as a result of the Loral
Merger.
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. See Note D to the unaudited condensed consolidated
financial statements for additional information on segment results.
16
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
OPERATING REVENUES (IN MILLIONS):
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS
ENDED
THREE MONTHS ENDED NINE MONTHS SIX MONTHS MARCH 31,
SEPTEMBER 30, ENDED ENDED 1998
-------------------- SEPTEMBER 30, SEPTEMBER 30, PREDECESSOR
1999 1998 1999 1998 COMPANY
---------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Fixed satellite services .......... $ 9.9 $ 8.1 $ 28.2 $ 16.4 $ 7.9
Data services ..................... 17.1 13.1 48.9 25.0 10.9
Intersegment elimination ........... (1.8) -- (5.3) -- --
--------- --------- ------------ ------------ -----------
Operating revenues ................. $ 25.2 $ 21.2 $ 71.8 $ 41.4 $ 18.8
--------- --------- ------------ ------------ -----------
</TABLE>
EBITDA 1 (IN MILLIONS):
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS
ENDED
THREE MONTHS ENDED NINE MONTHS SIX MONTHS MARCH 31,
SEPTEMBER 30, ENDED ENDED 1998
-------------------- SEPTEMBER 30, SEPTEMBER 30, PREDECESSOR
1999 1998 1999 1998 COMPANY
---------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Fixed satellite services .......... $ 6.1 $ 6.9 $ 17.4 $ 10.4 $ 5.1
Data services ..................... (2.4) (4.4) (5.1) (6.9) (4.1)
--------- --------- ------------ ------------ -----------
EBITDA ............................. $ 3.7 $ 2.5 $ 12.3 $ 3.5 $ 1.0
--------- --------- ------------ ------------ -----------
</TABLE>
--------------
(1) Pro forma EBITDA (which is equivalent to operating income (loss)
before depreciation and amortization) is provided because it is a
measure commonly used in the communications industry to analyze
companies on the basis of operating performance, leverage and
liquidity and is presented to enhance the understanding of 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.
17
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
Revenue and Backlog. Total revenues for the three months ended September 30,
1999 and 1998 were $25.2 million and $21.2 million, an increase of $4.0 million
or 19 percent. This increase is primarily attributable to the private
communications network services operations, which included the addition of 131
customer sites in service compared to the same period in 1998. Total revenues
for the nine months ended September 30, 1999 and pro forma nine months ended
September 30, 1998 were $71.8 million and $60.2 million, an increase of $11.6
million or 19 percent, which is primarily attributable to the additional
customer sites in service for private communication network services for the
nine month period ended September 30, 1999 compared to the same period in 1998.
At September 30, 1999, the Company had backlog (representing future revenues
under contract) of approximately $479.7 million (adjusted for the debooking of
$89 million for DACOM and the $87.5 million of backlog acquired in connection
with Apstar IIR) compared to $299.7 million at September 30, 1998. Revenue from
customer contract backlog is typically earned over two to five years.
Direct Expenses. Direct expenses for the three months ended September 30, 1999
were $9.9 million compared to $7.3 million for the same period in 1998, an
increase of $2.6 million or 36 percent. Direct expenses for the nine months
ended September 30, 1999 and the pro forma nine months ended September 30, 1998
were $24.1 million and $20.7 million, respectively. These increases are
primarily attributable to Internet access, satellite transponder leasing and
terrestrial link charges that support the Worldcast Internet access product
("Worldcast"), which provides international internet connectivity through Orion
1.
Sales and Marketing Expenses. Sales and marketing expenses were $5.6 million for
the three months ended September 30, 1999, as compared to $5.2 million for the
same period in September 30, 1998, an increase of $0.4 million or 8 percent.
Sales and marketing expenses for the nine months ended September 30, 1999 and
the pro forma nine months ended September 30, 1998 were $17.8 million.
Engineering and Technical Services Expenses. Engineering and technical services
expenses for the three months ended September 30, 1999 were $2.4 million
compared to $2.8 million for the same period in 1998, a decrease of $0.4 million
or 12 percent. Engineering and technical expenses for the nine months ended
September 30, 1999 and the pro forma nine months ended September 30, 1998 were
$6.8 million and $6.3 million, respectively.
General and Administrative Expenses. General and administrative expenses were
$3.5 million for the three months ended September 30, 1999 compared to $3.4
million for the same period in 1998, an increase of $0.1 million or 4 percent.
General and administrative expenses for the nine months ended September 30, 1999
and the pro forma nine months ended September 30, 1998 were $10.8 million and
$11.0 million, respectively.
Depreciation and Amortization. Depreciation and amortization expense for the
three months ended September 30, 1999 was $17.7 million compared to $16.3
million for the same period in 1998, an increase of $1.4 million or 9 percent.
Depreciation and amortization expense for the nine months ended September 30,
1999 and the pro forma nine months ended September 30, 1998 were $51.6 million
and $49.3 million, respectively.
Interest. Interest income was $2.2 million for the three months ended September
30, 1999, compared to $2.4 million for the three months ended September 30,
1998. Interest income for the nine months ended September 30, 1999 and the pro
forma nine months ended September 30, 1998 were $4.3 million and $13.0 million,
respectively. These decreases were due to the reduction in the balance of
segregated and restricted cash in 1999, which were used for the payment of
satellites and to fund interest payments on the Company's senior notes. Interest
expense, net of capitalized interest of $4.8 million and $6.1 million,
respectively, was $19.4 million for the three months
18
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
ended September 30, 1999, and $15.0 million for the three months ended September
30, 1998. The increases in interest expense are due to additional interest on
intercompany debt funded by Loral and less capitalized interest on satellites
under construction. Interest expense for the nine months ended September 30,
1999 and the pro forma nine months ended September 30, 1998 were $50.9 million
and $50.8 million, respectively.
Income Taxes. The Company is included in the consolidated U.S. Federal income
tax return of Loral Space & Communications Corporation. Pursuant to a tax
sharing agreement for 1998 and 1999 with Loral Space & Communications
Corporation, the Company is entitled to reimbursement for the use of its tax
losses when such losses are utilized by the consolidated group. The Company has
recorded a receivable under this tax sharing agreement of approximately $0.8
million and $5.4 million and a deferred tax provision of $1.3 million and $3.2
million, resulting in a net tax provision of $0.5 million for the three months
and $2.2 million for the nine months ended September 30, 1999. The deferred tax
asset of $50.7 million as of September 30, 1999 on the accompanying balance
sheet arises from the tax effect of the temporary differences between the
carrying amount of the Senior Notes and the Senior Discount Notes payable for
financial and income tax purposes.
Net Loss. As a result of the above, the Company incurred net losses of $31.6
million and $29.6 million for the three months ended September 30, 1999 and
1998, respectively. Net losses for the nine months ended September 30, 1999 and
the pro forma nine months ended September 30, 1998 were $83.4 million and $78.1
million, respectively.
RESULTS BY OPERATING SEGMENT
Effective January 1, 1999, data services contracted with FSS for transponder
capacity, which is reflected as revenues for FSS and costs for data services. In
1998, costs for the leasing of transponder capacity for data services were
allocated from fixed satellite services.
Fixed Satellite Service
FSS revenue for the three months ended September 30, 1999 was $9.9 million
(including $1.8 million of intersegment revenue) versus $8.1 million for three
months ended September 30 1998. EBITDA for the three months ended September 30,
1999 was $6.1 million, or 62 percent of revenues, versus $5.3 million (after
allocating $1.6 million of costs to data services), or 65 percent of revenues,
for the three months ended September 30, 1998. FSS revenue for the nine months
ended September 30, 1999 was $28.2 million (including $5.3 million of
intersegment revenue) versus $24.3 million for the pro forma nine months ended
September 30, 1998. EBITDA for the nine months ended September 30, 1999 was
$17.4, or 62 percent of revenues, versus $15.5 million (after allocating $4.8
million of costs to data services), or 64 percent of revenues, for the pro forma
nine months ended September 30, 1998.
Data Services
Revenues for the data services segment for the three months ended September 30,
1999 was approximately $17.1 million versus $13.1 million for the three months
ended September 30, 1998, primarily from Loral Orion's corporate data networking
and Internet and intranet services businesses. EBITDA for the three months ended
September 30, 1999 was a loss of approximately $2.4 million (including $1.8
million of charges from FSS for leasing capacity on Orion 1) versus a loss of
$4.4 million (including $1.6 million of costs allocated from FSS for capacity
used on Orion 1) for the three months ended September 30, 1998. Data services
revenue for the nine months ended September 30, 1999 and the pro forma nine
months ended September 30, 1998 were $48.9 million and $35.9 million,
respectively. EBITDA for the nine months ended September 30, 1999 was a loss of
$5.1 million (including $5.3 million of charges from FSS for leasing capacity on
Orion 1) versus a loss of $11.0 million (including $4.8 million of costs
allocated from FSS for capacity used on Orion 1) for the pro forma nine months
ended September 30, 1998.
19
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Existing Capital Resources. As of September 30, 1999, the Company had cash and
cash equivalents of $16.5 million and restricted and segregated cash of $197.5
million, placed in a pledged account (approximately $50 million to pre-fund the
next two interest payments on the Senior Notes and the remainder is expected to
fund Apstar IIR). Restricted and segregated cash increased as of September 30,
1999, as a result of the receipt of the insurance proceeds from the Orion 3
launch failure.
Based upon its current expectations for growth, the Company anticipates it will
have additional funding requirements over the next three years to fund the
purchase of VSATs, Senior Notes interest payments, other capital expenditures
and other operating needs. Interest charges on the Senior Notes are fully
provided for by restricted cash through July 2000. The Company does not have a
revolving credit facility. Accordingly, the Company will need to secure funding
from Loral, or raise additional financing. Sources of additional capital may
include public or private debt, equity financings or strategic investments. To
the extent that the Company seeks to raise additional debt financing, the
Indentures limit the amount of such additional debt (under a variety of
provisions contained in such Indentures) and prohibit the Company from using
Orion 1, Orion 2 or Apstar IIR or the insurance proceeds from Orion 3 as
collateral for indebtedness for money borrowed. If the Company requires
additional financing and is unable to obtain such financing from Loral or from
outside sources in the amounts and at the times needed, there would be a
material adverse effect on the Company.
OTHER MATTERS
IMPACT OF YEAR 2000
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, systems 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 September 30,
1999, the Company has completed approximately 99 percent of the inventory phase
and approximately 99 percent of its assessment phase. The Company expects to
complete all phases of its Year 2000 Program during the fourth quarter of 1999,
which is prior to any potential material impact on the operations of the
Company.
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 through September 30, 1999, for this effort by the
Company was approximately $275,000. Based on the efforts of the Company to date,
the Company anticipates additional incremental expenses of approximately $9,000
will be incurred to substantially complete the effort.
20
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
As an added safeguard against the possibility that a Year 2000 related issue
will adversely affect the Company's ability to continue operations, contingency
plans are being developed under the assumption that worst case scenarios are
encountered in critical areas. Emphasis is being placed upon the action to be
taken if there is discontinuance of services and/or lack of delivery of
compliant products from third party suppliers, including utilities which provide
power, water, fuel and telecommunications. Baseline contingency plans are
expected to be completed prior to the end of the fourth quarter of 1999. The
Company believes that adequate time will be available to ensure that these
contingency plans are 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 plans, 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, the ability of
vendors to meet specific commitments 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. Ongoing assessments are made by the Company
regarding the Year 2000 readiness of key third-party suppliers. Information
requests are distributed to such suppliers and replies are evaluated. When the
risk is deemed material, on-site visits to suppliers are 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, 2001.
21
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
August 18, 1999 Item 5 - Other Events - Apstar IIR acquisition.
Item 7 (c) - Exhibits - Lease Agreement, dated
as of August 18, 1999, by and between Loral
Asia Pacific Satellite (HK) Limited and APT
Satellite Company Limited.
22
<PAGE>
LORAL ORION, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LORAL ORION, INC.
-----------------
Registrant
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<S> <C>
Date: November 15, 1999 /s/ RICHARD J. TOWNSEND
-----------------------------------------------------------------------------
Richard J. Townsend
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Registrant's Authorized Officer)
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