ITEM 1. BUSINESS.
General
Loral Orion, Inc. ("we", "us", "Loral Orion" or the "Company"), more recently known as Loral CyberStar, Inc., before it transferred its data services business to another subsidiary of its parent, Loral Space & Communications Ltd. ("Loral") in December 2001 in connection with the Company's exchange offers, is a provider of satellite-based communications services, providing fixed satellite services, including video distribution and other satellite transmission services.
Business Segment
Prior to December 21, 2001, the Company operated in two business segments: Fixed Satellite Services and Data Services. On December 21, 2001, the Company, in connection with exchange offers for its outstanding senior notes and senior discount notes, transferred its data services business to a subsidiary of Loral. Accordingly, it now operates in one segment, Fixed Satellite Services.
Loral Orion, through its ownership of three high power geostationary satellites, and with agreements with Loral Skynet, a division of Loral SpaceCom Corporation, a wholly owned subsidiary of Loral, provides transmission capacity to cable and television programmers, news and information networks, telecommunications companies, Internet service providers, ISPs and other carriers for a variety of applications. The Company's customers include HBO, Disney, Cable & Wireless and United Pan Europe Communications. A majority of the Company'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. Unless otherwise indicated, all transponder references for the Company's satellites are in 36 MHz equivalents.
About 200 commercial geosynchronous satellites currently offer fixed satellite services. The Company competes primarily with large fleet operators, including PanAmSat Corporation, SES Global, Intelsat and Eutelsat. Large fleets offer customers global or near-global coverage and in-orbit backup in case of a satellite failure. The Company is a member of the Loral Global Alliance, whose other members include Loral Skynet, Skynet do Brasil, Satelites Mexicanos, S.A de C.V., Europe*Star Limited and Stellat S.N.C. The Loral Global Alliance, with ten satellites currently and 15 expected by the end of 2003, enhances the geographic reach, market presence and offerings of Loral Orion.
In providing fixed satellite services, the Company faces competition from fiber optic cable and other terrestrial delivery systems. In some applications, such as broadcast or point-to-multipoint transmission of video, satellites are usually considerably more efficient. In other applications, fiber may cost less, so that satellites compete on the basis of superior reliability, or as a back-up service.
Telstar 11, a high power satellite with 48 Ku-band transponders, commenced operations in January 1995, and provides coverage in North America as far west as Phoenix, Arizona and in Europe as far east as Istanbul, Turkey.
Telstar 12, a high power satellite with 57 Ku-band transponders, commenced operations in January 2000 and expands Loral Orion's European coverage and extends coverage to portions of Russia, Latin America, the Middle East and South Africa. Telstar 12 was launched in October 1999 into 15 degrees W.L.
Telstar 10/Apstar IIR, formerly known as Apstar IIR, a high power satellite with 28 C-Band and 24 Ku-Band transponders, commenced operations in December 1997 at 76.5 degrees E.L. and covers portions of Asia, Europe, Africa and Australia, accounting for more than 75% of the world's population. Loral Orion purchased all of Telstar 10/Apstar IIR's transponder capacity (other than a single, reserved C-Band transponder) from APT Satellite Company in September 1999 to replace its Orion 3 satellite, which was lost in a launch failure in May 1999. Insurance proceeds from the launch failure covered most of the $273 million purchase price. APT has also given Loral Orion the right to provide replacement satellites at this orbital location at the end of the satellite's useful life, for which Loral Orion will be required to pay a fee to APT for the right to use the orbital slot.
In March 2000, Loral Orion entered into an agreement with a subsidiary of Loral to assign to the Loral subsidiary, pending regulatory approval, its Ka-band orbital slots located at 89 degrees W.L., 81 degrees W.L., 78 degrees E.L. and 47 degrees W.L. In connection with this transaction, Loral Orion also agreed to transfer to the Loral subsidiary all agreements, including satellite construction contracts, related to such slots. The total purchase price for the slots and these agreements was $36.5 million, which was applied by Loral Orion towards the last installment payment on Telstar 10/Apstar IIR. This assignment was approved by the Federal Communications Commission on December 11, 2000.
Agreements with Loral Skynet and Loral
Loral Orion and Loral Skynet, entered into agreements (the "Loral Skynet Agreements") effective January 1, 1999, whereby Loral Skynet provides to Loral Orion (i) marketing and sales of satellite capacity services on the Loral 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 Loral Orion satellite network (the "Technical Services", and together with the Sales Services, the "Services"). The Company is charged Loral Skynet's costs for providing these services plus a 5 percent administrative fee. Loral Orion believes it has achieved cost efficiencies in connection with the Loral Skynet Agreements.
Beginning in 2002, Loral initiated the allocation of corporate management expenses to its individual subsidiaries and divisions, including Loral Orion. The allocation of these expenses is computed with respect to Loral Orion in a manner consistent with Loral's other subsidiaries and divisions, using a fixed formula based on three factors: employee payroll, revenues and assets. The amount expected to be allocated to Loral Orion is estimated to be between three and four million dollars for 2002.
Exchange Offers and Transfer of Data Business
In December 2001, the Company successfully completed exchange offers and consent solicitations for $841,302,000 aggregate principal amount of 11.25% senior notes due 2007 and 12.50% senior discount notes due 2007 in exchange for $612,704,000 principal amount of the Company's new 10% senior notes due July 15, 2006, which new senior notes are guaranteed by Loral, together with five-year warrants to purchase 6,042,986 shares of Loral's common stock at a purchase price of $2.37 per share and $59,753 in cash paid to certain holders of new senior notes in lieu of receipt of a principal amount of new senior notes in a denomination other than an integral multiple of $1,000. The exchange offers were part of a plan to reduce and refinance the Company's indebtedness and to create a capital structure that is intended to permit the Company to finance anticipated obligations with respect to its fixed satellite services business. Approximately $36,627,000 principal amount of the original senior notes and $49,071,000 principal amount of the senior discount notes remain outstanding after consummation of the exchange offers.
In connection with the consummation of the exchange offers and consent solicitations, Loral SpaceCom Corporation agreed to cancel its $79.7 million intercompany note issued to it by the Company which ranked pari passu to senior debt in exchange for the transfer of the Company's data services business to a newly formed Loral subsidiary, and the issuance of a new note to Loral SpaceCom Corporation in the principal amount of $29.7 million due 2006, having an interest rate of 10% per annum payable in kind, subordinated to the Company's new senior notes and guaranteed by Loral.
Summary Satellite Data
The following table presents a brief description of the Company's satellite network. The Company is subject to regulation and licensing by the U.S. Federal Communications Commission and other national telecommunications regulatory bodies, and to the frequency coordination process of the International Telecommunications Union, or ITU.
All satellite systems are subject to ITU frequency coordination requirements and must obtain appropriate authority to provide service in a given territory. The result of the required international coordination process may limit the extent to which all or some portion of a particular authorized orbital slot may be used for commercial operations. In addition, the result of the process by which satellite systems must seek authorization to provide service in a given territory may limit the extent to which such service may be provided from a given orbital location.
The Company's ability to provide satellite service in the geographic regions noted below will be subject to technical constraints, international coordination, local regulatory approval and any limitations on the scope of the approval so obtained.
(1) Satellite transponders receive signals up from earth stations and then convert, amplify and transmit the signals back down to other earth stations.
(2) Ku-band frequencies are higher than C-band frequencies and are used worldwide for commercial satellite communications.
(3) 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 Telstar 10/Apstar IIR is designed to transmit over C-band frequencies, since Telstar 10/Apstar IIR covers areas of Asia where satellite signals experience significant interference from rain during several months of the year.
(4) 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.
(5) 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.
(6) Total prime power is the total amount of power that is required to support all of the communications and electronics functions of the satellite.
(7) 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.
(8) The approximate percentages of world population covered or to be covered by the Loral Orion satellites are not additive. In the aggregate, the footprints of the Loral Orion satellites cover over approximately 85 percent of the world's population.
Employees
As of December 31, 2001, Loral Orion and its subsidiaries had no full time employees. See Loral Skynet Agreements.
CERTAIN FACTORS THAT MAY AFFECT 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, we, Loral or our representatives have made or may make forward- looking statements, orally or in writing. They can be identified by the use of forward-looking words such as "believes", "expects", "plans", "may", "will", "would", "could", "should", "anticipates", "estimates", "project", "intend", or "outlook" or their negatives or other variations of these words or other comparable words, or by discussions of strategy that involve risks and uncertainties. Such forward-looking statements may be included in, but are not limited to, various filings made by us with the Securities and Exchange Commission, press releases or oral statements made by or with the approval of an authorized executive officer. 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 presented below. We undertake no obligation to update any forward-looking statements. The following are representative of factors that could affect the outcome of the forward-looking statements.
Financial Structure
We have substantial debt.
As of December 31, 2001, we had $709 million principal amount of senior debt. Our 10% senior notes mature in 2006 and are guaranteed by Loral. In addition, our 11.25% senior notes and 12.50% senior discount notes mature in 2007. Our ability to meet our debt service obligations will be dependent upon our future performance, including our ability to sustain our revenues, which will be subject to financial, business, competitive and other factors, including factors beyond our control. There can be no assurance that we will be able to generate sufficient cash flow to meet our debt service obligations with respect to all of our outstanding indebtedness, if there was an uninsured loss of one of our satellites or as a result of other factors beyond our control.For the twelve months ended December 31, 2001, we had a deficiency of earnings to cover fixed charges of approximately $106.7 million.
Our debt imposes restrictions and otherwise affects our ability to undertake certain actions.
The indentures relating to our 10% senior notes contain restrictions, which among other things, limit our ability to incur other indebtedness, create liens, make investments, sell assets, pay dividends and engage in mergers and acquisitions. In addition, the level of our indebtedness adversely affects:
o our ability to pay expenses and fund expenditures, which will be affected by our need to use a substantial amount of our cash flow to service existing indebtedness;
o our ability to raise additional debt; and
o our flexibility in planning for, or reacting to, changes to our business and market conditions.
We have funding requirements.
We anticipate we will have additional requirements over the next three years to fund the replacement of Telstar 11 which is expected to reach the end of its useful life in 2005. To the extent that excess cash flow from our satellites is not sufficient to meet these requirements, we will need to secure funding from Loral, or raise additional financing to fund this requirement. Sources of additional capital may include public or private debt, vendor financing, equity financings or strategic investments. To the extent that we seek to raise additional debt financing, the indenture relating to our 10% senior notes limits the amount of such additional debt to $100 million for such replacement satellite and prohibits us from using Telstar 11, Telstar 10/Apstar IIR and Telstar 12 as collateral for indebtedness. If we are 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 our business.
Operational Matters
Launch failures have delayed some of our operations in the past and may do so again in the future.
We depend on third parties, in the United States and abroad, to launch our satellites. Satellite launches are risky, and some launch attempts have ended 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 launch failures may therefore result in uninsured economic losses. Replacement of a lost satellite typically requires at least 24 months from the time a contract is executed until the launch date of the replacement satellite.
After launch, our satellites remain vulnerable to in-orbit failures, which may result in uninsured losses.
Failure of satellite components in space may result in damage to or loss of a satellite before the end of its
expected life. In-orbit failure may result from various causes, some random, including component failure, loss of power or fuel, inability to maintain positioning of the satellite, solar and other astronomical events, and space debris. Satellites are carefully built and tested and have some redundant components to save the satellite in case of a component failure. Due to the failure of a primary component, one of our satellites is currently operating using a back-up component. If this back-up component fails and the primary component cannot be restored, this satellite could lose a significant amount of capacity which, until replacement satellites are placed in-orbit, would result in lost revenue and lost profits to the Company.
Repair of satellites in space is not feasible. Many factors affect the useful life of our satellites including fuel consumption, the quality of construction, degradation of solar panels and the durability of components.
Telstar 10/Apstar IIR has experienced operational problems with its solar arrays.
Telstar 10/Apstar IIR has experienced minor losses of power from its solar arrays. Although, to date, Telstar 10/Apstar IIR has not experienced any degradation in performance, there can be no assurance that Telstar 10/Apstar IIR will not experience additional power loss that could result in performance degradation, including loss of transponder capacity. In the event of additional power loss, the extent of the performance degradation, if any, will depend on numerous factors, including the amount of the additional power loss, when in the life of Telstar 10/Apstar IIR the loss occurred, and the number and type of uses being made of transponders then in service. A complete or partial loss of Telstar 10/Apstar IIR could result in a loss of revenues and profits. Based upon information currently available, including design redundancies to accommodate small power losses and the fact that no pattern has been identified as to the timing or specific location within the solar arrays of the failures, we believe that this matter will not have a material adverse effect on our consolidated financial position or our results of operations.
It may be difficult to obtain full insurance coverage for satellites that have experienced problems in the past.
While we have in the past, consistent with industry practice, typically obtained in-orbit insurance for our satellites, we cannot guarantee that, upon a policy's expiration, we will be able to renew the insurance on terms acceptable to us, especially on satellites that have, or that are part of a family of satellites that have, experienced problems in the past. For example, in connection with the renewal of the insurance for the Telstar 10/Apstar IIR satellite in October 2001, the insurance underwriters have excluded losses due to solar array failures, since Telstar 10/Apstar IIR was manufactured by Space Systems/Loral ("SS/L") and has the same solar array configuration as another 1300-class satellite manufactured by SS/L that recently experienced a solar array failure. SS/L believes that this failure is an isolated event and does not reflect a systemic problem in either the satellite design or manufacturing process. Accordingly, we do not believe that this anomaly will affect Telstar 10/ Apstar IIR. We are currently in discussions with our insurers to remove this exclusion from the Telstar 10/ Apstar IIR policy, in return for a deductible for losses arising from electrical problems on the satellite's solar arrays. There can be no assurance that these discussions will be successful. An uninsured loss of a satellite will have a material adverse effect on our consolidated financial position and our results of operations.
We are faced with increased costs due to the recent trend in the insurance industry towards higher insurance premiums and shorter terms.
We, like others in the satellite industry, are faced with significantly higher premiums on launch and in-orbit insurance and significantly shorter coverage periods than those that have been available in the past, which was due in part to the events of September 11, 2001. This development in the insurance industry will increase our cost of doing business. We intend to pass on such increased cost to our customers, although we cannot guarantee that
we will be able to do so. Insurance market conditions have historically been cyclical in nature. While we anticipate that these conditions will improve in the future, there can be no assurance that they will do so.
We compete for market share and customers; technological developments from competitors or others may reduce demand for our services.
We face heavy competition in fixed satellite services from companies such as PanAmSat Corporation, SES Global and newly privatized organizations such as Intelsat and Eutelsat. Competition in this market may lower prices or result in reduced satellite fleet utilization, which may have an adverse effect on our consolidated financial position and our results of operations.
As land-based telecommunications services expand, demand for some satellite-based services may be reduced. New technology could render satellite-based services less competitive by satisfying consumer demand in other ways or through the use of incompatible standards.
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 fixed orbital positions.
Our business is regulated, causing uncertainty and additional costs.
Our business is regulated by authorities in multiple jurisdictions, including the Federal Communications Commission, the International Telecommunication Union, or ITU, and the European Union. The following are some strategically important activities which are regulated and could be adversely affected by regulatory policies:
o the operation of our business in the U.S. and foreign markets;
o the launch of satellites; and
o the international service offered by our business operations.
Regulatory authorities in the various jurisdictions in which we operate can modify, withdraw or impose charges or conditions upon, or deny or delay action on applications for, the licenses which we need, and so increase our costs. The regulatory process also requires potentially costly negotiations with third parties operating or intending to operate satellites at or near orbital locations where we place our satellites so that the frequencies of those other satellites do not interfere with our own. For example, as part of our coordination effort on Telstar 12, we agreed to provide four 54 MHz transponders on Telstar 12 to Eutelsat for the life of the satellite and have retained risk of loss with respect to those transponders. We also granted Eutelsat the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. Moreover, as part of this international coordination process, we continue to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees west longitude. If these discussions are not successful, Telstar 12's useable capacity may be reduced. We cannot guarantee successful frequency coordination for our satellites.
Failure to successfully coordinate our satellites' frequencies or to resolve other required regulatory approvals could have an adverse effect on our consolidated financial position and our results of operations.
We face risks in conducting business internationally.
A substantial portion of our revenue is generated from customers located outside of the United States. We could be harmed financially and operationally by changes in foreign regulations and telecommunications standards, tariffs or taxes and other trade barriers. Almost all of our contracts with foreign customers require payment in U.S. dollars, and customers in developing countries could have difficulty obtaining U.S. dollars to pay us due to currency exchange controls and other factors. Exchange rate fluctuations may adversely affect the ability of our customers to pay us in U.S. dollars. If we need to pursue legal remedies against our foreign business partners or customers, we may have to sue them abroad where it could be difficult for us to enforce our rights.
Matters Relating To Holders Of Our 11.25% Senior Notes And 12.50% Senior Discount Notes.
The rights of holders of our 11.25% senior notes and 12.50% senior discount notes under their indentures have been substantially reduced.
In December 2001, as part of our exchange offers and consent solicitations, the indentures for our 11.25% senior notes and 12.50% senior discount notes were amended so as to remove substantially all of their operating restrictions and events of default.
The market for our 11.25% senior notes and 12.50% senior discount notes is limited.
Because the exchange offers and consent solicitations that we conducted in December 2001 resulted in the tender and exchange of substantially all of our 11.25% senior notes and 12.50% senior discount notes then outstanding, the market for the remaining notes is quite limited. Moreover, we cannot guarantee that these notes will continue to be rated in the future.
ITEM 2.
ITEM 2. PROPERTIES.
Loral Orion does not own or lease office space. See Loral Skynet Agreements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is party to legal and regulatory proceedings incident to its business. The Company does not believe that there are any material legal proceedings pending or, to the knowledge of its management, threatened against, the Company or its subsidiaries that would have a material effect on its consolidated financial position or its results of operations.
ITEM 4.
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.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the Company's outstanding common stock is owned, directly or indirectly, 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. The Company's indenture relating to its 10% senior notes obligations includes certain restrictions on the Company's ability to pay dividends or make loans to its parent.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS.
Except for the historical information contained herein, the matters discussed in the following Management's Narrative Analysis of Results of Operations of Loral Orion, Inc. ("Loral Orion" or the "Company") are not historical facts, but are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. In addition, the Company or its representatives have made and may continue to make forward-looking statements, orally or in writing, in other contexts, such as in reports filed with the SEC, press releases or statements made with the approval of an authorized executive officer of the Company. These forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "plans," "may," "will," "would," "could," "should," "anticipates," "estimates," "project," "intend," or "outlook" or the negative of these words or other variations of these words or other comparable words, or by discussion of strategy that involves risks and uncertainties. These forward-looking statements are only predictions, and actual events or results may differ materially as a result of a wide variety of factors and conditions, many of which are beyond the Company's control. Some of the factors and conditions that could affect the outcome of forward-looking statements relate to (i) the Company's financial structure, and (ii) operational matters. For a detailed discussion of these factors and conditions, please refer to the section of this Annual Report on Form 10-K titled "Certain Factors that May Affect Future Results" beginning on page 5 and to the other periodic reports filed with the SEC by Loral Orion. In addition, we caution you that the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the Company's control. The Company undertakes no obligation to update any forward-looking statements.
General
The principal business of Loral Orion, Inc. (the "Company" or "Loral Orion"), more recently known as Loral CyberStar, Inc., is leasing transponder capacity on its satellites to its customers for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television ("DTH"). Loral Skynet, a division of Loral SpaceCom Corporation, which is a subsidiary of Loral Space & Communications Corporation, which is in turn a subsidiary of Loral, manages the Company's continuing operations.
Prior to December 21, 2001, the Company operated in two business segments: Fixed Satellite Services and Data Services. On December 21, 2001, the Company, in connection with the exchange offers for its outstanding senior notes and senior discount notes, transferred its data services business to a subsidiary of Loral. Accordingly, it now operates in one segment, Fixed Satellite Services.
The Company's revenues from continuing operations are principally generated from long-term contracts or occasional use services for transmission capacity services.
The Company's historical consolidated balance sheets, statements of operations and cash flows have been restated to account for the data services segment as a discontinued operation.
No restrictions exist on the ability of any of the subsidiaries of Loral Orion ("Subsidiary Guarantors") other than inconsequential subsidiaries, to pay dividends or make other distributions to the Company, except to the extent provided by law generally (e.g., adequate capital to pay dividends under state corporate laws).
Critical accounting matters
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses reported for the period. Actual results could differ from estimates.
Depreciation is provided for on the straight-line method for satellites over the estimated useful life of the satellite, which is determined by engineering analyses performed at the in-service date and re-evaluated periodically.
Realization of the net deferred tax assets is dependent on the Company's ability to generate future taxable income and utilize tax planning strategies. A valuation allowance has been recorded to reduce the deferred tax assets to the amount that is more likely than not to be realized based on current estimates and assumptions. The Company evaluates the valuation allowance on a quarterly basis. Any resulting changes to the valuation allowance would result in an adjustment to income in the period the determination is made.
Contingencies by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss, if any. The most important contingencies impacting our financial statements are detailed below under Operational Matters.
Results of Operations
In evaluating financial performance, management uses revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") as a measure of a segment's profit or loss. The following discusses the results of Loral Orion for 2001, 2000 and 1999.
Operating Revenues from Continuing Operations (in millions):
EBITDA(2) (in millions):
- ----------
(1) Primarily represents sales to the Company's discontinued operation (formerly the data services segment).
(2)EBITDA (which is equivalent to operating income (loss) before depreciation and amortization, including amortization of unearned compensation) is provided because it is a measure commonly used in the communications industry to analyze companies on the basis of operating performance, leverage and liquidity and is presented to enhance the understanding of the Company's operating results. However, EBITDA should not be construed as an alternative to net income as an indicator of a company's operating performance, or cash flow from operations as a measure of a company's liquidity. EBITDA may be calculated differently and, therefore, may not be comparable to similarly titled measures reported by other companies.
Revenues from continuing operations for 2001, 2000 and 1999, were $108.9 million, $83.4 million, and $35.7 million, respectively. These increases were primarily due to the increased number of transponders leased and higher revenue per transponder in 2001 and 2000 as compared to the respective prior year, primarily resulting from the addition of two satellites to our fleet in the latter part of 1999 (see below).
Cost of satellite services for continuing operations for 2001, 2000 and 1999, were $107.2 million, $104.6 million and $69.0 million, respectively. The increase in 2000 as compared to 1999, was primarily due to increased depreciation expense from Telstar 10/Apstar IIR acquired in September 1999 and Telstar 12 which went into service in December 1999.
Selling, general and administrative expenses for continuing operations 2001, 2000 and 1999, were $10.8 million, $12.8 million and $12.5 million, respectively. The decrease in 2001 as compared to 2000 was primarily due to a reduction in marketing and promotions expenses.
Interest income for continuing operations for 2001, 2000 and 1999, was $0.4 million, $2.8 million and $6.1 million, respectively. The decreases were primarily due to a reduction in the balances held for investments for the respective years. Interest expense for 2001, 2000 and 1999 was $98.3 million, $97.2 million and $69.6 million, respectively. The increase in 2000 as compared to 1999 was primarily due to the decrease in capitalized interest and interest incurred on the note payable to Loral SpaceCom.
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 2001 with Loral Space & Communications Corporation, the Company is entitled to reimbursement for the use of its tax losses when such losses are utilized by Loral Space & Communications Corporation. For the year ended December 31, 2001, the Company recorded a current income tax benefit of approximately $8.8 million under this tax sharing agreement (a receivable from Loral Space & Communications Corporation) and a deferred tax provision of $4.5 million.
During December 2001, the Company recognized an extraordinary gain of $26.2 million, net of taxes, related to the Company's debt exchanges.
The historical consolidated balance sheet, statements of operations and cash flows have been restated for all periods presented to account for the data services segment as a discontinued operation. The financial data presented for the Company's data services segment reflects the historical sales and expenses of the data services segment after elimination of intercompany transactions with FSS. Discontinued operations include revenue for the data services segment of $80.2 million, $103.8 million and $69.2 million for the period January 1, 2001 to December 21, 2001 and the years ended December 31, 2000 and 1999, respectively. See Note 4 to the consolidated financial statements.
Results by Operating Segment
Fixed Satellite Service
Fixed Satellite Services revenue for 2001 was $128.7 million as compared to $109.4 million in 2000 and $42.8 in 1999. EBITDA on the same basis was $105.2 million in 2001, or 82 percent of revenues, as compared to $81.9 million, or 75 percent of revenues in 2000 and $21.7 million, or 51 percent of revenues in 1999. These increases in EBITDA are primarily due to strong revenue growth from the increased number of transponders leased and higher revenue per transponder in 2001 and 2000 as compared to the respective prior year, primarily resulting from the addition of two satellites to the Company's fleet in the latter part of 1999, without a corresponding increase in operating costs.
At December 31, 2001, the Company had an external contracted backlog (representing future revenues under customer contracts) of approximately $576.0 million, as compared to $739.4 million at December 31, 2000. As of December 31, 2001, the average length of contracted backlog was approximately 5.5 years. The reduction in total funded backlog resulted from contract terminations in the third and fourth quarters of 2001, as well as de-bookings arising largely from the restructuring of one customer contract in the second quarter of 2001, which reduced the length of the lease agreement from 13 years to eight. In this instance the Company received appropriate compensation in exchange for meeting its customer's requirements and, accordingly, this de-booking did not have an adverse impact on results of operations in 2001, nor is it expected to have an adverse impact on near-term results of operations.
Other Matters
Operational Matters
Loral Orion anticipates it will have additional requirements over the next three years to fund the replacement of Telstar 11 which is expected to reach the end of its useful life in 2005. To the extent that excess cash flow from Loral Orion's satellites is not sufficient to meet these requirements, Loral Orion will need to secure funding from Loral, or raise additional financing to fund this requirement. Sources of additional capital may include public or private debt, vendor financing, equity financings or strategic investments. To the extent that Loral Orion seeks to raise additional debt financing, its indenture relating to the Company's 10% senior notes limits the amount of such additional debt to $100 million for such replacement satellite and prohibits Loral Orion from using Telstar 11, Telstar 10/Apstar IIR and Telstar 12 as collateral for indebtedness.
Telstar 12, originally intended to operate at 12 degrees W.L., was launched aboard an Ariane launch vehicle in October 1999 into the orbital slot located at 15 degrees W.L., and commenced operations in January 2000. Under an agreement reached with Eutelsat, Loral Orion agreed to operate Telstar 12 at 15 degrees W.L. while Eutelsat continues to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority rights at such location on Loral Orion's behalf. As part of this coordination effort, Loral Orion agreed to provide to Eutelsat four 54 MHz transponders on Telstar 12 for the life of the satellite and has retained risk of loss with respect to those transponders. Eutelsat also has the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. As part of the international coordination process, Loral continues to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees W.L. If these discussions are not successful, Telstar 12's useable capacity may be reduced.
On September 28, 1999, Loral Orion purchased from APT Satellite Company Limited ("APT") for approximately $273 million, the rights to all transponder capacity and existing customer leases on the Apstar IIR satellite (except for one C-band transponder retained by APT), and renamed the satellite the Telstar 10/Apstar IIR satellite. Loral Orion has full use of the transponders for the remaining life of Telstar 10/Apstar IIR. Loral Orion also has the right to provide replacement satellites upon the end of life of Telstar 10/Apstar IIR, for which it will be required to pay a fee to APT for the right to use the orbital slot.
Telstar 10/Apstar IIR has experienced minor losses of power from its solar arrays. Although, to date, Telstar 10/Apstar IIR has not experienced any degradation in performance, there can be no assurance that Telstar 10/Apstar IIR will not experience additional power loss that could result in performance degradation, including
loss of transponder capacity. In the event of additional power loss, the extent of the performance degradation, if any, will depend on numerous factors, including the amount of the additional power loss, when in the life of Telstar 10/Apstar IIR the loss occurred, and the number and type of uses being made of transponders then in service. A complete or partial loss of Telstar 10/Apstar IIR could result in a loss of revenues and profits. Based upon information currently available, including design redundancies to accommodate small power losses and the fact that no pattern has been identified as to the timing or specific location within the solar arrays of the failures, we believe that this matter will not have a material adverse effect on our consolidated financial position or our results of operations.
While the Company has in the past, consistent with industry practice, typically obtained in-orbit insurance for its satellites, the Company cannot guarantee that, upon a policy's expiration, the Company will be able to renew the insurance on acceptable terms, especially on satellites that have, or that are part of a family of satellites that have, experienced problems in the past. For example, in connection with the renewal of the insurance for the Telstar 10/Apstar IIR satellite in October 2001, the insurance underwriters have excluded losses due to solar array failures, since Telstar 10/Apstar IIR was manufactured by Space Systems/Loral ("SS/L") and has the same solar array configuration as another 1300-class satellite manufactured by SS/L that recently experienced a solar array failure. SS/L believes that this failure is an isolated event and does not reflect a systemic problem in either the satellite design or manufacturing process. Accordingly, the Company does not believe that this anomaly will affect Telstar 10/ Apstar IIR. Loral is currently in discussions with the Company's insurers to remove this exclusion from the Telstar 10/ Apstar IIR policy, in return for a deductible for losses arising from electrical problems on the satellite's solar arrays. There can be no assurance that these discussions will be successful. An uninsured loss of a satellite will have a material adverse effect on the Company's consolidated financial position and results of operations.
The Company, like others in the satellite industry, is faced with significantly higher premiums on launch and in-orbit insurance and significantly shorter coverage periods than those that have been available in the past, which was due in part to the events of September 11, 2001. This development in the insurance industry will increase the Company's cost of doing business. The Company intends to pass on such increased cost to its customers. There can be no assurance, however, that it will be able to do so. Insurance market conditions have historically been cyclical in nature. While the Company anticipates that these conditions will improve in the future, there can be no assurance that they will.
Beginning in 2002, Loral initiated the allocation of corporate management expenses to its individual subsidiaries and divisions, including Loral Orion. The allocation of these expenses is computed with respect to Loral Orion in a manner consistent with Loral's other subsidiaries and divisions, using a fixed formula based on three factors: employee payroll, revenues and assets. The amount expected to be allocated to Loral Orion is estimated to be between three and four million dollars for 2002.
Exchange Offers
On December 21, 2001, Loral Orion completed exchange offers and consent solicitations by issuing $613 million principal amount of new senior notes due 2006 guaranteed by Loral, in exchange for the extinguishment of $841 million principal amount of Loral Orion senior notes due in 2007 and senior discount notes due 2007 as discussed below. As part of the exchange, Loral issued to the new note holders 6.04 million five-year warrants to purchase Loral common stock at a price of $2.37 per share. The warrants were valued at $6.7 million using the Black Scholes option pricing model with the following assumptions: stock volatility, 75%, risk free interest rate, 4.36%, and no dividends during the expected term, and is reflected in capital in excess of par value on the consolidated balance sheet. After the exchange offers, principal amount of $37 million of the existing senior notes and principal amount of $49 million of the existing senior discount notes remain outstanding at their original maturities and interest rates.
The interest rate on the new senior notes is 10%, a reduction from the 11.25% interest rate on the existing senior notes and the 12.5% rate on the existing senior discount notes. Interest is payable semi-annually on July 15 and January 15, beginning July 15, 2002. As a result of the lower interest rate and the $229 million reduction in principal amount of debt, Loral Orion's annual cash interest payments will be reduced by approximately $39 million. Under U.S. generally accepted accounting principles dealing with debt restructurings, the Company recorded an after-tax extraordinary gain of $26 million on the exchange, after expenses of $5 million. The carrying value of the new senior notes on the balance sheet is $904 million, although the actual principal amount of the new senior notes is $613 million. The difference between this carrying value and the actual principal amount of the new senior notes will be amortized over the life of the new senior notes, fully offsetting interest expense through maturity of the new senior notes. The indenture relating to the new senior notes contains
limitations on Loral Orion and its subsidiaries, including, without limitation, restrictions on Loral Orion's ability to pay dividends or make loans to Loral.
In connection with the consummation of the exchange offers, Loral SpaceCom Corporation ("LSC"), cancelled its $79.7 million intercompany note issued to it by Loral Orion which ranked pari passu to senior debt in exchange for the transfer of the Company's data services business and the issuance of a new note to LSC in the principal amount of $29.7 million due 2006, having an interest rate of 10% per annum payable in kind, and subordinated to Loral Orion's new senior notes. Loral Orion's data services business was transferred to a newly-formed subsidiary of Loral, which assumed the name "Loral CyberStar, Inc". In addition, as a result of the transfer of the Company's data services business, the Company recognized capital contributions from Loral of $9.2 million, which represents the difference in the carrying value of the net assets of the data services business and the $50.0 million portion of the net notes cancelled by LSC and the expenses of the exchange offers in excess of $5 million.
Accounting Pronouncements
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives that do not qualify, or are not effective as hedges, must be recognized currently in earnings. There was no effect on the Company due to adoption of this standard, as the Company had no stand-alone or embedded derivatives at January 1, 2001, and as a matter of policy does not currently enter into transactions involving derivative financial instruments.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 140"). SFAS 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. The Company adopted the applicable disclosure requirements of SFAS 140 in its consolidated financial statements for the year ended December 31, 2000. The Company has determined that there was no effect on the Company's consolidated financial position or results of operations relating to the adoption of the other provisions of SFAS 140.
In June 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS 141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires that all business combinations initiated after June 30, 2001, be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but will rather be tested at least annually for impairment. The Company will adopt SFAS 142 on January 1, 2002. Upon adoption of SFAS 142, the Company will stop the amortization of goodwill with a net carrying value of approximately $562 million at the date of adoption and annual amortization of approximately $16 million that resulted from business combinations completed prior to the adoption of SFAS 141. Based on management's preliminary evaluation under the new transitional impairment test in SFAS 142, the Company expects to record a non-cash charge in the first quarter of 2002 to write-off a portion or all of its goodwill. Any transitional impairment loss will be recognized as a change in accounting principle.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. The Company is required to adopt SFAS 143 on January 1, 2003. The Company has not yet determined the impact that the adoption of SFAS 143 will have on its results of operations or its financial position.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. The Company is required to adopt SFAS 144 on January 1, 2002. The Company expects that there will be no effect on the Company's consolidated financial position or results of operations relating to the adoption of SFAS 144.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
As of December 31, 2001, all of the Company's outstanding debt had fixed interest rates.
As of December 31, 2001, the carrying value of the Company's long-term debt was $1.0 billion and the fair value of such debt was $452 million. The fair value of the Company's long-term debt is primarily based on quoted market prices. The table below provides information about the carrying amount of the Company's long-term debt obligations by fiscal year of maturity (in thousands).
Approximately $291 million of the difference between the carrying amount and the fair value of the Company's long-term debt as of December 31, 2001 is attributable to the accounting for the Loral Orion exchange offers (see above).
ITEM 8.
ITEM 8.
INDEPENDENT AUDITORS' REPORT
To the Stockholder of Loral Orion, Inc.:
We have audited the accompanying consolidated balance sheets of Loral Orion, Inc. (formerly Loral CyberStar, Inc.) and its subsidiaries a wholly owned subsidiary of Loral Space & Communications Corporation, as of December 31, 2001 and 2000 and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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, such 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, 2001, and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
San Jose, California March 5, 2002
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Consolidated Balance Sheets (in thousands, except par amounts)
See notes to consolidated financial statements
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Consolidated Statements of Operations (in thousands)
See notes to consolidated financial statements
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Consolidated Statements of Stockholder's Equity (in thousands)
See notes to consolidated financial Statements
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Consolidated Statements of Cash Flows (in thousands)
See notes to consolidated financial statements
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements
1. ORGANIZATION AND BUSINESS
The principal business of Loral Orion, Inc. (the "Company" or "Loral Orion"), more recently known as Loral CyberStar, Inc., is providing fixed satellite services, including video distribution and other satellite transmission services by leasing transponder capacity on its satellites to its customers for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television ("DTH"). Loral Skynet, a division of Loral SpaceCom Corporation, which is a subsidiary of Loral Space & Communications Corporation, which is in turn a subsidiary of Loral Space & Communications Ltd. ("Loral"), manages the Company's business. Prior to December 21, 2001, the Company operated in two business segments: Fixed Satellite Services and Data Services. On December 21, 2001, the Company, in connection with an exchange offer for its outstanding senior notes and senior discount notes (notes 4 and 9), transferred its data services business to a subsidiary of Loral. Accordingly, the Company now operates in one segment, Fixed Satellite Services ("FSS").
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation Policy
The consolidated financial statements include the accounts of Loral Orion and its wholly-owned subsidiaries. All intercompany transactions have been eliminated.
Cash and Cash Equivalents
Loral Orion considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject Loral Orion to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company's cash and cash equivalents are maintained with high-credit-quality financial institutions. The company does not require collateral against its receivables; however, management believes that its credit evaluation, approval and monitoring processes combined with negotiated billing arrangements mitigate potential credit risks with regard to the Company's current customer base.
As of December 31, 2001 and 2000, accounts receivable was reduced by an allowance for doubtful accounts of $1.3 million and $1.8 million, respectively.
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Satellites and Related Equipment
Satellites and related equipment consist of the following (in thousands):
December 31, --------------------------- 2001 2000 --------- --------- Satellites and related equipment, including satellite transponder rights of $273 million............................. 796,118 795,539 --------- --------- Less accumulated depreciation and amortization............................. (216,208) (139,956) --------- --------- Total satellite and related equipment, net . $ 579,910 $ 655,583 ========= =========
Satellites and related equipment is recorded at cost. Depreciation and amortization expense for the years ended December 31, 2001, 2000 and 1999 was $76.2 million, $71.4 million, and $41.6 million respectively. Accumulated depreciation and amortization at December 31, 2001 and 2000 includes $47.4 million and $26.4 million, respectively, related to the Company's rights to transponders for the remaining life of Telstar 10/Apstar IIR. Depreciation expense is calculated using the straight-line method over the estimated original useful lives of 10.5 - 16.5 years.
Costs incurred in connection with the construction and successful deployment of satellites and related equipment are capitalized. Such costs include direct contract costs, allocated indirect costs, launch costs, launch insurance, construction period interest and the present value of satellite incentive payments. Loral Orion began depreciating the Telstar 11 and Telstar 12 satellites over their estimated useful life commencing on the date of operational delivery in orbit, January 1995 and December 1999, respectively. Satellite lives are re-evaluated periodically. Capitalized interest for 2001, 2000, and 1999, was zero, zero and $20.3 million, respectively.
In September, 1999, Loral Orion purchased from APT Satellite Company Limited ("APT") for approximately $273 million, the rights to all transponder capacity and existing customer leases on the Apstar IIR satellite (except for one C-band transponder retained by APT), and renamed the satellite the Telstar 10/ Apstar IIR satellite. Loral Orion has full use of the transponders for the remaining life of Telstar 10/Apstar IIR. Loral Orion has the right to provide replacement satellites upon the end of life of Telstar 10/Apstar IIR, for which it will be required to pay a fee to APT for the right to use the orbital slot.
Satellites in-orbit are either leased by customers or held for lease by the Company. Future minimum lease receipts due from customers under long-term operating leases for transponder capacity on satellites in-orbit as of December 31, 2001 are as follows (in thousands):
2002 ................................................ $111,262 2003 ................................................ 77,312 2004 ................................................ 59,964 2005 ................................................ 54,792 2006 ................................................ 49,247 Thereafter .......................................... 225,583 -------- $578,160 ========
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired resulted from the acquisition of the Company by Loral in March 1998 ("the Merger") and amounted to $620.4 million, which is being amortized over 40 years using the straight-line method. Accumulated amortization relating to cost in excess of net assets acquired at December 31, 2001 and 2000 was $58.2 million and $42.7 million, respectively. See Accounting Pronouncements.
Valuation of Long-Lived Assets and Cost in Excess of Net Assets Acquired
The carrying value of the Company's long-lived assets, including cost in excess of net assets acquired, is reviewed for impairment whenever events or changes in circumstances indicate that an asset may not be recoverable. The Company looks to current and future profitability, as well as current and future undiscounted cash flows, excluding financing costs, as primary indicators of recoverability. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Fair value is determined based on quoted market values, discounted cash flows or appraisals, as appropriate in the circumstances. See Accounting Pronouncements.
Other Assets
Intangible assets are primarily amortized over the remaining useful life of Telstar 11, which was approximately 6.75 years at the date of the Merger. The Company amortizes FCC license application costs related to Telstar 11 and Telstar 12 over the estimated useful lives of the satellites. Accumulated amortization relating to other assets at December 31, 2001 and 2000 was $10.9 million and $8.6 million, respectively.
Revenue Recognition
The Company provides satellite capacity under lease agreements that generally provide for the use of satellite transponders and, in certain cases, earth stations for periods generally ranging from one year to the end of life of the satellite. Some of these agreements have certain obligations, including providing spare or substitute capacity, if available, in the event of satellite failure. If no spare or substitute capacity is available, the agreement may be terminated. Revenue under transponder lease and data services agreements is recognized as services are performed, provided that a contract exists, the price is fixed or determinable and collectibility is reasonably assured. Revenues under contracts that include fixed lease payment increases are recognized on a straight-line basis over the life of the lease.
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The benefit (provision) for income taxes on the loss before income taxes, extraordinary gain and discontinued operations differs from the amount computed by applying the statutory U.S. Federal income tax rate because of the effect of the following items (in thousands):
In 2001, the Company is included in the U.S. federal income tax return for Loral Space & Communications Corporation. Pursuant to a tax sharing agreement for 2001 with Loral Space & Communications Corporation, the Company is entitled to reimbursement for the use of its tax losses to the extent such losses are utilized by Loral Space & Communications Corporation. For the year ended December 31, 2001, the Company recorded a current income tax benefit of approximately $8.8 million related to this tax sharing agreement and a deferred tax provision of approximately $4.5 million, resulting in a net tax benefit of approximately $4.3 million. The tax benefit for 2001 excludes (a) an additional deferred tax provision of $8.3 million under the tax sharing agreement related to the extraordinary gain on debt exchanges and (b) a current tax benefit of $0.1 million under the tax sharing agreement and a current foreign tax provision of $1.1 million related to discontinued operations.
In 2000, the Company was included in the U.S. federal income tax return for Loral Space & Communications Corporation. Pursuant to a tax sharing agreement for 2000 with Loral Space & Communications Corporation, the Company was entitled to reimbursement for the use of its tax losses to the extent such losses were utilized by Loral Space & Communications Corporation. For the year ended December 31, 2000, the Company recorded a current income tax benefit of approximately $3.3 million related to this tax sharing agreement and a deferred tax provision of approximately $4.2 million, resulting in a net tax provision of approximately $0.9 million. The net tax provision for 2000 excludes a current foreign tax provision of $0.2 million related to discontinued operations.
In 1999, the Company was included in the U.S. federal income tax return for Loral Space & Communications Corporation. Pursuant to a tax sharing agreement for 1999 with Loral Space & Communications Corporation, the Company was entitled to reimbursement for the use of its tax losses to the extent such losses were utilized by Loral Space & Communications Corporation. For the year ended December 31, 1999, the Company recorded a current income tax benefit of approximately $15.1 million related to this tax sharing agreement and a deferred tax provision of approximately $4.7 million, resulting in a net tax benefit of approximately $10.4 million. The net tax benefit for 1999 excludes a current foreign tax provision of $0.1 million related to discontinued operations.
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company recognizes deferred tax assets and liabilities for the expected future consequences of temporary differences between financial reporting and tax bases of assets and liabilities using enacted tax rates in effect at the end of the year.
Following is a summary of the components of the net deferred income tax asset at December 31, 2001 and 2000 (in thousands):
At December 31, 2001, the Company had approximately $293 million in net operating loss carryforwards which expire at varying dates from 2011 through 2020. Pursuant to its tax sharing agreement with Loral Space & Communications Corporation, the Company has received cumulative reimbursements of $32 million as of December 31, 2001, for the partial use of these net operating loss carryforwards. Due to uncertainties regarding its ability to realize the remaining benefits from these net operating loss carryforwards and certain other net deferred tax assets, the Company established a valuation allowance against its net deferred tax assets of $170 million at December 31, 2001, $175 million at December 31, 2000 and $131 million at December 31, 1999.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and amounts of revenues and expenses reported for the period. Significant estimates include the estimated useful lives of the company's satellites and the amortization period of costs in excess of net assets. Actual results could differ from those estimates.
Comprehensive Loss
During the periods presented, comprehensive loss from continuing operations was the same as net loss. Cumulative translation losses attributable to discontinued operations were $0.4 million, $0.6 million and $1.4 million, in 2001, 2000 and 1999, respectively.
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounting Pronouncements
On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives that do not qualify, or are not effective as hedges, must be recognized currently in earnings. There was no effect on the Company due to adoption of this standard, as the Company had no stand-alone or embedded derivatives at January 1, 2001, and as a matter of policy does not currently enter into transactions involving derivative financial instruments.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("SFAS 140"). SFAS 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. The Company adopted the applicable disclosure requirements of SFAS 140 in its consolidated financial statements for the year ended December 31, 2000. The Company has determined that there was no effect on the Company's consolidated financial position or results of operations relating to the adoption of the other provisions of SFAS 140.
In June 2001, the FASB issued SFAS No. 141, Business Combinations ("SFAS 141") and SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 requires that all business combinations initiated after June 30, 2001, be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but will rather be tested at least annually for impairment. The Company will adopt SFAS 142 on January 1, 2002. Upon adoption of SFAS 142, the Company will stop the amortization of goodwill with a net carrying value of approximately $562 million at the date of adoption and annual amortization of approximately $16 million that resulted from business combinations completed prior to the adoption of SFAS 141. Based on management's preliminary evaluation under the new transitional impairment test in SFAS 142, the Company expects to record a non-cash charge in the first quarter of 2002 to write-off a portion or all of its goodwill. Any transitional impairment loss will be recognized as a change in accounting principle.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. The Company is required to adopt SFAS 143 on January 1, 2003. The Company has not yet determined the impact that the adoption of SFAS 143 will have on its results of operations or its financial position.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued)
Transactions, for the disposal of a segment of a business. The Company is required to adopt SFAS 144 on January 1, 2002. The Company expects that there will be no effect on the Company's consolidated financial position or results of operations relating to the adoption of SFAS 144.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation. In addition, the Company's historical consolidated balance sheets, statements of operations and cash flows have been restated to account for the data services segment as a discontinued operation.
3. COMMITMENTS AND CONTINGENCIES
In November 1995, a component on Telstar 11 malfunctioned, resulting in a 2-hour service interruption. The malfunctioning component supported nine transponders serving the European portion of Telstar 11's footprint. Full service was restored using a back-up component. If that back-up component fails, Telstar 11 would lose a significant amount of usable capacity. In such event, while the Company would be entitled to insurance proceeds of approximately $195 million as of December 31, 2001, and could lease replacement capacity and function as a reseller with respect to such capacity, the loss of capacity would have a material adverse effect on the Company.
Telstar 12 was launched in October 1999 into 15 degrees W.L., and commenced operations in January 2000. Although Telstar 12 was originally intended to operate at 12 degrees W.L., Loral Orion reached an agreement with Eutelsat to operate Telstar 12 at 15 degrees W.L. while Eutelsat continued to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority rights at such location on Loral Orion's behalf. As part of this coordination effort Loral Orion agreed to provide to Eutelsat four transponders on Telstar 12 for the life of the satellite and has retained risk of loss. Eutelsat also has the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. As part of the international coordination process, the Company continues to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees W.L. If these discussions are not successful, Telstar 12's useable capacity may be reduced.
Telstar 10/Apstar IIR has experienced minor losses of power from its solar arrays. Although, to date, Telstar 10/Apstar IIR has not experienced any degradation in performance, there can be no assurance that Telstar 10/Apstar IIR will not experience additional power loss that could result in performance degradation, including loss of transponder capacity. In the event of additional power loss, the extent of the performance degradation, if any, will depend on numerous factors, including the amount of the additional power loss, when in the life of Telstar 10/Apstar IIR the loss occurred, and the number and type of uses being made of transponders then in service. A complete or partial loss of Telstar 10/Apstar IIR could result in a loss of revenues and profits. Based upon information currently available, including design redundancies to accommodate small power losses and the fact that no pattern has been identified as to the timing or specific location within the solar arrays of the failures, the Company believes that this matter will not have a material adverse effect on its consolidated financial position or its results of operations.
While the Company has in the past, consistent with industry practice, typically obtained in-orbit insurance for its satellites, the Company cannot guarantee that, upon a policy's expiration, the Company will be able to renew the insurance on acceptable terms, especially on satellites that have, or that are part of a family of satellites that have experienced problems in the past. For example, in connection with the renewal of the insurance for the Telstar 10/Apstar IIR satellite in October 2001, the insurance underwriters have excluded losses due to solar array failures, since Telstar 10/Apstar IIR was manufactured by Space Systems/Loral ("SS/L") and has the same solar array configuration as another 1300-class satellite manufactured by SS/L that recently experienced a solar array failure. SS/L believes that this failure is an isolated event and does not reflect a systemic problem in either the satellite design or manufacturing process. Accordingly, the Company does not believe that this anomaly will affect Telstar 10/ Apstar IIR. Loral is currently in discussions with the Company's insurers to remove this exclusion from the Telstar 10/ Apstar IIR policy in return for a deductible for losses arising from electrical problems on the satellite's solar arrays. There can be no assurance that these discussions will be successful. An uninsured loss of a satellite will have a material adverse effect on the Company's consolidated financial position and its results of operations.
Loral Orion anticipates it will have additional requirements over the next three years to fund the replacement of Telstar 11 which is expected to reach the end of its useful life in 2005. To the extent that excess cash flow from Loral Orion's satellites is not sufficient to meet these requirements, Loral Orion will need to secure funding from Loral, or raise additional financing to fund this requirement. Sources of additional capital may include public or private debt, vendor financing, equity financings or strategic investments. To the extent that Loral Orion seeks to raise additional debt financing, its indenture relating to the Company's 10% senior notes limits the amount of such additional debt to $100 million for such replacement satellite and
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued)
prohibits Loral Orion from using Telstar 11, Telstar 10/Apstar IIR and Telstar 12 as collateral for indebtedness.
The Company is party to various litigation arising in the normal course of its operations. In the opinion of management, the ultimate liability for these matters, if any, will not have a material adverse effect on the Company's financial position or results of operations.
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
Aggregate annual maturities of the carrying value of long-term debt, including unamortized deferred amounts on senior notes, consist of the following (in thousands):
On December 21, 2001, Loral Orion completed exchange offers and consent solicitations by issuing $613 million principal amount of new senior notes due 2006 ("New Senior Notes") guaranteed by Loral, in exchange for the
extinguishment of $841 million principal amount of Loral Orion senior notes due 2007 and senior discount notes due 2007 as discussed below. As part of the exchange, Loral issued to the New Senior Note holders 6.04 million five-year warrants to purchase Loral common stock at a price of $2.37 per share. The warrants were valued at $6.7 million using the Black Scholes option pricing model with the following assumptions: stock volatility, 75%, risk free interest rate, 4.36%, and no dividends during the expected term and is reflected in capital in excess of par value on the consolidated balance sheet. After the exchange offers, principal amount of $37 million of the existing senior notes and principal amount of $49 million of the existing senior discount notes remain outstanding at their original maturities and interest rates.
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
The interest rate on the New Senior Notes is 10%, a reduction from the 11.25% interest rate on the existing senior notes and the 12.5% rate on the existing senior discount notes. Interest is payable semi-annually on July 15 and January 15, beginning July 15, 2002. As a result of the lower interest rate and the $229 million reduction in principal amount of debt, Loral Orion's annual cash interest payments will be reduced by approximately $39 million. Under U.S. generally accepted accounting principles dealing with debt restructurings, the Company recorded an after-tax extraordinary gain of $26 million on the exchange, after expenses of $5 million. The carrying value of the New Senior Notes on the balance sheet is $904 million, although the actual principal amount of the New Senior Notes is $613 million. The difference between this carrying value and the actual principal amount of the New Senior Notes will be amortized over the life of the New Senior Notes, fully offsetting interest expense through maturity of the New Senior Notes. The indenture relating to the New Senior Notes contains limitations on Loral Orion and its subsidiaries, including, without limitation, restrictions on Loral Orion's ability to pay dividends or make loans to Loral.
In connection with the consummation of the exchange offer, Loral SpaceCom Corporation("LSC") a subsidiary of Loral, canceled its $79.7 million intercompany note issued to it by Loral Orion which ranked pari passu to senior debt in exchange for the transfer of Loral Orion's data services business(see Note 9) and the issuance of a new note to LSC in the principal amount of $29.7 million due 2006, having an interest rate of 10% per annum payable in kind, subordinated to Loral Orion's New Senior Notes. Loral Orion's data services business was transferred to a newly-formed subsidiary of Loral (see Note 9), which assumed the name "Loral CyberStar, Inc". In addition, as a result of the transfer of the Company's data services business, the Company recognized capital contributions from Loral of $9.2 million, which represents the difference in the carrying value of the net assets of the data services business and the $50.0 million portion of net notes cancelled by LSC and the expenses of the exchange offer in excess of $5 million.
The Loral Orion senior notes are due in 2007 and pay interest semi-annually on January 15 and July 15 of each year. The senior discount notes are due in 2007 and pay interest semi-annually commencing on July 15, 2002. The accreted principal value of the senior discount notes was $49 million and $427 million as of December 31, 2001 and 2000, respectively. Along with the original issuance of each senior note and senior discount note, one warrant was originally issued to purchase shares of common stock. In connection with the Merger, each warrant was converted so that it could purchase shares of Loral common stock. As of December 31, 2001, exercisable warrants for 68,045 shares of Loral common stock at an exercise price of $0.02 per share under the Loral Orion senior notes and 126,359 shares of Loral common stock at an exercise price of $0.03 per share under the Loral Orion senior discount notes are yet to be exercised.
In connection with the Merger, the carrying value of the senior notes and senior discount notes were increased to reflect a fair value adjustment based on quoted market prices at the date of acquisition. Such adjustment resulted in effective interest rates of 8.69% and 9.69% on the senior notes and senior discount notes, respectively, through maturity.
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
Loral and Loral Asia Pacific Satellite (HK) Limited ("Loral HK Sub") have unconditionally guaranteed, and the Company's future restricted subsidiaries will unconditionally guarantee, the New Senior Notes, on a joint and several basis. Loral HK Sub continues to provide a guarantee to the senior notes and senior discount notes that remain outstanding.
No restrictions exist on the ability of Loral HK Sub and the Company's future restricted subsidiaries, 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).
Satellite Incentive Obligations -- The obligations relating to satellite performance have been recorded at the present value (discounted at 12 percent, the Company's estimated incremental borrowing rate for unsecured financing at the date of the obligations)of the required payments through 2007.
5. FAIR VALUES OF FINANCIAL INSTRUMENTS
Other than amounts due under the New Senior Notes, senior notes and senior discount notes, the Company believes that the carrying amounts reported in the balance sheets of its other financial assets and liabilities approximates their fair value at December 31, 2001 and 2000. The fair value of the Company's New Senior Notes, senior notes and senior discount notes was estimated based on quoted market prices, and at December 31, 2001 was approximately $452 million and at December 31, 2000 was approximately $271 million.
6. SEGMENTS
The Company has presented the results of its previously reported data services segment as a discontinued operation (see Notes 4 and 9). As a result, the Company's continuing operations are organized and operate in one business segment: Fixed Satellite Services(see Note 1). The Company's segment information has been restated to reflect the results of such transactions. In evaluating financial performance, management uses revenues and earnings before interest, taxes and depreciation ("EBITDA") as the measure of profit or loss. Revenues before elimination of intercompany revenues from its discontinued operations and other eliminations totaled $128.7 million, $109.4 million and $42.8 million for the years ended December 31, 2001, 2000, and 1999, respectively. EBITDA on the same basis totaled $105.2 million, $81.9 million and $21.7 million for the years ended December 31, 2001, 2000 and 1999, respectively. EBITDA (which is equivalent to operating income (loss) before depreciation and amortization, including amortization of unearned compensation) is provided because it is a measure commonly used in the communications industry to analyze companies on the basis of operating performance, leverage and liquidity and is presented to enhance the understanding of the Company's operating results. However, EBITDA should not be construed as an alternative to net income as an indicator of a company's operating performance, or cash flow from operations as a measure of a company's liquidity. EBITDA may be calculated differently and, therefore, may not be comparable to similarly titled measures reported by other companies.
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued)
6. SEGMENTS (CONTINUED)
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued)
6. SEGMENTS (CONTINUED)
With the exception of the Company's satellites in orbit, the Company's long-lived assets are primarily located in the United States.
The following summarizes the Company's domestic and foreign revenues (in thousands):
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued)
7. RELATED PARTY TRANSACTIONS
Due from Loral companies consist of the following (in thousands):
Due to Loral companies consist of the following (in thousands):
Loral Orion obtained financing (via an intercompany note from Loral SpaceCom) to complete the construction of its satellite fleet and meet its operating requirements. At December 31, 2001, $29.7 million was outstanding, which is reflected on the balance sheet as a subordinated note payable to Loral SpaceCom (see Note 4). Borrowings and accrued interest from Loral SpaceCom totaled $107.9 million at December 31, 2000.
Loral Orion and Loral Skynet have entered into agreements (the "Loral Skynet Agreements") effective January 1, 1999, whereby Loral Skynet provides to Loral Orion (i) marketing and sales of satellite capacity services on the Loral 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 Loral Orion satellite network (the "Technical Services", and together with the Sales Services, the "Services"). Loral Orion is charged Loral Skynet's costs for providing these services plus a 5 percent administrative fee, which amounted to $9.1 million for 2001, $21.4 million for 2000 and $18.7 for 1999.
Space Systems/Loral ("SS/L"), a subsidiary of Loral SpaceCom, built the Company's Telstar 12 satellite that was launched in October 1999. The Company made payments to SS/L during 2001, 2000 and 1999 totaling approximately $8.1 million, $9.8 million and $98.3 million, respectively, for construction, launch and insurance costs.
In December 1999, in connection with a contractual arrangement between SS/L and one of SS/L's customers, Loral Orion agreed to lease to SS/L the capacity of three transponders on Telstar 10/Apstar IIR through the end of its life. Under this arrangement, Loral Orion recorded revenue of $4.2 million and $4.4 million in 2001 and 2000, respectively. Under another arrangement with SS/L, Loral Orion recorded revenue of $2.5 million in 2001 related to transponder capacity for another customer.
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
On March 24, 2000, Loral Orion entered into an agreement with a subsidiary of Loral to assign to the Loral subsidiary, pending regulatory approval, its Ka-band orbital slots located at 89 degrees N.L., 81 degrees W.L., 78 degrees E.L. and 47 degrees W.L. In connection this transaction, Loral Orion also agreed to transfer to the Loral subsidiary all agreements, including satellite construction contracts, related to such slots. The total purchase price for the slots and these agreements was $36.5 million, which was applied by Loral Orion toward the last installment payment on Telstar 10/Apstar IIR In connection with the sale, the Company recorded a gain of approximately $34 million. Since the sale was to a subsidiary of Loral, the gain was credited directly to equity. This assignment was approved by the Federal Communications Commission on December 11, 2000.
9. DISCONTINUED OPERATIONS
The historical consolidated balance sheet, statements of operations and cash flows have been restated for all periods presented to account for the data services segment as a discontinued operation. The financial data presented for the Company's data services segment reflects the historical sales and expenses of the data services segment after elimination of intercompany transactions with FSS. Discontinued operations include revenue for the data services segment of $80.2 million, $103.8 million and $69.2 million for the period January 1, 2001 to December 21, 2001 and the years ended December 31, 2000 and 1999, respectively. See Note 4.
The data services segment began leasing transponder capacity from Loral Skynet in 2000. Amounts incurred for transponder capacity leased from Loral Skynet totaled $3.0 million and $4.5 million in 2001 and 2000 respectively, and are included in the results of discontinued operations (see Note 4).
10. FINANCIAL INFORMATION FOR THE ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES
In December 2001, Loral Orion (the "Parent Company") issued New Senior Notes in an exchange offer (see Note 4) which are fully and unconditionally guaranteed, on a joint and several basis, by the Parent Company and one of its wholly-owned subsidiaries (the "Guarantor Subsidiary") and Loral ("Issuer's Parent"). The Company's remaining original senior notes and senior discount notes are fully and unconditionally guaranteed on a joint and several basis by the Parent Company, the Guarantor subsidiary and substantially all of the other wholly-owned subsidiaries in existence through December 21, 2001 (the "Other Subsidiaries").
Presented below is condensed consolidating financial information for the Parent Company, Issuer's Parent, the Guarantor Subsidiary and the Other Subsidiaries for the years ended December 31, 2001, 2000 and 1999. The Other Subsidiaries were part of the Company's data services segment which was transferred on December 21, 2001 to a subsidiary of Loral (see Note 4) and have been accounted for as a discontinued operation. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of the Parent Company, Issuer's Parent, Guarantor Subsidiary and Other Subsidiaries.
The supplemental condensed consolidating financial information reflects the investments of the Parent Company in the Guarantor Subsidiary and the Other Subsidiaries using the equity method of accounting. The Company's significant transactions with its subsidiaries other than the investment account and related equity in net loss of unconsolidated subsidiaries are the intercompany payables and receivables between its subsidiaries. The note payable due to Loral SpaceCom, bears interest at 10% per annum. All principal and interest is due at maturity on July 30, 2006.
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to consolidated Financial Statements (continued) 10. FINANCIAL INFORMATION FOR ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES -- (Continued) LORAL ORION, INC. CONDENSED CONSOLIDATING BALANCE SHEET December 31, 2001 (in thousands)
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued) 10. FINANCIAL INFORMATION FOR ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES -- (Continued) LORAL ORION, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 (IN THOUSANDS)
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued) 10. FINANCIAL INFORMATION FOR ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES -- (Continued) LORAL ORION, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2001 (IN THOUSANDS)
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued) 10. FINANCIAL INFORMATION FOR ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES -- (Continued) LORAL ORION, INC. CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2000 (IN THOUSANDS)
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued) 10. FINANCIAL INFORMATION FOR ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES -- (Continued)
LORAL ORION, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS)
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued) 10. FINANCIAL INFORMATION FOR ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES -- (Continued)
LORAL ORION, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2000 (IN THOUSANDS)
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued) 10. FINANCIAL INFORMATION FOR ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES -- (Continued)
LORAL ORION, INC. CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued) 10. FINANCIAL INFORMATION FOR ISSUER'S PARENT, GUARANTORS AND OTHER SUBSIDIARIES -- (Continued) LORAL ORION, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
Loral Orion, Inc. and Subsidiaries (A wholly owned subsidiary of Loral Space & Communications Corporation) Notes to Consolidated Financial Statements (continued)
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the years ended December 31, 2001 and 2000 (in thousands):
(1) Includes a $12.0 million settlement resulting from a contract termination with a customer.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND FINANCIAL DISCLOSURES.
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to General Instruction I of Form 10-K.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) and (2) List of Financial Statements and Financial Statement Schedules
The following consolidated financial statements of Loral Orion are included in Item 8:
Consolidated Balance Sheets - December 31, 2001 and 2000
Consolidated Statements of Operations - Years ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Stockholders' Equity - Years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows - Year ended December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
(b) Reports on Form 8-K filed in the fourth quarter of 2001
(c) Exhibits
- ---------- * Filed herewith
SIGNATURES
CORPORATE UPDATE TITLES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LORAL ORION, INC.
By: /s/ Terry J. Hart
Title: President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.