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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
COMMISSION FILE NUMBER 0-22085
LORAL ORION, INC.
DELAWARE 52-1564318
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
500 HILLS DRIVE, BEDMINSTER, NJ 07921
TELEPHONE: (908) 470-2300
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
11 1/4% SENIOR NOTES DUE 2007
12 1/2% SENIOR DISCOUNT NOTES DUE 2007
10% SENIOR NOTES DUE 2006
The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12 b-2). Yes [ ] No [X]
The number of shares of common stock, par value $.01 per share of the
registrant outstanding as of September 30, 2003 was 100, all of which were
owned, directly or indirectly, by Loral Space & Communications Ltd.
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PART 1.
FINANCIAL INFORMATION
LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 52,798 $ 42,964
Accounts receivable, net....................................... 7,936 7,615
Prepaid expenses and other current assets...................... 5,072 13,213
Due from Loral companies....................................... -- 52,577
-------------- --------------
Total current assets....................................... 65,806 116,369
Satellites and related equipment, net............................. 474,497 524,699
Other assets, net................................................. 11,865 17,318
-------------- --------------
Total assets............................................... $ 552,168 $ 658,386
============== ==============
LIABILITIES AND STOCKHOLDER'S DEFICIT
Liabilities not subject to compromise:
Current liabilities:
Current portion of long-term debt............................ $ -- $ 62,996
Accounts payable............................................. 461 2,387
Customer advances............................................ 1,448 3,731
Due to Loral companies....................................... 3,806 46,723
Accrued interest and other current liabilities............... -- 6,431
-------------- --------------
Total current liabilities.................................. 5,715 122,268
Customer advances............................................... 4,089 8,765
Long-term liabilities........................................... -- 6,297
Long-term debt.................................................. -- 888,532
Note payable to Loral SpaceCom.................................. -- 31,540
-------------- --------------
Total liabilities not subject to compromise....................... 9,804 1,057,402
Liabilities subject to compromise................................. 1,012,062 --
Commitments and contingencies (Notes 2,5,6 and 9)
Stockholder's deficit:
Common stock, $.01 par value................................... -- --
Paid-in capital................................................ 604,166 604,166
Due from Loral companies....................................... (57,747) --
Retained deficit............................................... (1,016,117) (1,003,182)
-------------- --------------
Total stockholder's deficit................................ (469,698) (399,016)
-------------- --------------
Total liabilities and stockholder's deficit................ $ 552,168 $ 658,386
============== ==============
See notes to condensed consolidated financial statements
2
LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues from satellite services ............................. $ 24,398 $ 25,776 $ 74,307 $ 82,976
Operating expenses:
Cost of satellite services ................................ 23,587 22,639 70,764 67,934
Selling, general and administrative expenses .............. 3,559 2,804 8,490 9,147
--------- --------- --------- ---------
Operating (loss) income before reorganization expenses
due to bankruptcy .......................................... (2,748) 333 (4,947) 5,895
Reorganization expenses due to bankruptcy .................... (1,575) -- (1,575) --
--------- --------- --------- ---------
Operating (loss) income ...................................... (4,323) 333 (6,522) 5,895
Interest expense ............................................. (657) (3,062) (6,305) (9,812)
Interest income .............................................. 14 208 19 509
--------- --------- --------- ---------
Loss before, income taxes and cumulative effect of change
in accounting principle .................................... (4,966) (2,521) (12,808) (3,408)
Income tax (provision) benefit ............................... (7) 3,274 (127) 4,643
--------- --------- --------- ---------
(Loss) income before cumulative effect of change in
accounting principle ....................................... (4,973) 753 (12,935) 1,235
Cumulative effect of change in accounting principle (Note 4).. -- -- -- (562,201)
--------- --------- --------- ---------
Net loss (income) ............................................ $ (4,973) $ 753 $ (12,935) $(560,966)
========= ========= ========= =========
See notes to condensed consolidated financial statements
3
LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2003 2002
--------- ---------
Operating activities:
Net loss .............................................. $ (12,935) $(560,966)
Non-cash items:
Deferred taxes .................................... -- 3,388
Depreciation and amortization ..................... 56,470 56,469
Interest .......................................... 669 909
Provisions for bad debts .......................... 1,578 1,093
Cumulative effect of change in accounting
principle........................................ -- 562,201
Changes in operating assets and liabilities:
Accounts receivable ............................... (1,899) 1,602
Prepaid expenses and other current assets ......... 8,141 3,102
Other assets ...................................... 3,936 2,902
Accounts payable .................................. (135) (2,113)
Accrued interest and other current liabilities .... 384 42
Customer advances ................................. (2,333) (3,885)
Other long-term liabilities ....................... (1,284) (1,325)
Due to Loral companies, net ....................... (7,372) 2,724
--------- ---------
Net cash provided by operating activities ................ 45,220 66,143
--------- ---------
Investing activities:
Capital expenditures .................................. (4,751) (14,628)
--------- ---------
Net cash used in investing activities .................... (4,751) (14,628)
--------- ---------
Financing activities:
Interest payments on 10% senior notes ................. (30,635) (45,952)
--------- ---------
Net cash used in financing activities .................... (30,635) (45,952)
--------- ---------
Net increase in cash and cash equivalents ................ 9,834 5,563
Cash and cash equivalents at beginning of period ......... 42,964 19,399
--------- ---------
Cash and cash equivalents at end of period ............... $ 52,798 $ 24,962
========= =========
Supplemental information - cash received (paid) for
reorganization items:
Professional fees..................................... $ (68) $ --
Interest income....................................... 84 --
--------- ---------
$ 16 $ --
========= =========
See notes to condensed consolidated financial statements
4
LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
The principal business of Loral Orion, Inc. (the "Company" or "Loral
Orion"), is providing fixed satellite services, including video distribution and
other satellite transmission services by leasing transponder capacity on its
satellites to its customers for various applications, including broadcasting,
news gathering, Internet access and transmission, private voice and data
networks, business television, distance learning and direct-to-home television
("DTH"). Loral Skynet, a division of Loral SpaceCom Corporation ("Loral
SpaceCom" or "LSC"), which is a subsidiary of Loral Space & Communications
Corporation, which is in turn a subsidiary of Loral Space & Communications Ltd.
("Loral"), manages the Company's business. The Company operates in one business
segment, Fixed Satellite Services ("FSS").
2. BANKRUPTCY FILINGS
On July 15, 2003, Loral, Loral Orion and certain of its subsidiaries,
including Loral Asia Pacific Satellite (HK) Limited ("Loral Asia Pacific"), (the
"Debtor Subsidiaries"), filed voluntary petitions for reorganization under
Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the
United States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court") (Lead Case No. 03-41716 (RDD), Case Nos. 03-41717 (RDD)
through 03-41723 (RDD)) (the "Chapter 11 Cases"). Loral Orion and its Debtor
Subsidiaries continue to manage their properties and operate their businesses as
"debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the provisions of the Bankruptcy Code.
As a result of Loral Orion's and the Debtor Subsidiaries' voluntary
petitions for reorganization, Loral Orion's prepetition debt obligations
(aggregating $827 million), including its 10% senior notes obligations, have
been accelerated and are immediately due and Loral Orion's other prepetition
debt obligations of $93 million are subject to acceleration (see Note 5). On
July 15, 2003, Loral Orion failed to make interest payments of $30.6 million on
its 10% Senior Notes due 2006, $2.1 million on its 11.25% Senior Notes due 2007
and $3.1 million on its 12.50% Senior Notes due 2007. A creditors' committee has
been appointed in the Chapter 11 Cases to represent all unsecured creditors,
including all holders of Loral Orion's senior unsecured notes, and, in
accordance with the provisions of the Bankruptcy Code, will have the right to be
heard on all matters that come before the Bankruptcy Court.
As provided by the Bankruptcy Code, Loral Orion and its Debtor Subsidiaries
have the exclusive right to submit their plan or plans of reorganization for 120
days from the date of the filing of the voluntary petitions. On November 12,
2003, the Bankruptcy Court extended this exclusive period to March 12, 2004.
Further extension may be sought and may be granted or rejected by the Bankruptcy
Court. If Loral Orion and its Debtor Subsidiaries fail to file their plan or
plans of reorganization during such period, or if such plan or plans is not
accepted by the required number of creditors and equity holders within the
required period, any party in interest may subsequently file its own plan or
plans of reorganization for Loral Orion and its Debtor Subsidiaries. A plan of
reorganization must be confirmed by the Bankruptcy Court, upon certain findings
being made by the Bankruptcy Court which are required by the Bankruptcy Code.
The Bankruptcy Court may confirm a plan or plans of reorganization
notwithstanding an objection to the plan by an impaired class of creditors or
equity holders if certain requirements of the Bankruptcy Code are met. Although
Loral Orion and its Debtor Subsidiaries expect to file a reorganization plan or
plans that provide for emergence from bankruptcy sometime during 2004, there can
be no assurance that a reorganization plan or plans will be proposed by Loral
Orion and its Debtor Subsidiaries or confirmed by the Bankruptcy Court or that
any such plan will be consummated.
During the pendency of the Chapter 11 Cases, Loral Orion's business will be
subject to risks and uncertainties relating to the Chapter 11 Cases. For
example, the Chapter 11 Cases could adversely affect relationships with Loral
Orion's customers and suppliers, which could adversely affect the going concern
value of the business and of its assets, particularly if the Chapter 11 Cases
are protracted. Also, transactions outside the ordinary course of business will
be subject to the prior approval of the Bankruptcy Court which may limit Loral
Orion's ability to respond to certain market events or take advantage of certain
market opportunities, and, as a result, Loral Orion's operations could be
materially adversely affected.
As a result of the commencement of the Chapter 11 Cases, the pursuit of all
pending claims and litigation against Loral Orion and its Debtor Subsidiaries
arising prior to or relating to events which occurred prior to the commencement
of the Chapter 11 Cases is
5
generally subject to an automatic stay under Section 362 of the Bankruptcy Code,
and, absent further order of the Bankruptcy Court, no party may take any action
to recover any prepetition claims, enforce any lien against or obtain possession
of any property from Loral Orion or its Debtor Subsidiaries. In addition,
pursuant to Section 365 of the Bankruptcy Code, Loral Orion and its Debtor
Subsidiaries may reject or assume prepetition executory contracts and unexpired
leases, and parties affected by rejections of these contracts or leases may file
claims with the Bankruptcy Court which will be addressed in the context of the
Chapter 11 Cases.
3. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared assuming the Company in its current structure will continue as a
going concern. The factors mentioned in Note 2 above, however, among other
things, raise substantial doubt about Loral Orion's ability to continue as a
going concern. The condensed consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty. The
ability of the Company to continue as a going concern is dependent on a number
of factors including, but not limited to, the Company's development of a plan of
reorganization, confirmation of the plan by the Bankruptcy Court, customer
retention and the Company's ability to continue to provide high quality
services. If a plan of reorganization is not confirmed and implemented, the
Company may be forced to liquidate under applicable provisions of the Bankruptcy
Code. There can be no assurance of the level of recovery that the Company's
creditors would receive in such liquidation. The condensed consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities if the Company is forced to liquidate.
The condensed consolidated financial statements have been prepared by the
Company pursuant to the rules of the Securities and Exchange Commission ("SEC")
and, in the opinion of the Company, include all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of results of
operations, financial position, and cash flows as of and for the periods
presented. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to SEC rules. The Company believes that the disclosures made are adequate to
keep the information presented from being misleading. The results of operations
for the three and nine months ended September 30, 2003, are not necessarily
indicative of the results to be expected for the full year. The December 31,
2002 balance sheet has been derived from the audited consolidated financial
statements at that date. It is suggested that these condensed consolidated
financial statements be read in conjunction with the audited consolidated
financial statements and notes thereto of Loral Orion in Loral Orion's latest
Annual Report on Form 10-K.
The condensed consolidated financial statements have been prepared in
accordance with Statement of Position No. 90-7, Financial Reporting by Entities
in Reorganization under the Bankruptcy Code ("SOP 90-7"). SOP 90-7 requires an
entity to distinguish prepetition liabilities subject to compromise from
postpetition liabilities in the Company's condensed consolidated balance sheet.
The caption "liabilities subject to compromise" reflects the Company's best
current estimate of the amount of prepetition claims that will be restructured
in Loral Orion's and its Debtor Subsidiaries' Chapter 11 Cases. In addition, the
Company's condensed consolidated statement of operations portrays the results of
operations of the reporting entity during Chapter 11 proceedings. As a result,
any revenue, expenses, realized gains and losses, and provision for losses
resulting directly from the reorganization and restructuring of the organization
are reported separately as reorganization items, except those required to be
reported as discontinued operations and extraordinary items in conformity with
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
("SFAS 144") and SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). The
Company did not prepare condensed combined financial statements for Loral Orion
and the Debtor Subsidiaries, since the subsidiaries that did not file voluntary
petitions for reorganization under Chapter 11 of the Bankruptcy Code were
immaterial to the Company's consolidated financial position and results of
operations. In accordance with SOP 90-7, the Company stopped accruing interest
expense on its liabilities subsequent to July 14, 2003.
Income Taxes
At December 31, 2002, the Company recorded a 100% valuation allowance
against its deferred tax assets under the criteria of SFAS No. 109, Accounting
for Income Taxes. The Company continued to maintain the 100% valuation allowance
during 2003 and recorded no benefit in 2003 under the tax sharing agreement with
Loral Space and Communications Corporation for its loss. The tax provision for
2003 represents foreign income taxes. For the three and nine months ended
September 30, 2002, the Company recorded a tax benefit of $3.3 million and $4.6
million, respectively, under the tax sharing agreement.
6
Reclassifications
Certain reclassifications have been made to conform prior year amounts to
the current year's presentation.
4. ACCOUNTING FOR GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), which addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS 142 provides that intangible assets with finite useful lives
be amortized and that goodwill and intangible assets with indefinite lives not
be amortized, but rather be tested at least annually for impairment. SFAS 142
also changed the evaluation criteria for testing goodwill for impairment from an
undiscounted cash flow approach, which was previously utilized under the
guidance in SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of ("SFAS 121") and Accounting Principles
Board Opinion No. 17, Intangible Assets ("APB 17"), to a test based on fair
value. Fair value is determined by the amount at which an asset or liability
could be bought or sold in a current transaction between willing parties, that
is, other than in a forced or liquidation sale. Quoted market prices in active
markets are the best evidence of fair value and must be used as the basis for
the measurement, if available. If quoted market prices are not available, the
estimate of fair value must be based on the best information available,
including prices for similar assets and liabilities and the results of using
other valuation techniques, such as public company trading multiples and future
discounted cash flows.
Goodwill
In accordance with SFAS 142, the Company's previously recognized cost in
excess of net assets acquired ("goodwill") of $562 million (at December 31,
2001) from the acquisition of the Company by Loral in 1998 was reviewed under
the new transitional guidance as of January 1, 2002. The Company hired
professionals in the valuation consulting business to determine the fair value
of the Company. Since there were no quoted market prices in active markets for
the Company, the measurement of fair value was based on the best information
available in the circumstances, including reasonable and supportable assumptions
and projections, to determine that the most appropriate method of fair value was
public company trading multiples. Based on the fair values concluded on by those
professionals, management determined that the Company's goodwill under the new
guidance in SFAS 142 was fully impaired. Accordingly, as of January 1, 2002, the
Company recorded a non-cash charge for the cumulative effect of the change in
accounting principle of $562 million. The charge is the result of a change in
the evaluation criteria for goodwill from an undiscounted cash flow approach,
which was previously utilized under the guidance in SFAS 121 and APB 17, to the
fair value approach which is stipulated in SFAS 142.
Other Acquired Intangible Assets
The Company evaluated the useful lives of its other acquired intangible
assets in connection with the adoption of SFAS 142 and determined that no
changes to the useful lives were necessary. Other acquired intangible assets are
included in other assets in the Company's condensed consolidated balance sheets
as follows (in millions):
SEPTEMBER 30, 2003 DECEMBER 31, 2002
-------------------------- ------------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------- ------------ ------- ------------
Customer relations $ 7.0 $ (5.3) $ 7.0 $ (4.5)
Trademarks.......... 6.0 (4.5) 6.0 (3.9)
Regulatory.......... 2.5 (1.6) 2.5 (1.4)
------- -------- ------- ------
Total............ $ 15.5 $ (11.4) $ 15.5 $ (9.8)
======= ======== ======= ======
As of September 30, 2003, the weighted average remaining amortization
period for customer relations and trademarks was two years and for regulatory
fees was seven years.
Total amortization expense for other acquired intangible assets was $0.5
million for both the three months ended September 30, 2003 and 2002 and $1.5
million for both the nine months ended September 30, 2003 and 2002. Annual
amortization expense for other acquired intangible assets for the five years
ending December 31, 2007 is estimated to be as follows (in millions):
7
2003................ $ 2.0
2004................ 2.0
2005................ 1.2
2006................ --
2007................ --
5. DEBT
Debt consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
----------- -----------
10.00% senior notes due 2006:
Principal amount.............................................. $ 612,704 $ 612,704
Accrued interest (deferred gain on debt exchanges)............ 214,446 245,080
11.25% senior notes due 2007 (principal amount $37 million)...... 39,401 39,762
12.50% senior discount notes due 2007 (principal amount at
maturity and accreted principal amount $49 million)........... 53,426 53,982
----------- ---------
Total debt.................................................... 919,977 951,528
Less, current maturities as of December 31, 2002 and amounts
included in liabilities subject to compromise as of
September 30, 2003............................................ 919,977 62,996
----------- ----------
$ -- $ 888,532
=========== ==========
As a result of Loral Orion's and the Debtor Subsidiaries' voluntary
petitions for reorganization, Loral Orion's prepetition debt obligations
(aggregating $827 million), including its 10% senior notes obligations, have
been accelerated and are immediately due and Loral Orion's other prepetition
debt obligations of $93 million are subject to acceleration. On July 15, 2003,
Loral Orion failed to make interest payments of $30.6 million on its 10% Senior
Notes due 2006, $2.1 million on its 11.25% Senior Notes due 2007 and $3.1
million on its 12.50% Senior Notes due 2007. A creditors' committee has been
appointed in the Chapter 11 Cases to represent all unsecured creditors,
including all holders of Loral Orion's senior unsecured notes, and, in
accordance with the provisions of the Bankruptcy Code, will have the right to be
heard on all matters that come before the Bankruptcy Court.
6. LIABILITIES SUBJECT TO COMPROMISE
As discussed in Note 2, the Company has been operating as a
debtor-in-possession under the jurisdiction of the Bankruptcy Court and in
accordance with the provisions of the Bankruptcy Code.
In the condensed consolidated balance sheet, the caption "liabilities
subject to compromise" reflects Loral Orion's current estimate of the amount of
prepetition claims that will be restructured in Loral Orion's and its Debtor
Subsidiaries' Chapter 11 Cases. Pursuant to court order, Loral Orion has been
authorized to pay certain prepetition operating liabilities incurred in the
ordinary course of business (e.g. insurance). Since July 15, 2003, as permitted
under the Bankruptcy Code, the Company has rejected certain of its prepetition
obligations. Loral Orion is in the process of calculating its estimated
liability to the unsecured creditors affected by these contract rejections.
Loral Orion will notify all known claimants subject to the bar date of their
need to file a proof of claim with the
8
Bankruptcy Court. A bar date is the date by which claims against Loral Orion and
its Debtor Subsidiaries must be filed if the claimants wish to receive any
distribution in the Chapter 11 Cases. No bar date has yet been set by the
Bankruptcy Court. Differences between liability amounts estimated by the Company
and claims filed by creditors will be investigated and the Bankruptcy Court will
make a final determination of the allowable claim. The determination of how
liabilities will ultimately be settled and treated cannot be made until the
Bankruptcy Court approves a Chapter 11 plan of reorganization. Loral Orion and
its Debtor Subsidiaries will continue to evaluate the amount and classification
of their prepetition liabilities in general through the remainder of their
Chapter 11 Cases. Should Loral or its Debtor Subsidiaries, through this ongoing
evaluation, identify additional liabilities subject to compromise, such amounts
will be recognized accordingly. As a result, "liabilities subject to compromise"
are subject to change. Claims classified as "liabilities subject to compromise"
represent secured as well as unsecured claims. Liabilities subject to compromise
at September 30, 2003 consisted of the following (in thousands):
Debt obligations......................................... $ 919,977
Accounts payable......................................... 1,791
Customer advances........................................ 4,626
Accrued interest and other current liabilities........... 6,815
Other long term liabilities ............................. 5,013
Due to Loral companies................................... 40,714
Note payable to Loral SpaceCom........................... 33,126
-----------
Total liabilities subject to compromise.............. $ 1,012,062
===========
7. REORGANIZATION EXPENSES DUE TO BANKRUPTCY
Reorganization expenses due to bankruptcy for the period from July 15, 2003
(filing date) to September 30, 2003 include professional fees associated with
developing a plan of reorganization and for bankruptcy services and interest
income and were as follows (in thousands):
Professional fees.................................... $ 1,659
Interest income...................................... (84)
---------
Total reorganization expenses due to bankruptcy.... $ 1,575
=========
8. RELATED PARTY TRANSACTIONS
Due from (to) Loral companies consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- ------------
Loral Space & Communications Corporation....... $ 46,424 $ 43,772
Loral Skynet Network Services, Inc............. 10,442 8,805
Loral SpaceCom Corporation ("LSC")............. (28,009) (23,977)
Loral Skynet................................... (9,581) (7,854)
Space Systems/Loral ("SS/L")................... (6,049) (14,892)
----------- ----------
$ 13,227 $ 5,854
=========== ==========
As a result of the uncertainty regarding collectibility, due to Loral Space
& Communications Corporation and Loral Skynet Network Services, Inc. (formerly
known as Loral Cyberstar, Inc.) filing voluntary petitions for reorganization,
the Company's receivables due from Loral Space & Communications Corporation,
Loral Skynet Network Services, Inc. and SS/L (aggregating $57.7 million as of
September 30, 2003) have been reflected as debit balances in stockholder's
deficit. Liabilities due to related parties of $40.7 million have been included
in liabilities subject to compromise as of September 30, 2003 (see Note 6).
Loral Skynet Agreements
Effective January 1, 1999, Loral Orion and Loral Skynet entered into
agreements (the "Loral Skynet Agreements"), 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 estimated costs for providing these services plus a 5
percent administrative fee. Effective September 1, 2003, the Loral Skynet
Agreements were amended to reflect a price increase, which is expected to
increase the cost to Loral Orion by approximately $3.5 million per quarter. The
increase in the cost to Loral Orion during the quarter ended September 30, 2003
was approximately $1.1 million.
9
Note Payable to LSC
The Company has a note payable outstanding with 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 10% senior notes. As of September 30, 2003,
the balance of the note was $33.1 million, including accrued interest which is
included in liabilities subject to compromise (see Note 6).
9. COMMITMENTS AND CONTINGENCIES
On September 20, 2002, and as further amended in March 2003, Loral and
Loral Orion agreed with APT Satellite Company Limited ("APT") to jointly
acquire the Apstar V satellite, a satellite then under construction by SS/L for
APT pursuant to which Loral Orion and APT agreed to share, on a 50/50 basis,
the project cost of constructing, launching and insuring the satellite. Under
this agreement, Loral Orion would initially acquire 23% of the satellite in
return for paying 25% of the project cost, and would pay to APT over time an
additional 25% of the project cost to acquire an additional 23% interest in the
satellite. Of the 12.5 transponders initially acquired by Loral Orion, Loral
SpaceCom has agreed to purchase from Loral Orion 4.75 of such transponders,
together with a lease of an additional transponder for an approximate two-year
period from the satellite's in-service date, at a price equal to 12.5% of the
project cost of the satellite.
In August 2003, in order to expedite the receipt of necessary export
licenses from the U.S. government, Loral Orion and APT amended their various
agreements to convert their arrangement from a joint ownership arrangement to a
lease arrangement, but leaving unchanged the cost allocation between the parties
relating to the project cost of the satellite and the arrangement between Loral
Orion and Loral SpaceCom described above. Under this arrangement approved by the
Bankruptcy Court in October 2003, Loral Orion will retain title to the entire
satellite, now known as Telstar 18, and will lease to APT transponders
representing initially 77% of the transponder capacity on the satellite. The
number of transponders leased to APT would be reduced over time upon repayment
by Loral Orion of the second 25% of the satellite's project cost. Upon payment
in full by Loral Orion of 50% of the project cost of the satellite, the lease to
APT would be reduced from 77% to 54% of the satellite's transponder capacity. At
September 30, 2003 the project cost of the satellite was estimated at $230
million. The second 25% of the project cost of the satellite to be repaid by
Loral Orion to APT as termination fees are estimated as follows: $7 million to
terminate APT's leasehold interest in 2.5 additional transponders on the second
anniversary of the satellite's in-service date; $13 million for three additional
transponders on the third anniversary; and $18 million for four additional
transponders on each of the fourth and fifth anniversary. Loral Orion may at its
option, elect to accelerate the termination of APT's leasehold interest in
certain of the foregoing transponders upon earlier payment of the related
termination fee. Loral Orion has agreed that if so requested by APT, it will
seek further government approval to transfer a portion of the satellite to APT.
If it is successful in doing so, the parties will revert back to the original
joint ownership arrangement. As a result of the above changes to the agreement,
whereby Loral Orion will retain title and provide capacity to APT under a lease
arrangement, in the fourth quarter of 2003 Loral Orion will record 100% of the
satellite cost, deferred revenue to APT for the capacity that APT will be
leasing, and a long-term liability to APT for the leasehold interests to be
acquired by Loral Orion from APT in the future (which will be based on the
present value of such obligations).
In October 2003, Loral and APT have engaged in discussions to further
revise their existing arrangement. Under this proposed arrangement, Loral would
accelerate the termination of APT's leasehold interest in 4.5 transponders by
assuming $20.4 million of project cost which otherwise would have been
initially borne by APT, increasing Loral's initial economic interest in the
satellite from 23% to 31%. In addition, Loral Orion would provide to APT, free
of charge, available capacity on Telstar 10/Apstar IIR, during an interim
period and provide APT with certain rights to exchange Ku-band transponder
capacity, on Telstar 18 for Ku-band transponder capacity on Telstar 10/Apstar
IIR. The effectiveness of any revised arrangement agreed to between APT and
Loral will be subject to the approval of the Bankruptcy Court.
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, the Company could lease replacement capacity and function as a reseller
with respect to such capacity. In addition, Loral Orion did not renew its
in-orbit insurance policy due to the high cost of such insurance and the
relative age of the satellite. As of September 30, 2003, the net book value of
the satellite was $65 million. A loss of the satellite, would have a material
adverse effect on the Company.
Telstar 12, originally intended to operate at 12 degrees W.L., was launched
aboard an Ariane launch vehicle in October 1999 into the orbital slot located at
15 degrees W.L., and commenced operations in January 2000. Under an agreement
reached with Eutelsat, Loral Orion agreed to operate Telstar 12 at 15 degrees
W.L. while Eutelsat continues to develop its services at 12.5 degrees W.L.
Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to
assert its priority rights at such location on Loral Orion's behalf. As part of
this coordination effort, Loral Orion agreed to provide to Eutelsat four 54 MHz
transponders on Telstar 12 for the
10
life of the satellite and has retained risk of loss with respect to those
transponders. Eutelsat also has the right to acquire, at cost, four transponders
on the next replacement satellite for Telstar 12. As part of the international
coordination process, Loral Orion continues to conduct discussions with various
administrations regarding Telstar 12's operations at 15 degrees W.L. If these
discussions are not successful, Telstar 12's useable capacity may be reduced.
While the Company has in the past, consistent with industry practice and
the requirements of the Company's indenture, typically obtained in-orbit
insurance for its satellites, the Company cannot guarantee that, upon a policy's
expiration, the Company will be able to renew the insurance on acceptable terms,
especially on satellites that have, or that are part of a family of satellites
that have, experienced problems in the past. Two satellites owned by Loral Orion
have the same solar array configuration as two other 1300-class satellites
manufactured by SS/L that have experienced solar array failures. SS/L believes
that these failures are isolated events and do not reflect a systemic problem in
either the satellite design or manufacturing process. Accordingly, the Company
does not believe that these anomalies will affect these satellites. The
insurance coverage for Telstar 10/Apstar IIR, however, provides for coverage of
losses due to solar array failures only in the event of a capacity loss of 80%
or more. The Company believes that the insurers will require either exclusions
of, or limitations on, coverage due to solar array failures in connection with
the renewal of insurance for the Company's other satellite in 2004. An uninsured
loss of a satellite would have a material adverse effect on the Company's
consolidated financial position and results of operations.
The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, that arise in the ordinary course of business.
Although the outcome of these claims cannot be predicted with certainty, the
Company does not believe that any of these other existing legal matters will
have a material adverse effect on its consolidated financial position or results
of operations. These claims against the Company are subject to the automatic
stay as a result of the commencement of the Chapter 11 Cases.
10. NEW ACCOUNTING PRONOUNCEMENTS
SFAS 143
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and the normal operation of a long-lived
asset, except for certain obligations of lessees. The Company has determined
that there was no effect on its consolidated financial position or results of
operations upon the adoption of SFAS 143 on January 1, 2003.
FIN 45
In November 2002, the FASB issued FIN 45 which elaborates on the
disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation were applicable on a prospective basis to guarantees issued or
modified after December 31, 2002; while the provisions of the disclosure
requirements were effective for financial statements of interim or annual
reports ending after December 15, 2002. The Company adopted the disclosure
provisions of FIN 45 during the fourth quarter of 2002. The Company adopted the
recognition provisions of FIN 45 on January 1, 2003 and determined that there
was no effect on its consolidated financial position or results of operations.
FIN 46
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51 ("FIN 46"). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 will be applied by the Company as
of December 31, 2003. The Company is currently evaluating the provisions of FIN
46.
11
SFAS 149
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS 149 is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003, except for certain
provisions that relate to SFAS 133 Implementation Issues that have been
effective for fiscal quarters prior to June 15, 2003. Management determined that
the adoption of SFAS 149 did not have an impact on its consolidated financial
position or results of operations.
SFAS 150
In May 2003, the FASB issued SFAS 150 which establishes standards for how
an issuer classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within the
scope as a liability (or an asset in some circumstances) because that financial
instrument embodies an obligation of the issuer. Management has determined that
there was no effect on its consolidated financial position or results of
operations upon the adoption of SFAS 150 on July 1, 2003.
EITF 00-21
In November 2002, the Emerging Issues Task Force of the FASB ("EITF")
reached a consensus on Issue No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables ("EITF 00-21"). EITF 00-21 addresses determination of
whether an arrangement involving more than one deliverable contains more than
one unit of accounting and how the related revenues should be measured and
allocated to the separate units of accounting. EITF 00-21 applies to revenue
arrangements entered into after June 30, 2003; however, upon adoption, the EITF
allows the guidance to be applied on a retroactive basis, with the change, if
any, reported as a cumulative effect of accounting change in the statement of
operations. Management determined that the adoption of EITF 00-21 did not have
an effect on the Company's consolidated financial position or results of
operations.
11. FINANCIAL INFORMATION FOR PARENT, ISSUER'S PARENT, GUARANTOR SUBSIDIARIES
AND OTHER SUBSIDIARIES
Loral Orion's (the "Parent Company") 10% Senior Notes due 2006 are fully
and unconditionally guaranteed, on a joint and several basis, by several of its
wholly-owned subsidiaries (the "Guarantor Subsidiaries") and Loral ("Issuer's
Parent"). The Company's remaining original senior notes and senior discount
notes are fully and unconditionally guaranteed, on a joint and several basis, by
the Guarantor Subsidiaries and substantially all of the other wholly-owned
subsidiaries (the "Other Subsidiaries"). The Parent Company, Issuer's Parent,
the Guarantor Subsidiaries and certain other non-guarantor subsidiaries of Loral
Orion filed voluntary petitions for reorganization under Chapter 11 of the
Bankruptcy Code on July 15, 2003.
Presented below is condensed consolidating financial information for the
Parent Company, Issuer's Parent, the Guarantor Subsidiaries and the Other
Subsidiaries as of September 30, 2003 and December 31, 2002 and for the three
and nine months ended September 30, 2003 and 2002. The condensed consolidating
financial information has been presented to show the nature of assets held,
results of operations and cash flows of the Parent Company, Issuer's Parent,
Guarantor Subsidiaries and Other Subsidiaries. The supplemental condensed
consolidating financial information reflects the investments of the Parent
Company in the Guarantor Subsidiaries and the Other Subsidiaries using the
equity method of accounting. The Company's significant transactions with its
subsidiaries, other than the investment account and related equity in net loss
of unconsolidated subsidiaries, are intercompany payables and receivables
between its subsidiaries.
12
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2003
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ---------- ------------ ------------ ------------
Current assets:
Cash and cash equivalents ................. $ 52,798 $ 4,545 $ -- $ -- $ (4,545) $ 52,798
Accounts receivable, net .................. 7,418 -- 518 -- -- 7,936
Prepaid expenses and other current assets . 4,505 4,301 1,532 -- (5,266) 5,072
----------- ----------- ---------- ------------ ------------ ------------
Total current assets ................... 64,721 8,846 2,050 -- (9,811) 65,806
Property, plant and equipment, net .......... 285,556 -- 188,941 -- -- 474,497
Due (to) from unconsolidated subsidiaries ... (10,909) (849) 18,105 -- (10,153) (3,806)
Investments in unconsolidated subsidiaries .. 309,853 (199,628) (271,698) -- 161,473 --
Investments in and advances to affiliates ... -- (30,120) -- -- 30,120 --
Other assets, net ........................... 11,274 4,253 591 -- (4,253) 11,865
----------- ----------- ---------- ------------ ------------ ------------
Total assets ........................... $ 660,495 $ (217,498) $ (62,011) $ -- $ 167,376 $ 548,362
=========== =========== ========== ============ ============ ============
Liabilities not subject to compromise:
Current liabilities:
Accounts payable .......................... $ 249 $ -- $ 212 $ -- $ -- $ 461
Customer advances ......................... 1,443 -- 5 -- -- 1,448
Accrued interest, preferred dividends and
other current liabilities ................ -- 1,792 -- -- (1,792) --
----------- ----------- ---------- ------------ ------------ ------------
Total current liabilities .............. 1,692 1,792 217 -- (1,792) 1,909
Long-term liabilities ...................... 4,089 52,233 13,812 -- (66,045) 4,089
----------- ----------- ---------- ------------ ------------ ------------
Total liabilities not subject to
compromise............................. 5,781 54,025 14,029 -- (67,837) 5,998
Liabilities subject to compromise ........... 1,128,725 434,306 (116,663) -- (434,306) 1,012,062
Stockholder's (deficit) equity:
Common stock .............................. -- 4,413 -- -- (4,413) --
Paid-in capital ........................... 604,166 3,392,867 -- -- (3,392,867) 604,166
Treasury stock, at cost ................... -- (3,360) -- -- 3,360 --
Unearned compensation ..................... -- (188) -- -- 188 --
Due from Loral companies .................. (57,747) -- -- -- -- (57,747)
Retained deficit .......................... (1,020,430) (4,060,669) 40,623 -- 4,024,359 (1,016,117)
Accumulated other comprehensive income .... -- (38,892) -- -- 38,892 --
----------- ----------- ---------- ------------ ------------ ------------
Total stockholder's (deficit) equity ... (474,011) (705,829) 40,623 -- 669,519 (469,698)
----------- ----------- ---------- ------------ ------------ ------------
Total liabilities and stockholder's
(deficit) equity....................... $ 660,495 $ (217,498) $ (62,011) $ -- $ 167,376 $ 548,362
=========== =========== ========== ============ ============ ============
13
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------ ------------
Revenues from satellite services .... $ 22,631 $ -- $ 9,906 $ -- $ (8,139) $ 24,398
Cost of satellite services .......... 23,721 -- 8,005 -- (8,139) 23,587
Selling, general and
administrative expenses ........... 2,587 3,169 972 -- (3,169) 3,559
Management fee expense .............. -- (109) -- -- 109 --
--------- --------- ---------- ----- ------------ ------------
Operating (loss) income before
reorganization expenses due to
bankruptcy ........................ (3,677) (3,060) 929 -- 3,060 (2,748)
Reorganization expenses due to
bankruptcy ........................ (1,575) (814) -- -- 814 (1,575)
--------- --------- ---------- ----- ------------ ------------
Operating (loss) income ............. (5,252) (3,874) 929 -- 3,874 (4,323)
Interest expense .................... (657) (2,005) -- -- 2,005 (657)
Interest and investment income ...... 14 873 -- -- (873) 14
--------- --------- ---------- ----- ------------ ------------
(Loss) income before income taxes,
equity in net losses of
unconsolidated subsidiaries and
affiliates and cumulative effect
of change in accounting principle (5,895) (5,006) 929 -- 5,006 (4,966)
Income tax benefit (provision) ...... (788) (261) (327) -- 1,369 (7)
--------- --------- ---------- ----- ------------ ------------
(Loss) income before equity in net
losses of unconsolidated
subsidiaries and affiliates and
cumulative effect of change in
accounting principle .............. (6,683) (5,267) 602 -- 6,375 (4,973)
Equity in net (losses) income of
unconsolidated subsidiaries ....... 602 (82,542) -- -- 81,940 --
Equity in net (losses) income of
affiliates ........................ -- (38,100) -- -- 38,100 --
--------- --------- ---------- ----- ------------ ------------
(Loss) income before cumulative
effect of change in accounting
principle ......................... (6,081) (125,909) 602 -- 126,415 (4,973)
Cumulative effect of change in
accounting principle .............. -- (1,970) -- -- 1,970 --
--------- --------- ---------- ----- ------------ ------------
Net (loss) income ................... $ (6,081) $(127,879) $ 602 $ -- $ 128,385 $ (4,973)
========= ========= ========== ===== ============ ============
14
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------ ------------
Revenues from satellite services .. $ 68,655 $ -- $ 30,575 $ -- $ (24,923) $ 74,307
Cost of satellite services ........ 71,917 -- 23,770 -- (24,923) 70,764
Selling, general and administrative
expenses ......................... 6,948 7,353 1,542 -- (7,353) 8,490
--------- --------- ---------- ----- --------- ---------
Operating (loss) income before
reorganization expenses due to
bankruptcy ...................... (10,210) (7,353) 5,263 -- 7,353 (4,947)
Reorganization expenses due to
bankruptcy ...................... (1,575) (814) -- -- 814 (1,575)
--------- --------- ---------- ----- --------- ---------
Operating (loss) income ........... (11,785) (8,167) 5,263 -- 8,167 (6,522)
Interest expense .................. (6,305) (21,674) -- -- 21,674 (6,305)
Interest and investment income .... 19 12,201 -- -- (12,201) 19
--------- --------- ---------- ----- --------- ---------
(Loss) income before income taxes,
equity in net losses of
unconsolidated subsidiaries and
affiliates and cumulative
effect of change in accounting
principle ....................... (18,071) (17,640) 5,263 -- 17,640 (12,808)
Income tax (provision) benefit .... (1,678) (3,656) (1,842) -- 7,049 (127)
--------- --------- ---------- ----- --------- ---------
(Loss) income before equity in net
losses of unconsolidated
subsidiaries and affiliates and
cumulative effect of change
in accounting principle ......... (19,749) (21,296) 3,421 -- 24,689 (12,935)
Equity in net (losses) income of
unconsolidated subsidiaries ..... 3,421 (197,683) -- -- 194,262 --
Equity in net (losses) income of
affiliates ...................... -- (50,893) -- -- 50,893 --
--------- --------- ---------- ----- --------- ---------
(Loss) income before cumulative
effect of change in accounting
principle ....................... (16,328) (269,872) 3,421 -- 269,844 (12,935)
Cumulative effect of change in
accounting principle ............ -- (1,970) -- -- 1,970 --
--------- --------- ---------- ----- --------- ---------
Net (loss) income ................. $ (16,328) $(271,842) $ 3,421 $ -- $ 271,814 $ (12,935)
========= ========= ========== ===== ========= =========
15
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------ ------------
Operating activities:
(Loss) income from continuing operations ................. $(16,328) $(271,842) $ 3,421 $ -- $ 271,814 $ (12,935)
Non-cash items:
Equity in net losses of affiliates ...................... -- 50,893 -- -- (50,893) --
Equity in net losses of unconsolidated subsidiaries ..... (3,421) 197,683 -- -- (194,262) --
Cumulative effect of change in accounting principle ..... -- 1,970 -- -- (1,970) --
Deferred taxes .......................................... -- 3,656 3,393 -- (7,049) --
Depreciation and amortization ........................... 40,710 -- 15,760 -- -- 56,470
Provisions for bad debt ................................. 1,423 -- 155 -- -- 1,578
Interest ................................................ 669 -- -- -- -- 669
Accounts receivable, net ................................ (1,364) -- (535) -- -- (1,899)
Prepaid expenses and other assets ....................... 4,867 (2,924) 7,158 -- 2,976 12,077
Due (to) from Loral companies, net ...................... 21,733 152 (29,053) -- (204) (7,372)
Accounts payable ........................................ (155) -- 20 -- -- (135)
Accrued expenses and other current liabilities .......... 384 1,492 -- -- (1,492) 384
Customer advances ....................................... (2,014) -- (319) -- -- (2,333)
Other long-term liabilities ............................. (1,284) -- -- -- -- (1,284)
Interest ................................................ -- 64 -- -- (64) --
-------- --------- ------- --------- --------- ---------
Net cash provided by (used in) operating activities ....... 45,220 (18,856) -- -- 18,856 45,220
-------- --------- ------- --------- --------- ---------
Investing activities:
Capital expenditures .................................... (4,751) -- -- -- -- (4,751)
Investments in and advances to unconsolidated
subsidiaries............................................ -- 734 -- -- (734) --
-------- -------- ------- --------- --------- ---------
Net cash (used in) provided by in investing activities .... 4,751) 734 -- -- (734) (4,751)
-------- -------- ------- --------- --------- ---------
Financing activities:
Interest payments on 10% senior notes ................... (30,635) -- -- -- -- (30,635)
Note receivable from unconsolidated affiliate ........... -- 17,284 -- -- (17,284) --
Proceeds from stock issuances ........................... -- 3,869 -- -- (3,869) --
-------- -------- ------- ---------- --------- ---------
Net cash (used in) provided by financing activities ....... (30,635) 21,153 -- -- (21,153) (30,635)
-------- -------- ------- ---------- --------- ---------
(Decrease) increase in cash and cash equivalents .......... 9,834 3,031 -- -- (3,031) 9,834
Cash and cash equivalents--beginning of period ............ 42,964 1,514 -- -- (1,514) 42,964
-------- --------- ------- ---------- --------- ---------
Cash and cash equivalents--end of period .................. $ 52,798 $ 4,545 $ -- $ -- $ (4,545) $ 52,798
======== ========= ========== ========== ========= =========
16
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2002
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------ ------------
Current assets:
Cash and cash equivalents ............ $ 42,964 $ 1,514 $ -- $ -- $ (1,514) $ 42,964
Accounts receivable, net ............. 7,477 -- 138 -- -- 7,615
Prepaid expenses and other
current assets ..................... 5,540 823 8,584 -- (1,734) 13,213
----------- ----------- ------------ ------ ------------ ----------
Total current assets ............. 55,981 2,337 8,722 -- (3,248) 63,792
Satellites and related equipment, net .. 319,998 -- 204,701 -- -- 524,699
Notes (payable to) receivable from
unconsolidated subsidiary ............ (31,540) 157,500 -- -- (157,500) (31,540)
Due (to) from unconsolidated
subsidiaries ......................... (97,652) 36,448 107,917 -- (40,859) 5,854
Investments in unconsolidated
subsidiaries ......................... 304,590 (20,185) (271,698) -- (12,707) --
Investments in and advances to
affiliates ........................... -- 21,507 -- -- (21,507) --
Other assets, net ...................... 16,622 3,191 696 -- (3,191) 17,318
----------- ----------- ------------ ------ ------------ ----------
Total assets ..................... $ 567,999 $ 200,798 $ 50,338 $ -- $ (239,012) $ 580,123
=========== =========== ============ ====== ============ ==========
Current liabilities:
Current portion of long-term debt .... $ 62,996 $ -- $ -- $ -- $ -- $ 62,996
Accounts payable ..................... 1,194 2,404 1,193 -- (2,404) 2,387
Customer advances .................... 3,176 -- 556 -- (1) 3,731
Accrued interest and preferred
dividends .......................... 6,431 20,840 -- -- (20,840) 6,431
Income taxes payable ................. -- 8,123 -- -- (8,123) --
----------- ----------- ------------ ------ ------------ ----------
Total current liabilities ........ 73,797 31,367 1,749 -- (31,368) 75,545
Long-term liabilities .................. 14,040 48,577 11,387 -- (58,942) 15,062
Long-term debt ......................... 888,532 350,000 -- -- (350,000) 888,532
6% Series C convertible redeemable
preferred stock ...................... -- 104,582 -- -- (104,582) --
6% Series D convertible redeemable
preferred stock ...................... -- 20,499 -- -- (20,499) --
Stockholder's (deficit) equity:
6% Series C convertible
redeemable preferred stock ......... -- 80,171 -- -- (80,171) --
6% Series D convertible
redeemable preferred stock ......... -- 15,125 -- -- (15,125) --
Common stock ......................... -- 4,293 -- -- (4,293) --
Paid-in capital ...................... 604,166 3,389,035 -- -- (3,389,035) 604,166
Treasury stock, at cost .............. -- (3,360) -- -- 3,360 --
Unearned compensation ................ -- (151) -- -- 151 --
Retained deficit ..................... (1,012,536) (3,782,107) 37,202 -- 3,754,259 (1,003,182)
Accumulated other comprehensive
income ............................. -- (57,233) -- -- 57,233 --
----------- ----------- ------------ ------ ------------ ----------
Total stockholder's (deficit)
equity ........................ (408,370) (354,227) 37,202 -- 326,379 (399,016)
----------- ----------- ------------ ------ ------------ ----------
Total liabilities and
stockholder's (deficit)
equity ......................... $ 567,999 $ 200,798 $ 50,338 $ -- $ (239,012) $ 580,123
=========== =========== ============ ====== ============ ==========
17
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
Revenues from satellite services $ 23,383 $ -- $ 12,052 $ -- $ (9,659) $ 25,776
Cost of satellite services ........ 25,208 -- 7,090 -- (9,659) 22,639
Selling, general and
administrative expenses ......... 2,743 1,203 61 -- (1,203) 2,804
Management fee expense ............ -- (4) -- -- 4 --
-------- -------- ------------ ---- ------------ ------------
Operating (loss) income ........... (4,568) (1,199) 4,901 -- 1,199 333
Interest expense .................. (3,062) (9,831) -- -- 9,831 (3,062)
Interest and investment income .... 208 5,341 -- -- (5,341) 208
-------- -------- ------------ ---- ------------ ------------
(Loss) income before income taxes
and equity in net loss of
unconsolidated subsidiaries and
affiliates ...................... (7,422) (5,689) 4,901 -- 5,689 (2,521)
Income tax (provision) benefit .... 3,848 (1,581) (1,714) -- 2,721 3,274
-------- -------- ------------ ---- ------------ ------------
(Loss) income before equity in
net loss of unconsolidated
subsidiaries and affiliates ..... (3,574) (7,270) 3,187 -- 8,410 753
Equity in net income (loss) of
unconsolidated subsidiaries,
net of taxes .................... 3,187 (20,951) -- -- 17,764 --
Equity in net loss of affiliates,
net of taxes .................... -- (20,491) -- -- 20,491 --
-------- -------- ------------ ---- ------------ ------------
Net (loss) income ................. $ (387) $(48,712) $ 3,187 $ -- $ 46,665 $ 753
======== ======== ============ ==== ============ ============
18
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------ ------------ ------------ ------------ ------------
Revenues from satellite services........ $ 75,190 $ -- $ 36,225 $ -- $ (28,439) $ 82,976
Cost of satellite services.............. 75,087 -- 21,286 -- (28,439) 67,934
Selling, general and administrative
expenses.............................. 8,372 3,660 775 -- (3,660) 9,147
Management fee expense.................. -- 23 -- -- (23) --
--------- ---------- ----------- ----------- --------- ----------
Operating (loss) income................. (8,269) (3,683) 14,164 -- 3,683 5,895
Interest expense........................ (9,812) (29,483) -- -- 29,483 (9,812)
Interest and investment income.......... 509 15,958 -- -- (15,958) 509
--------- ---------- ----------- ----------- --------- ----------
(Loss) income before income taxes,
equity in net loss of unconsolidated
subsidiaries and affiliates and
cumulative effect of change in
accounting principle...... ........... (17,572) (17,208) 14,164 -- 17,208 (3,408)
Income tax benefit (provision).......... 6,197 (4,735) (4,942) -- 8,123 4,643
--------- ---------- ------------ ------------- --------- ----------
(Loss) income before equity in net loss
of unconsolidated subsidiaries and
affiliates and cumulative effect of
change in accounting principle........ (11,375) (21,943) 9,222 -- 25,331 1,235
Equity in net income (loss) of
unconsolidated subsidiaries, net of
taxes................................. 9,222 (888,951) -- -- 879,729 --
Equity in net loss of affiliates, net
of taxes.............................. -- (56,747) -- -- 56,747 --
--------- ---------- ----------- ----------- --------- ----------
(Loss) income before cumulative effect
of change in accounting principle..... (2,153) (967,641) 9,222 -- 961,807 1,235
Cumulative effect of change in
accounting principle.................. (562,201) -- -- -- -- (562,201)
--------- ---------- ----------- ----------- --------- ----------
Net (loss) income....................... $(564,354) $ (967,641) $ 9,222 $ -- $ 961,807 $ (560,966)
========= ========== =========== =========== ========= ==========
19
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------ ------------ ------------ ------------ ------------
Operating activities:
Net (loss) income .............................. $(564,354) $(967,641) $ 9,222 $ -- $ 961,807 $(560,966)
Non-cash items:
Cumulative effect of change in accounting
Principle ................................. 562,201 -- -- -- -- 562,201
Equity in net loss of affiliates, net of taxes -- 56,747 -- -- (56,747) --
Equity in net loss of unconsolidated
subsidiaries, net of taxes ................. (9,222) 888,951 -- -- (879,729) --
Deferred taxes ............................... -- 4,735 3,388 -- (4,735) 3,388
Depreciation and amortization ................ 40,709 -- 15,760 -- 56,469
Non-cash interest income ..................... 909 -- -- -- -- 909
Provisions for bad debts ..................... 1,069 -- 24 -- -- 1,093
Changes in operating assets and liabilities:
Accounts receivable, net ..................... 1,764 -- (162) -- -- 1,602
Prepaid expenses and other current assets .... 209 -- 2,893 -- -- 3,102
Due (to) from Loral companies, net ........... 37,384 -- (31,272) -- (3,388) 2,724
Due (to) from unconsolidated subsidiaries .... -- (12,899) -- -- 12,899 --
Other assets ................................. 2,780 (446) 122 -- 446 2,902
Accounts payable ............................. (2,363) 171 250 -- (171) (2,113)
Accrued expenses and other current
liabilities ................................ 42 (10,210) -- -- 10,210 42
Customer advances ............................ (3,660) -- (225) -- -- (3,885)
Other long-term liabilities .................. (1,325) -- -- -- -- (1,325)
Other ........................................ -- 97 -- -- (97) --
--------- --------- --------- ------- --------- ---------
Net cash provided by (used in) operating
activities ...................................... 66,143 (40,495) -- -- 40,495 66,143
--------- --------- --------- ------- --------- ---------
Investing activities:
Capital expenditures ........................... (14,628) -- -- -- -- (14,628)
Investments in and advances to affiliates ...... -- (12,092) -- -- 12,092 --
Investments in and advances to
unconsolidated subsidiaries .................. -- (2,240) -- -- 2,240 --
--------- --------- --------- ------- --------- ---------
Net cash used in investing activities ............. (14,628) (14,332) -- -- 14,332 (14,628)
--------- --------- --------- ------- --------- ---------
Financing activities:
Interest payment on 10% notes .................. (45,952) -- -- -- -- (45,952)
Note payable to Loral Satellite ................ -- 29,500 -- -- (29,500) --
Preferred dividends ............................ -- (29,485) -- -- 29,485 --
Proceeds from stock issuances .................. -- 9,967 -- -- (9,967) --
--------- --------- --------- ------- --------- ---------
Net cash used in financing activities ............. (45,952) 9,982 -- -- (9,982) (45,952)
--------- --------- --------- ------- --------- ---------
Increase (decrease) in cash and cash
equivalents ..................................... 5,563 (44,845) -- -- 44,845 5,563
Cash and cash equivalents -- beginning of
period ......................................... 19,399 46,068 -- -- (46,068) 19,399
--------- --------- --------- ------- --------- ---------
Cash and cash equivalents -- end of period ........ $ 24,962 $ 1,223 $ -- $ -- $ (1,223) $ 24,962
========= ========= ========= ======= ========= =========
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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. These include the Company
developing a plan of reorganization, confirmation of the plan by the Bankruptcy
Court, customer retention and the Company's ability to continue to provide high
quality services. For a detailed discussion of additional factors and
conditions, please also refer to the section of the Company's latest Annual
Report on Form 10-K titled "Certain Factors that May Affect Future Results"
beginning on page 4 and to the other periodic reports filed with the SEC by
Loral Orion. In addition, we caution you that the Company operates in an
industry sector where securities values may be volatile and may be influenced by
economic and other factors beyond the Company's control. The Company undertakes
no obligation to update any forward-looking statements.
GENERAL
The principal business of Loral Orion is leasing transponder capacity on
its satellites to its customers for various applications, including
broadcasting, news gathering, Internet access and transmission, private voice
and data networks, business television, distance learning and direct-to-home
television ("DTH"). Loral Skynet, a division of Loral SpaceCom Corporation
("Loral SpaceCom" or "LSC"), which is a subsidiary of Loral Space &
Communications Corporation, which is in turn a subsidiary of Loral Space and
Communications Ltd. ("Loral"), manages the Company's business. The Company
operates in one segment, Fixed Satellite Services ("FSS").
BANKRUPTCY FILINGS
On July 15, 2003, Loral, Loral Orion and certain of its subsidiaries,
including Loral Asia Pacific Satellite (HK) Limited ("Loral Asia Pacific"), (the
"Debtor Subsidiaries"), filed voluntary petitions for reorganization under
Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the
United States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court") (Lead Case No. 03-41716 (RDD), Case Nos. 03-41717 (RDD)
through 03-41723 (RDD)) (the "Chapter 11 Cases"). Loral Orion and its Debtor
Subsidiaries continue to manage their properties and operate their businesses as
"debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the provisions of the Bankruptcy Code.
As a result of Loral Orion's and the Debtor Subsidiaries' voluntary
petitions for reorganization, Loral Orion's prepetition debt obligations
(aggregating $827 million), including its 10% senior notes obligations, have
been accelerated and are immediately due and Loral Orion's other prepetition
debt obligations of $93 million are subject to acceleration (see Note 5 to the
condensed consolidated financial statements). On July 15, 2003, Loral Orion
failed to make interest payments of $30.6 million on its 10% Senior Notes due
2006, $2.1 million on its 11.25% Senior Notes due 2007 and $3.1 million on its
12.50% Senior Notes due 2007. A creditors' committee has been appointed in the
Chapter 11 Cases to represent all unsecured creditors, including all holders of
Loral Orion's senior unsecured notes, and, in accordance with the provisions of
the Bankruptcy Code, will have the right to be heard on all matters that come
before the Bankruptcy Court.
As provided by the Bankruptcy Code, Loral Orion and its Debtor Subsidiaries
have the exclusive right to submit their plan or plans of reorganization for 120
days from the date of the filing of the voluntary petitions. On November 12,
2003, the Bankruptcy Court extended this exclusive period to March 12, 2004.
Further extension may be sought and may be granted or rejected by the Bankruptcy
Court. If Loral Orion and its Debtor Subsidiaries fail to file their plan or
plans of reorganization during such period, or if such plan or plans is not
accepted by the required number of creditors and equity holders within the
required period, any party in interest may subsequently file its own plan or
plans of reorganization for Loral Orion and its Debtor Subsidiaries. A plan of
reorganization must be
21
confirmed by the Bankruptcy Court, upon certain findings being made by the
Bankruptcy Court which are required by the Bankruptcy Code. The Bankruptcy Court
may confirm a plan or plans of reorganization notwithstanding an objection to
the plan by an impaired class of creditors or equity holders if certain
requirements of the Bankruptcy Code are met. Although Loral Orion and its Debtor
Subsidiaries expect to file a reorganization plan or plans that provide for
emergence from bankruptcy sometime during 2004, there can be no assurance that a
reorganization plan or plans will be proposed by Loral Orion and its Debtor
Subsidiaries or confirmed by the Bankruptcy Court or that any such plan will be
consummated.
During the pendency of the Chapter 11 Cases, Loral Orion's business will be
subject to risks and uncertainties relating to the Chapter 11 Cases. For
example, the Chapter 11 Cases could adversely affect relationships with Loral
Orion's customers and suppliers, which could adversely affect the going concern
value of the business and of its assets, particularly if the Chapter 11 Cases
are protracted. Also, transactions outside the ordinary course of business will
be subject to the prior approval of the Bankruptcy Court which may limit Loral
Orion's ability to respond to certain market events or take advantage of certain
market opportunities, and, as a result, Loral Orion's operations could be
materially adversely affected.
As a result of the commencement of the Chapter 11 Cases, the pursuit of all
pending claims and litigation against Loral Orion and its Debtor Subsidiaries
arising prior to or relating to events which occurred prior to the commencement
of the Chapter 11 Cases is generally subject to an automatic stay under Section
362 of the Bankruptcy Code, and, absent further order of the Bankruptcy Court,
no party may take any action to recover any prepetition claims, enforce any lien
against or obtain possession of any property from Loral Orion or its Debtor
Subsidiaries. In addition, pursuant to Section 365 of the Bankruptcy Code, Loral
Orion and its Debtor Subsidiaries may reject or assume prepetition executory
contracts and unexpired leases, and parties affected by rejections of these
contracts or leases may file claims with the Bankruptcy Court which will be
addressed in the context of the Chapter 11 Cases.
As part of its Chapter 11 Cases, Loral and its Debtor Subsidiaries
routinely file pleadings, documents and reports with the Bankruptcy Court, which
may contain updated, additional or more detailed information about the Company,
its assets and liabilities or financial performance. Copies of the filings for
Loral's Chapter 11 Cases are available, for a fee, during regular business hours
at the office of the Clerk of the Bankruptcy Court or from the Bankruptcy
Court's website located at http://www.nysb.uscourts.gov.
The condensed consolidated financial statements have been prepared assuming
the Company in its current structure will continue as a going concern. The
factors mentioned above, however, among other things, raise substantial doubt
about Loral Orion's ability to continue as a going concern. The condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. The ability of the Company to
continue as a going concern is dependent on a number of factors including, but
not limited to, the Company's development of a plan of reorganization,
confirmation of the plan by the Bankruptcy Court, customer retention and the
Company's ability to continue to provide high quality services. If a plan of
reorganization is not confirmed and implemented, the Company may be forced to
liquidate under applicable provisions of the Bankruptcy Code. There can be no
assurance of the level of recovery that the Company's creditors would receive in
such liquidation. The condensed consolidated financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities if the
Company is forced to liquidate.
CRITICAL ACCOUNTING MATTERS
See the Company's latest Annual Report on Form 10-K filed with the SEC and
Accounting Pronouncements below.
RESULTS OF OPERATIONS
In evaluating financial performance, management uses revenues and operating
income (loss) before depreciation and amortization and reorganization expenses
due to bankruptcy ("Adjusted EBITDA" see note 1 to table below) as a measure of
its businesses' profit or loss. The following discusses the results of Loral
Orion for the three and nine months ended September 30, 2003 and 2002.
REVENUE AND ADJUSTED EBITDA(1) (IN MILLIONS):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues......................................... $ 24.4 $ 25.8 $ 74.3 $ 83.0
======== ======== ======== ========
Adjusted EBITDA.................................. $ 16.1 $ 19.2 $ 51.6 $ 62.4
22
Depreciation and amortization.................... (18.8) (18.9) (56.5) (56.5)
Reorganization expenses due to bankruptcy........ (1.6) -- (1.6) --
-------- -------- -------- --------
Operating (loss) income.......................... (4.3) 0.3 (6.5) 5.9
Interest expense................................. (0.7) (3.0) (6.3) (9.8)
Interest income.................................. -- 0.2 -- 0.5
Income tax benefit (provision)................... -- 3.3 (0.1) 4.6
Cumulative effect of change in
accounting principle.......................... -- -- -- (562.2)
-------- -------- -------- --------
Net (loss) income................................ $ (5.0) $ 0.8 $ (12.9) $ (561.0)
======== ======== ======== ========
(1) The common definition of EBITDA is "Earnings Before Interest, Taxes,
Depreciation and Amortization." The Company defines "Adjusted EBITDA" as
EBITDA before amortization of stock compensation; reorganization expenses
due to bankruptcy; gain on investment; equity in net losses of affiliates,
net of tax; minority interest, net of tax; cumulative effect of change in
accounting principle, net of tax, and extraordinary gain on acquisition of
minority interest, net of tax. Adjusted EBITDA should be used in
conjunction with GAAP financial measures and is not presented as an
alternative to cash flow from operations as a measure of the Company's
liquidity or as an alternative to net income as an indicator of the
Company's operating performance.
The Company believes the use of Adjusted EBITDA along with GAAP financial
measures enhances the understanding of the Company's operating results and
is useful to investors in comparing performance with competitors,
estimating enterprise value and making investment decisions. Adjusted
EBITDA allows investors to compare operating results of competitors
exclusive of depreciation and amortization, a useful tool given the
significant variation that can result from the timing of capital
expenditures, the amount of intangible assets and the differences in
assets' lives. Adjusted EBITDA as used here may not be comparable to
similarly titled measures reported by other companies. The Company also
uses Adjusted EBITDA to evaluate operating performance, to allocate
resources and capital, and to evaluate future growth opportunities. See the
above table for reconciliations of Adjusted EBITDA to net loss.
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH SEPTEMBER 30, 2002
Revenues were $24.4 million and $25.8 million in 2003 and 2002,
respectively. Revenues decreased due to reduced prices of $3 million resulting
form the global economic downturn, which has caused a delay in demand for new
telecommunications applications and services, offset by increased volume of $2
million.
Cost of satellite services were $23.6 million and $22.6 million in 2003 and
2002, respectively. This increase was primarily due to higher insurance costs
resulting from a higher premium on renewal (including changes in coverage
requirements) for one of the Company's satellites.
Selling, general and administrative expenses were $3.6 million and $2.8
million in 2003 and 2002, respectively. This increase was primarily due to an
increase in bad debt expense.
Reorganization expenses due to bankruptcy in 2003 were $1.6 million for the
period from July 15, 2003 (date of filing) to September 30, 2003, which includes
professional fees of $1.7 million, offset by interest and investment income
earned of $0.1 million (which represents the interest earned subsequent to
filing bankruptcy).
As a result of the above, the Company had an operating loss of $4.3 million
in 2003 as compared to operating income of $0.3 million in 2002.
Interest expense was $0.7 million, net of capitalized interest of $0.1
million in 2003, as compared to $3.1 million in 2002. The decrease was primarily
as a result of the Company's voluntary petitions for reorganization as the
Company does not pay interest on its debt obligations subsequent to July 15,
2003.
23
The Company is included in the consolidated U.S. federal income tax return
of Loral Space & Communications Corporation. Pursuant to a tax sharing agreement
for 2003 with Loral Space & Communications Corporation, the Company is entitled
to reimbursement for the use of its current period tax losses to the extent such
losses are utilized by the consolidated group in the current period; otherwise
the Company is required to pay its separate Company income tax liability to
Loral Space & Communications Corporation. At December 31, 2002, Loral Orion
recorded a 100% valuation allowance against its net deferred tax assets under
the criteria of SFAS No. 109, Accounting for Income Taxes. During 2003, the
Company continued to maintain the 100% valuation allowance and recorded no
benefit under the tax sharing agreement for its loss. In 2002, the Company
recorded a nominal tax provision for foreign income taxes on a pre-tax loss of
$5.0 million. In 2002, the Company recorded a tax benefit of $3.3 million under
the tax sharing agreement on a pre-tax loss of $2.5 million.
As a result of the above, net (loss) income was $(5.0) million and $0.8
million for the three months ended September 30, 2003 and 2002, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH SEPTEMBER 30, 2002
Revenues were $74.3 million and $83.0 million in 2003 and 2002,
respectively. Revenues decreased due to reduced prices of $12 million resulting
from the global economic downturn, which has caused a delay in demand for new
telecommunications applications and services, offset by increased volume of $4
million.
Cost of satellite services were $70.8 million and $67.9 million in 2003 and
2002, respectively. This increase was primarily due to higher insurance costs
resulting from a higher premium on renewal (including changes in coverage
requirements) for one of the Company's satellites.
Selling, general and administrative expenses were $8.5 million and $9.1
million in 2003 and 2002, respectively. This decrease was primarily due to
lower incurred and allocated marketing expenses from Loral Skynet.
Reorganization expenses due to bankruptcy in 2003 were $1.6 million for the
period from July 15, 2003 (date of filing) to September 30, 2003, which includes
professional fees of $1.7 million, offset by interest and investment income
earned of $0.1 million (which represents the interest earned subsequent to
filing bankruptcy).
As a result of the above, the Company had an operating loss of $6.5 million
in 2003, as compared to operating income of $5.9 million in 2002.
Interest expense was $6.3 million, net of capitalized interest of $0.9
million in 2003 as compared to $9.8 million in 2002. The decrease was primarily
as a result of the Company's voluntary petitions for reorganization as the
Company does not pay interest on its debt obligations subsequent to July 15,
2003.
The Company is included in the consolidated U.S. federal income tax return
of Loral Space & Communications Corporation. Pursuant to a tax sharing agreement
for 2003 with Loral Space & Communications Corporation, the Company is entitled
to reimbursement for the use of its current period tax losses to the extent such
losses are utilized by the consolidated group in the current period; otherwise
the Company is required to pay its separate Company income tax liability to
Loral Space & Communications Corporation. At December 31, 2002, Loral Orion
recorded a 100% valuation allowance against its net deferred tax assets under
the criteria of SFAS No. 109, Accounting for Income Taxes. During 2003, the
Company continued to maintain the 100% valuation allowance and recorded no
benefit under the tax sharing agreement for its loss. In 2003, the Company
recorded a tax provision of $(0.1) million for foreign income tax on a pre-tax
loss of $12.8 million. In 2002, the Company recorded a tax benefit of $4.6
million under the tax sharing agreement on a pre-tax loss of $3.4 million.
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, which resulted in the Company recording a charge for the
cumulative effect of change in accounting principle of $562 million (see
Accounting Pronouncements).
As a result of the above, net loss was $(12.9) million and $(561.0) million
for the nine months ended September 30, 2003 and 2002, respectively.
24
Backlog
The Company had contracted backlog of approximately $352 million and $453
million at September 30, 2003 and December 31, 2002, which includes $38 million
and $42 million, respectively, to Loral companies.
LIQUIDITY AND CAPITAL RESOURCES
Loral Orion's principal challenge has been to overcome a confluence of
events that have severely affected the satellite industry in recent years. These
include a downturn in the global economy in general, the inability of Loral
Orion's customers to access the capital markets which led to the declining
utilization of services by existing customers and a lack of new customers, in
particular telecommunications and Internet access providers entering the market,
and reduced demand resulting in an overabundance of transponder capacity for
satellite services. As a result of these and other factors, on July 15, 2003,
Loral, Loral Orion and certain of its subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court.
As a result of Loral Orion's and the Debtor Subsidiaries' voluntary
petitions for reorganization, Loral Orion's prepetition debt obligations
(aggregating $827 million), including its 10% senior notes obligations, have
been accelerated and are immediately due and Loral Orion's other prepetition
debt obligations of $93 million are subject to acceleration (see Note 5 to the
condensed consolidated financial statements). On July 15, 2003, Loral Orion
failed to make interest payments of $30.6 million on its 10% Senior Notes due
2006, $2.1 million on its 11.25% Senior Notes due 2007 and $3.1 million on its
12.50% Senior Notes due 2007. A creditors' committee has been appointed in the
Chapter 11 Cases to represent all unsecured creditors, including all holders of
Loral Orion's senior unsecured notes, and, in accordance with the provisions of
the Bankruptcy Code, will have the right to be heard on all matters that come
before the Bankruptcy Court.
During the pendency of the Chapter 11 Cases, Loral Orion's business will be
subject to risks and uncertainties relating to the Chapter 11 Cases. For
example, the Chapter 11 Cases could adversely affect relationships with Loral
Orion's customers and suppliers, which could adversely affect the going concern
value of the business and of its assets, particularly if the Chapter 11 Cases
are protracted. Also, transactions outside the ordinary course of business will
be subject to the prior approval of the Bankruptcy Court which may limit Loral
Orion's ability to respond to certain market events or take advantage of certain
market opportunities, and, as a result, Loral Orion's operations could be
materially adversely affected.
As a result of the commencement of the Chapter 11 Cases, the pursuit of all
pending claims and litigation against Loral Orion and its Debtor Subsidiaries
arising prior to or relating to events which occurred prior to the commencement
of the Chapter 11 Cases is generally subject to an automatic stay under Section
362 of the Bankruptcy Code, and, absent further order of the Bankruptcy Court,
no party may take any action to recover any prepetition claims, enforce any lien
against or obtain possession of any property from Loral Orion or its Debtor
Subsidiaries. In addition, pursuant to Section 365 of the Bankruptcy Code, Loral
Orion and its Debtor Subsidiaries may reject or assume prepetition executory
contracts and unexpired leases, and parties affected by rejections of these
contracts or leases may file claims with the Bankruptcy Court which will be
addressed in the context of the Chapter 11 Cases.
Liabilities Subject to Compromise
As discussed above, the Company has been operating as a
debtor-in-possession under the jurisdiction of the Bankruptcy Court and in
accordance with the provisions of the Bankruptcy Code.
In the condensed consolidated balance sheet, the caption "liabilities
subject to compromise" reflects Loral Orion's current estimate
25
of the amount of prepetition claims that will be restructured in Loral Orion's
and its Debtor Subsidiaries' Chapter 11 Cases. Pursuant to court order, Loral
Orion has been authorized to pay certain prepetition operating liabilities
incurred in the ordinary course of business (e.g. insurance). Since July 15,
2003, as permitted under the Bankruptcy Code, the Company has rejected certain
of its prepetition obligations. Loral Orion is in the process of calculating its
estimated liability to the unsecured creditors affected by these contract
rejections. Loral Orion will notify all known claimants subject to the bar date
of their need to file a proof of claim with the Bankruptcy Court. A bar date is
the date by which claims against Loral Orion and its Debtor Subsidiaries must be
filed if the claimants wish to receive any distribution in the Chapter 11 Cases.
No bar date has yet been set by the Bankruptcy Court. Differences between
liability amounts estimated by the Company and claims filed by creditors will be
investigated and the Bankruptcy Court will make a final determination of the
allowable claim. The determination of how liabilities will ultimately be settled
and treated cannot be made until the Bankruptcy Court approves a Chapter 11 plan
of reorganization. Loral Orion and its Debtor Subsidiaries will continue to
evaluate the amount and classification of their prepetition liabilities in
general through the remainder of their Chapter 11 Cases. Should Loral or its
Debtor Subsidiaries, through this ongoing evaluation, identify additional
liabilities subject to compromise, such amounts will be recognized accordingly.
As a result, "liabilities subject to compromise" are subject to change. Claims
classified as "liabilities subject to compromise" represent secured as well as
unsecured claims. Liabilities subject to compromise at September 30, 2003
consisted of the following (in thousands):
Debt obligations............................................................ $ 919,977
Accounts payable............................................................ 1,791
Customer advances........................................................... 4,626
Accrued interest and other current liabilities.............................. 6,815
Other long term liabilities ................................................ 5,013
Due to Loral companies...................................................... 40,714
Note payable to Loral SpaceCom.............................................. 33,126
-----------
Total liabilities subject to compromise................................. $ 1,012,062
===========
Contractual Obligations
Contractual obligations as previously disclosed in the Company's Latest
Annual Report on Form 10-K have not materially changed. However, as a result of
the Company's Chapter 11 filing, debt obligations of approximately $920 million
have been accelerated or are subject to acceleration.
Net Cash Provided by Operating Activities
Net cash provided by operating activities for the nine months ended
September 30, 2003 was $45 million. This was primarily due to net income as
adjusted for non-cash items of $46 million (primarily depreciation and
amortization).
Net cash provided by operating activities for the nine months ended
September 30, 2002 was $66 million, primarily due to net income as adjusted for
non-cash items of $63 million (primarily depreciation and amortization).
Net Cash Used in Investing Activities
Net cash used in investing activities was $5 million and $15 million for
the nine months ended September 30, 2003 and 2002, respectively, primarily for
capital expenditures for the construction of satellites and related equipment.
Net Cash Used in Financing Activities
Net cash used in financing activities was $31 million and $46 million for
the nine months ended September 30, 2003 and September 30, 2002, respectively,
resulting from interest payments on the 10% senior notes.
COMMITMENTS AND CONTINGENCIES
On September 20, 2002, and as further amended in March 2003, Loral and
Loral Orion agreed with APT Satellite Company Limited ("APT") to jointly
acquire the Apstar V satellite, a satellite then under construction by SS/L for
APT pursuant to which Loral Orion and APT agreed to share, on a 50/50 basis,
the project cost of constructing, launching and insuring the satellite. Under
this
26
agreement, Loral Orion would initially acquire 23% of the satellite in return
for paying 25% of the project cost, and would pay to APT over time an additional
25% of the project cost to acquire an additional 23% interest in the satellite.
Of the 12.5 transponders initially acquired by Loral Orion, Loral SpaceCom has
agreed to purchase from Loral Orion 4.75 of such transponders, together with a
lease of an additional transponder for an approximate two-year period from the
satellite's in-service date, at a price equal to 12.5% of the project cost of
the satellite.
In August 2003, in order to expedite the receipt of necessary export
licenses from the U.S. government, Loral Orion and APT amended their various
agreements to convert their arrangement from a joint ownership arrangement to a
lease arrangement, but leaving unchanged the cost allocation between the parties
relating to the project cost of the satellite and the arrangement between Loral
Orion and Loral SpaceCom described above. Under this arrangement approved by the
Bankruptcy Court in October 2003, Loral Orion will retain title to the entire
satellite, now known as Telstar 18, and will lease to APT transponders
representing initially 77% of the transponder capacity on the satellite. The
number of transponders leased to APT would be reduced over time upon repayment
by Loral Orion of the second 25% of the satellite's project cost. Upon payment
in full by Loral Orion of 50% of the project cost of the satellite, the lease to
APT would be reduced from 77% to 54% of the satellite's transponder capacity. At
September 30, 2003 the project cost of the satellite was estimated at $230
million. The second 25% of the project cost of the satellite to be repaid by
Loral Orion to APT as termination fees, are estimated as follows: $7 million to
terminate APT's leasehold interest in 2.5 additional transponders on the second
anniversary of the satellite's in-service date; $13 million for three additional
transponders on the third anniversary; and $18 million for four additional
transponders on each of the fourth and fifth anniversary. Loral Orion may at its
option, elect to accelerate the termination of APT's leasehold interest in
certain of the foregoing transponders upon earlier payment of the related
termination fee. Loral Orion has agreed that if so requested by APT, it will
seek further government approval to transfer a portion of the satellite to APT.
If it is successful in doing so, the parties will revert back to the original
joint ownership arrangement. As a result of the above changes to the agreement,
whereby Loral Orion will retain title and provide capacity to APT under a lease
arrangement, in the fourth quarter of 2003 Loral Orion will record 100% of the
satellite cost, deferred revenue to APT for the capacity that APT will be
leasing, and a long-term liability to APT for the leasehold interests to be
acquired by Loral Orion from APT in the future (which will be based on the
present value of such obligations).
In October 2003, Loral and APT have engaged in discussions to further
revise their existing arrangement. Under this proposed arrangement, Loral would
accelerate the termination of APT's leasehold interest in 4.5 transponders by
assuming $20.4 million of project cost which otherwise would have been
initially borne by APT, increasing Loral's initial economic interest in the
satellite from 23% to 31%. In addition, Loral Orion would provide to APT, free
of charge, available capacity on Telstar 10/Apstar IIR, during an interim
period and provide APT with certain rights to exchange Ku-band transponder
capacity on Telstar 18 for Ku-band transponder capacity on Telstar
10/Apstar IIR. The effectiveness of any revised arrangement agreed to between
APT and Loral will be subject to the approval of the Bankruptcy Court.
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, the Company could lease replacement capacity and function as a reseller
with respect to such capacity. In addition, Loral Orion did not renew its
in-orbit insurance policy due to the high cost of such insurance and the
relative age of the satellite. As of September 30, 2003, the net book value of
the satellite was $65 million. A loss of the satellite, would have a material
adverse effect on the Company.
Telstar 12, originally intended to operate at 12 degrees W.L., was launched
aboard an Ariane launch vehicle in October 1999 into the orbital slot located at
15 degrees W.L., and commenced operations in January 2000. Under an agreement
reached with Eutelsat, Loral Orion agreed to operate Telstar 12 at 15 degrees
W.L. while Eutelsat continues to develop its services at 12.5 degrees W.L.
Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to
assert its priority rights at such location on Loral Orion's behalf. As part of
this coordination effort, Loral Orion agreed to provide to Eutelsat four 54 MHz
transponders on Telstar 12 for the life of the satellite and has retained risk
of loss with respect to those transponders. Eutelsat also has the right to
acquire, at cost, four transponders on the next replacement satellite for
Telstar 12. As part of the international coordination process, Loral Orion
continues to conduct discussions with various administrations regarding Telstar
12's operations at 15 degrees W.L. If these discussions are not successful,
Telstar 12's useable capacity may be reduced.
While the Company has in the past, consistent with industry practice and
the requirements of the Company's indenture, typically obtained in-orbit
insurance for its satellites, the Company cannot guarantee that, upon a policy's
expiration, the Company will be able to renew the insurance on acceptable terms,
especially on satellites that have, or that are part of a family of satellites
that have, experienced problems in the past. Two satellites owned by Loral Orion
have the same solar array configuration as two other 1300-class satellites
manufactured by SS/L that have experienced solar array failures. SS/L believes
that these failures are isolated events and do not reflect a systemic problem in
either the satellite design or manufacturing process. Accordingly, the Company
does not believe that these anomalies will affect these satellites. The
insurance coverage for Telstar 10/Apstar IIR, however, provides for coverage of
losses due to solar array failures only in the event of a capacity loss of 80%
or more. The Company believes that the
27
insurers will require either exclusions of, or limitations on, coverage due to
solar array failures in connection with the renewal of insurance for the
Company's other satellite in 2004. An uninsured loss of a satellite would have a
material adverse effect on the Company's consolidated financial position and
results of operations.
The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, that arise in the ordinary course of business.
Although the outcome of these claims cannot be predicted with certainty, the
Company does not believe that any of these other existing legal matters will
have a material adverse effect on its consolidated financial position or results
of operations. These claims against the Company are subject to the automatic
stay as a result of the commencement of the Chapter 11 Cases. See Part II, Item
1, Legal Proceedings.
OTHER MATTERS
Insurance Matters
The Company, like others in the satellite industry, are faced with
significantly higher premiums on launch and in-orbit insurance, increasing
thresholds in determining total losses for satellites in orbit and significantly
shorter coverage periods than those that have been available in the past, which
was due in part to the events of September 11, 2001. This development in the
insurance industry has increased the Company's cost of doing business. The
Company intends to pass on some of the increased cost to its customers. There
can be no assurance, however, that the Company will be able to do so. Insurance
market conditions have historically been cyclical in nature. While the Company
anticipates that these conditions will improve in the future, there can be no
assurance that they will.
Accounting Pronouncements
SFAS 142
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets ("SFAS 142"), which addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS 142 provides that intangible assets with finite useful lives
be amortized and that goodwill and intangible assets with indefinite lives not
be amortized, but rather be tested at least annually for impairment. SFAS 142
also changed the evaluation criteria for testing goodwill for impairment from an
undiscounted cash flow approach, which was previously utilized under the
guidance in SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of ("SFAS 121") and Accounting Principles
Board Opinion No. 17, Intangible Assets ("APB 17"), to a test based on fair
value. Fair value is determined by the amount at which an asset or liability
could be bought or sold in a current transaction between willing parties, that
is, other than in a forced or liquidation sale. Quoted market prices in active
markets are the best evidence of fair value and must be used as the basis for
the measurement, if available. If quoted market prices are not available, the
estimate of fair value must be based on the best information available,
including prices for similar assets and liabilities and the results of using
other valuation techniques, such as public company trading multiples and future
discounted cash flows.
In accordance with SFAS 142, the Company's previously recognized cost in
excess of net assets acquired ("goodwill") of $562 million (at December 31,
2001) from the acquisition of the Company by Loral in 1998 was reviewed under
the new transitional guidance as of January 1, 2002. The Company hired
professionals in the valuation consulting business to determine the fair value
of the Company. Since there were no quoted market prices in active markets for
the Company, the measurement of fair value was based on the best information
available in the circumstances, including reasonable and supportable assumptions
and projections, to determine that the most appropriate method of fair value was
public company trading multiples. Based on the fair values concluded on by those
professionals, management determined that the Company's goodwill under the new
guidance in SFAS 142 was fully impaired. Accordingly, as of January 1, 2002, the
Company recorded a non-cash charge for the cumulative effect of the change in
accounting principle of $562 million. The charge is the result of a change in
the evaluation criteria for goodwill from an undiscounted cash flow approach
which was previously utilized under the guidance in SFAS 121 and APB 17 to the
fair value approach which is stipulated in SFAS 142.
SFAS 143
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations ("SFAS 143"). SFAS 143 addresses 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,
28
construction, development and the normal operation of a long-lived asset, except
for certain obligations of lessees. The Company has determined that there was no
effect on its consolidated financial position or results of operations upon the
adoption of SFAS 143 on January 1, 2003.
FIN 45
In November 2002, the FASB issued FIN 45 which elaborates on the
disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation were applicable on a prospective basis to guarantees issued or
modified after December 31, 2002; while the provisions of the disclosure
requirements were effective for financial statements of interim or annual
reports ending after December 15, 2002. The Company adopted the disclosure
provisions of FIN 45 during the fourth quarter of 2002. The Company adopted the
recognition provisions of FIN 45 on January 1, 2003 and determined that there
was no effect on its consolidated financial position or results of operations.
FIN 46
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of Accounting Research Bulletin
No. 51 ("FIN 46"). FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 will be applied by the Company as
of December 31, 2003. The Company is currently evaluating the provisions of FIN
46.
SFAS 149
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS 149 is effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003, except for certain
provisions that relate to SFAS 133 Implementation Issues that have been
effective for fiscal quarters prior to June 15, 2003. Management determined that
the adoption of SFAS 149 did not have an impact on its consolidated financial
position or results of operations.
SFAS 150
In May 2003, the FASB issued SFAS 150 which establishes standards for how
an issuer classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within the
scope as a liability (or an asset in some circumstances) because that financial
instrument embodies an obligation of the issuer. Management has determined that
there was no effect on its consolidated financial position or results of
operations upon the adoption of SFAS 150 on July 1, 2003.
EITF 00-21
In November 2002, the Emerging Issues Task Force of the FASB ("EITF")
reached a consensus on Issue No. 00-21, Accounting for Revenue Arrangements with
Multiple Deliverables ("EITF 00-21"). EITF 00-21 addresses determination of
whether an arrangement involving more than one deliverable contains more than
one unit of accounting and how the related revenues should be measured and
allocated to the separate units of accounting. EITF 00-21 applies to revenue
arrangements entered into after June 30, 2003; however, upon adoption, the EITF
allows the guidance to be applied on a retroactive basis, with the change, if
any, reported as a cumulative effect of accounting change in the statement of
operations. Management determined that the adoption of EITF 00-21 did not have
an effect on the Company's consolidated financial position or results of
operations
29
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. Loral Orion's chief executive
officer and its chief financial officer, after evaluating the effectiveness of
the Company's "disclosure controls and procedures" (as defined in the Securities
and Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of September 30, 2003,
have concluded that as of September 30, 2003, the Company's disclosure controls
and procedures were effective and designed to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known to
them by others within those entities.
(b) Internal control over financial reporting. There were no significant
changes in the Company's internal control over financial reporting during the
quarterly period ended September 30, 2003, that have materially effected, are
reasonably likely to materially effect, the Company's control over financial
reporting.
30
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 15, 2003, Loral, Loral Orion and certain of its subsidiaries,
including Loral Asia Pacific Satellite (HK) Limited ("Loral Asia Pacific"), (the
"Debtor Subsidiaries"), filed voluntary petitions for reorganization under
Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the
United States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court") (Lead Case No. 03-41716 (RDD), Case Nos. 03-41717 (RDD)
through 03-41723 (RDD)) (the "Chapter 11 Cases"). Loral Orion and its Debtor
Subsidiaries continue to manage their properties and operate their businesses as
"debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in
accordance with the provisions of the Bankruptcy Code.
As a result of Loral Orion's and the Debtor Subsidiaries' voluntary
petitions for reorganization, Loral Orion's prepetition debt obligations,
including its 10% senior notes obligations, have been accelerated and are
immediately due and payable and Loral Orion's other prepetition debt obligations
are subject to acceleration (see Note 5 to the condensed consolidated financial
statements). A creditors' committee has been appointed in the Chapter 11 Cases
to represent all unsecured creditors, including all holders of Loral Orion's
senior unsecured notes, and, in accordance with the provisions of the Bankruptcy
Code, will have the right to be heard on all matters that come before the
Bankruptcy Court. At this point, it is not possible to predict with certainty
when a plan of reorganization will be confirmed by the Bankruptcy Court in the
Chapter 11 Cases or how any such plan will treat the claims of prepetition
creditors.
See Note 9 to the condensed consolidated financial statements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) On July 15, 2003, Loral, Loral Orion, and certain of its subsidiaries,
including Loral Asia Pacific, (the "Debtor Subsidiaries") filed voluntary
petitions for reorganization under Chapter 11 of Title 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the Southern District of New York (the "Bankruptcy Court") (Lead Case No.
03-41716 (RDD), Case Nos. 03-41717 (RDD) through 03-41723 (RDD)). As a result of
Loral Orion's voluntary petitions for reorganization, Loral Orion's 10% senior
notes obligations have been accelerated and are immediately due and payable and
Loral Orion's other debt obligations are subject to acceleration (see Note 5 to
the condensed consolidated financial statements). On July 15, 2003, Loral Orion
failed to make interest payments of $30.6 million on its 10% Senior Notes due
2006, $2.1 million on its 11.25% Senior Notes due 2007 and $3.1 million on its
12.50% Senior Notes due 2007.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 -- Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 -- Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 -- Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 -- Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
NONE
31
SIGNATURES
Pursuant to the requirements 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. Registrant
Date: November 14, 2003 /s/ RICHARD J. TOWNSEND
---------------------------------------
Richard J. Townsend
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer and
Registrant's Authorized Officer)
32
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
---------- -----------
Exhibit 31.1 -- Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Exhibit 31.2 -- Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
Exhibit 32.1 -- Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Exhibit 32.2 -- Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
33