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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 Partne