EXHIBIT 99.1
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
In re: Chapter 11 Case No.
LORAL SPACE & COMMUNICATIONS LTD., ET AL., 03-41709 (RDD) to
03-41728 (RDD)
Debtors. (Jointly Administered)
MONTHLY OPERATING STATEMENTS FOR
THE PERIOD FROM APRIL 22, 2005 TO MAY 20, 2005
DEBTORS' ADDRESS: LORAL SPACE & COMMUNICATIONS LTD.
c/o LORAL SPACECOM CORPORATION
600 THIRD AVENUE
NEW YORK, NY 10016
MONTHLY DISBURSEMENTS MADE BY
LORAL SPACE & COMMUNICATIONS LTD. (IN PROVISIONAL
LIQUIDATION IN THE SUPREME COURT OF BERMUDA)
AND ITS DEBTOR SUBSIDIARIES (IN MILLIONS): $ 45
----
DEBTORS' ATTORNEYS: WEIL, GOTSHAL & MANGES LLP
767 FIFTH AVENUE
NEW YORK, NY 10153
CONSOLIDATED MONTHLY OPERATING LOSS (IN MILLIONS): $ 8
----
REPORT PREPARER: LORAL SPACE & COMMUNICATIONS LTD., A DEBTOR IN POSSESSION
(IN PROVISIONAL LIQUIDATION IN THE SUPREME COURT OF
BERMUDA)
THIS OPERATING STATEMENT MUST BE SIGNED BY A REPRESENTATIVE OF THE DEBTOR
The undersigned, having reviewed the attached report and being familiar
with the Debtors' financial affairs, verifies under penalty of perjury, that the
information contained therein is complete, accurate and truthful to the best of
my knowledge.
/s/ Richard J. Townsend
-----------------------------
Richard J. Townsend
Executive Vice President and
Chief Financial Officer
Indicate if this is an amended statement by checking here: AMENDED STATEMENT
----
LORAL SPACE & COMMUNICATIONS LTD., A DEBTOR IN POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEET
MAY 20, 2005
(IN MILLIONS)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 168
Accounts receivable, net .................................................. 15
Contracts-in-process ...................................................... 33
Inventories ............................................................... 40
Other current assets ...................................................... 18
-------
Total current assets .................................................. 274
Property, plant and equipment, net .......................................... 665
Long-term receivables ....................................................... 82
Investments in and advances to affiliates ................................... 55
Deposits .................................................................... 10
Other assets ................................................................ 55
-------
Total assets .......................................................... $ 1,141
=======
LIABILITIES AND SHAREHOLDERS' DEFICIT
Liabilities not subject to compromise:
Current liabilities:
Accounts payable ........................................................ $ 36
Accrued employment costs ................................................ 31
Customer advances and billings in excess of costs and profits ......... 120
Deferred gain on sale of assets ......................................... 10
Income taxes payable .................................................... 1
Other current liabilities ............................................... 19
-------
Total current liabilities ............................................. 217
Pension liabilities ....................................................... 1
Long-term liabilities ..................................................... 82
-------
Total liabilities not subject to compromise ........................... 300
Liabilities subject to compromise (Note 4) .................................. 1,924
Minority interest ........................................................... 2
Shareholders' deficit:
Common stock .............................................................. 4
Paid-in capital ........................................................... 3,393
Treasury stock ............................................................ (3)
Retained deficit .......................................................... (4,389)
Accumulated other comprehensive loss ...................................... (90)
-------
Total shareholders' deficit ........................................... (1,085)
-------
Total liabilities and shareholders' deficit ........................... $ 1,141
=======
2
LORAL SPACE & COMMUNICATIONS LTD., A DEBTOR IN POSSESSION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM APRIL 22, 2005 TO MAY 20, 2005
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Revenues from satellite services .................................. $ 12
Revenues from satellite manufacturing ............................. 22
----
Total revenues .................................................. 34
Cost of satellite services ........................................ 10
Cost of satellite manufacturing ................................... 20
Selling, general and administrative expenses ...................... 9
----
Loss from continuing operations before reorganization
expenses due to Bankruptcy ...................................... (5)
Reorganization income (expense) due to bankruptcy ................. (3)
----
Operating loss from continuing operations ......................... (8)
Interest and investment income ....................................
----
Loss from continuing operations before income taxes,
equity income in affiliates and minority interest ............... (8)
Income tax provision .............................................. --
----
Loss from continuing operations before equity income
in affiliates and minority interest ............................ (8)
Equity losses in affiliates ....................................... --
Minority interest ................................................. --
----
Loss from continuing operations ................................... (8)
Loss from discontinued operations ................................. --
----
Net loss .......................................................... $ (8)
====
Basic and diluted (loss) income per share:
Continuing operations ........................................... $(0.17)
Discontinued operations ........................................... --
----
Loss per share .................................................. $(0.17)
====
Weighted average shares outstanding - basic and diluted ........... 44
====
3
LORAL SPACE & COMMUNICATIONS LTD., A DEBTOR IN POSSESSION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM APRIL 22, 2005 TO MAY 20, 2005
(IN MILLIONS)
(UNAUDITED)
Operating activities:
Net loss ...................................................... $ (8)
Non-cash items:
Loss from discontinued operations ........................... --
Equity losses in affiliates ................................. --
Depreciation and amortization ............................... 7
Deferred taxes .............................................. --
Changes in operating assets and liabilities:
Accounts receivable ......................................... (1)
Contracts-in-process ........................................ 22
Inventories ................................................. (3)
Long-term receivables ....................................... --
Other current assets and other assets ....................... (10)
Accounts payable ............................................ (11)
Accrued expenses and other current liabilities .............. 3
Deferred gain on sale of assets ............................. --
Customer advances ........................................... (18)
Income taxes payable ........................................ --
Pension and other postretirement liabilities ................ 2
Long-term liabilities ....................................... --
-----
Net cash provided by operating activities ....................... (17)
-----
Net cash provided by discontinued operations .................... --
-----
Investing activities:
Capital expenditures for continuing operations ................ --
Investments in and advances to affiliates ..................... --
Insurance proceeds received ................................... 100
-----
Net cash used in investing activities ........................... 100
-----
Net cash used in financing activities ........................... --
-----
Net increase in cash and cash equivalents ....................... 83
Cash and cash equivalents -- beginning of period ................ 85
-----
Cash and cash equivalents -- end of period ...................... $ 168
=====
Supplemental Cash Flow Information:
Cash (paid) received for reorganization items:
Professional fees ........................................... $ 1
Retention costs ............................................. --
Severance costs ............................................. --
Interest income ............................................. --
-----
$ 1
=====
4
LORAL SPACE & COMMUNICATIONS LTD., A DEBTOR IN POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL BUSINESS
Loral Space & Communications Ltd. ("Loral," the "Company," "we," "our" and
"us", terms that include our subsidiaries unless otherwise indicated or the
context requires), together with its subsidiaries is a leading satellite
communications company with substantial activities in satellite-based
communications services and satellite manufacturing. Loral is organized into two
operating segments:
Satellite Services, managed by our Loral Skynet division, generates its
revenues and cash flows from providing satellite capacity and networking
infrastructure to customers for video and direct to home ("DTH") broadcasting,
high-speed data distribution, Internet access, communications and networking
services.
Satellite Manufacturing, conducted by our subsidiary, Space Systems/Loral,
Inc. ("SS/L"), generates its revenues and cash flows from designing and
manufacturing satellites, space systems and space system components for
commercial and government applications including fixed satellite services, DTH
broadcasting, broadband data distribution, wireless telephony, digital radio,
military communications, weather monitoring and air traffic management.
2. BANKRUPTCY FILINGS AND REORGANIZATION
Bankruptcy Filings
On July 15, 2003, Loral and certain of its subsidiaries (the "Debtor
Subsidiaries" and collectively with Loral, the "Debtors"), including Loral Space
& Communications Corporation, Loral SpaceCom Corporation ("Loral SpaceCom"),
Loral Satellite, Inc. ("Loral Satellite"), SS/L and Loral Orion, Inc. ("Loral
Orion"), filed voluntary petitions for reorganization under chapter 11 of title
11 ("Chapter 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. 03-41710 (RDD), Case Nos. 03-41709 (RDD)
through 03-41728 (RDD)) (the "Chapter 11 Cases"). We and our Debtor Subsidiaries
continue to manage our properties and operate our businesses as "debtors in
possession" under the jurisdiction of the Bankruptcy Court and in accordance
with the provisions of the Bankruptcy Code (see Basis of Presentation Note 3).
Also on July 15, 2003, Loral and one of its Bermuda subsidiaries (the
"Bermuda Group") filed parallel insolvency proceedings in the Supreme Court of
Bermuda (the "Bermuda Court"). On that date, the Bermuda Court entered an order
appointing Philip Wallace, Chris Laverty and Michael Morrison, partners of KPMG,
as Joint Provisional Liquidators ("JPLs") in respect of the Bermuda Group. The
Bermuda Court granted the JPLs the power to oversee the continuation and
reorganization of the Bermuda Group's businesses under the control of their
respective boards of directors and under the supervision of the Bankruptcy Court
and the Bermuda Court. The JPLs have not audited the contents of this report.
As a result of our voluntary petitions for reorganization, all of our
prepetition debt obligations were accelerated (see below). On July 15, 2003, we
also suspended interest payments on all of our prepetition unsecured debt
obligations. A creditors' committee (the "Creditors' Committee") was appointed
in the Chapter 11 Cases to represent all unsecured creditors, including all debt
holders and, in accordance with the provisions of the Bankruptcy Code, has the
right to be heard on all matters that come before the Bankruptcy Court.
For the duration of the Chapter 11 Cases, our businesses are subject to the
risks and uncertainties of bankruptcy. For example, the Chapter 11 Cases could
adversely affect our relationships with customers, suppliers and employees,
which in turn could adversely affect the going concern value of our businesses
and of our assets, particularly if the Chapter 11 Cases are protracted. Also,
transactions outside the ordinary course of business are subject to the prior
approval of the Bankruptcy Court, which may limit our ability to respond to
certain market events or take advantage of certain market opportunities, and, as
a result, our operations could be materially adversely affected.
Because we are in Chapter 11, the pursuit of claims and litigation pending
against us that arose prior to or relate to events that occurred prior to our
bankruptcy filings is generally subject to an automatic stay under Section 362
of the Bankruptcy Code. Accordingly, absent further order of the Bankruptcy
Court, parties are generally prohibited from taking any action to recover any
prepetition claims or enforce any lien against or obtain possession of any of
our property. In addition, pursuant to Section 365 of the Bankruptcy Code, we
may reject or assume prepetition executory contracts and unexpired leases.
Parties affected by our rejections of contracts or leases may file claims with
the Bankruptcy Court.
5
Reorganization
After a hearing on June 1, 2005, the Bankruptcy Court ruled that, subject to
our making certain clarifications, Loral's Disclosure Statement contained
adequate information for the purpose of soliciting creditor approval of Loral's
Plan of Reorganization. On June 3, 2005, we filed with the Bankruptcy Court a
revised disclosure statement (the "Disclosure Statement") reflecting the
requested clarifications, as well as a revised plan of reorganization (the "Plan
of Reorganization"), and the Bankruptcy Court entered an order approving the
Disclosure Statement and procedures for voting on the Plan of Reorganization.
The Plan of Reorganization and Disclosure Statement reflect an agreement among
us, the Creditors' Committee and the Ad-Hoc Committee of SS/L trade creditors on
the elements of a consensual plan of reorganization. The Disclosure Statement
establishes the enterprise value of reorganized Loral at between approximately
$708 million and approximately $939 million. The Plan of Reorganization
provides, among other things, that:
- Our two businesses, Satellite Manufacturing ("New SS/L") and Satellite
Services ("New Skynet"), will emerge intact as separate subsidiaries of
reorganized Loral ("New Loral").
- New SS/L will emerge debt-free.
- New Loral will emerge as a public company under current management and will
seek listing on a major stock exchange.
- Holders of allowed claims against SS/L and Loral SpaceCom will be paid in
cash in full, including interest from the petition date to the effective
date of the Plan of Reorganization.
- Loral Orion unsecured creditors will receive approximately 77 percent of
New Loral common stock and their pro rata share of $200 million of
preferred stock to be issued by New Skynet. These creditors also will be
offered the right to subscribe to purchase their pro-rata share of $120
million in new senior secured notes of New Skynet, which rights offering
will be underwritten by certain Loral Orion creditors who will receive a $6
million fee which may be payable in additional New Skynet notes.
- Loral bondholders and certain other unsecured creditors will receive
approximately 23 percent of the common stock of New Loral.
- Existing common and preferred stock will be cancelled and no distribution
will be made to the holders of such stock.
On December 17, 2004, the United States District Court for the Southern
District of New York reversed the Bankruptcy Court's decision denying the motion
of the Ad Hoc Loral Stockholders Protective Committee for the appointment of an
examiner under section 1104(c) of the Bankruptcy Code and remanded the matter to
the Bankruptcy Court to appoint a qualified independent examiner. On December
20, 2004, the Bankruptcy Court ordered that the United States Trustee appoint an
examiner to determine whether the Debtors, including their professionals, have
used customary and appropriate processes and procedures to value their assets
and businesses or, on the contrary, have employed improper processes and
procedures in order to arrive at a materially reduced valuation of their assets
and businesses. The Bankruptcy Court further ordered that the examiner shall
complete his or her investigation within 30 days of appointment and shall file
his or her final report within 60 days of appointment. The Bankruptcy Court
established a budget of $200,000 for the examiner to be paid by the Debtors'
estates. On March 14, 2005, the examiner filed his report with the Bankruptcy
Court, in which he stated, among other things, his conclusion that the value
range of Loral could reasonably exceed the value range set forth in our December
2004 disclosure statement, leading, in the examiner's view, to potential
alternative low, midpoint and high enterprise valuations for Loral of $931
million, $1,097 million and $1,263 million, respectively. On March 29, 2005, the
United States Trustee for the Southern District of New York appointed an
official committee of equity security holders (the "Equity Committee") (as
amended on April 7, 2005 and April 11, 2005).
Implementation of the Plan of Reorganization and the treatment of claims and
equity interests as provided therein are subject to confirmation of such Plan of
Reorganization by the Bankruptcy Court. The Disclosure Statement and ballots
have been mailed to creditors, and the voting deadline is set to expire on July
8, 2005. The Bankruptcy Court hearing to consider confirmation of the Plan of
Reorganization has been scheduled for July 13, 2005. We cannot predict with
certainty when or if confirmation of the Plan of Reorganization will occur.
There can be no assurance that we will be able to obtain court approval of the
Plan of Reorganization.
Although our cash is mostly unrestricted, it resides in different Debtor
Subsidiaries and we are not able to move cash freely between or among certain of
our Debtor Subsidiaries without Bankruptcy Court approval. Accordingly, one or
more of our Debtor Subsidiaries may not have sufficient cash to operate while
another Debtor Subsidiary may have surplus cash. SS/L has received a significant
portion of the insurance proceeds from the Telstar 14/Estrela do Sul-1 failure
(see below), and, accordingly, is not in need of additional cash to operate.
6
Certain contracts that SS/L has entered into recently provide that SS/L's
customer may defer milestone payments otherwise due until after SS/L emerges
from bankruptcy. Accordingly, SS/L expects to incur, through July 31, 2005,
costs of approximately $59 million in performance on these contracts without
corresponding payments and expects to have vendor termination liability exposure
of approximately $12 million. If SS/L has not emerged from bankruptcy by July
31, 2005, SS/L will incur additional costs in performing on these contracts,
which will further increase its cash needs during the pendency of the Chapter 11
Cases.
In January 2004, the North solar array of the Telstar 14/Estrela do Sul-1
satellite ("EDS") only partially deployed after launch, diminishing the power
and life expectancy of the satellite. SS/L has submitted to its insurers a claim
for a total constructive loss of the satellite, seeking recovery for the insured
value of $250 million. SS/L has reached a settlement agreement with a number of
the insurers with respect to this pending insurance claim. Under this
settlement, which was approved by the Bankruptcy Court on May 10, 2005, SS/L
will receive 82% of each settling insurer's respective proportion of the insured
amount which would result in $205 million in total proceeds to be received if
all insurers agree to the settlement. In addition, under the settlement, the
settling insurers waive any rights they may have to obtain title to EDS as a
result of payment on the insurance claim. As of the date hereof, SS/L has
received $129.4 million of insurance proceeds pursuant to settlements under the
terms approved by the Bankruptcy Court. As of the date hereof, SS/L expects to
receive an additional $4.7 million from an insurer that has agreed to the
settlement and an additional $8.2 million subject to finalizing documentation
with an insurer that has agreed in principle to the settlement. As to the
remaining insurers, SS/L continues to negotiate with them to reach a settlement
under the terms approved by the Bankruptcy Court. There can be no assurance that
SS/L will be able to obtain settlements with respect to the non-settling
insurers. In the event that SS/L is unable to settle with the remaining insurers
in accordance with the terms approved by the Bankruptcy Court, SS/L may need to
commence appropriate action(s) against such insurers to enforce its rights.
There can be no assurance that SS/L will prevail in such action(s). If SS/L
negotiates a lower settlement with the remaining insurers without commencing
such action(s) (which will also require Bankruptcy Court approval), SS/L may be
required to refund certain amounts to those insurers that have previously
settled so that no settling insurer is paying a greater percentage of its
respective portion of the insured amount than any other settling insurer.
3. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements (the
"financial statements") have been prepared assuming Loral, in its current
structure, will continue as a going concern. However, the factors mentioned in
Note 2 above, among other things, raise substantial doubt about our ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. Our ability
to continue as a going concern is dependent on a number of factors including,
but not limited to, the Bankruptcy Court's confirmation of a plan of
reorganization, and maintaining good relations with our customers, suppliers and
employees. If a plan of reorganization is not confirmed and implemented, we may
be forced to liquidate under applicable provisions of the Bankruptcy Code. We
cannot give any assurance of the level of recovery our creditors would receive
in a liquidation. The 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 we were forced to
liquidate (see Reorganization in Note 2).
The financial statements have been prepared in accordance with U.S. generally
accepted accounting principles ("U.S. GAAP") and, in the our opinion, 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. All intercompany transactions have been
eliminated. The results of operations for the period from April 22, 2005 to May
20, 2005 are not necessarily indicative of the results to be expected for the
full year.
The 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 us to distinguish prepetition
liabilities subject to compromise from postpetition liabilities in our condensed
consolidated balance sheet. The caption "liabilities subject to compromise"
reflects the carrying value of prepetition claims that will be restructured in
our Chapter 11 Cases. In addition, our condensed consolidated statement of
operations portray 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 Company are reported separately as reorganization items,
except those required to be reported as discontinued operations and
extraordinary items in conformity with Statement of Financial Accounting
Standards ("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"). We did not prepare combined financial statements for Loral and its Debtor
Subsidiaries, since the subsidiaries that did not file voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code were immaterial to our
consolidated financial position and results of operations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. GAAP have been condensed or omitted.
It is suggested that these financial statements be read in conjunction with the
audited consolidated
7
financial statements and notes thereto of Loral included in Loral's latest
Annual Report on Form 10-K and the other periodic reports filed by Loral with
the Securities and Exchange Commission.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the amounts of revenues and expenses
reported for the period. Actual results could differ from estimates.
A significant portion of our satellite manufacturing revenue is associated
with long-term contracts which require significant estimates. These estimates
include forecasts of costs and schedules, estimating contract revenue related to
contract performance (including orbital incentives) and the potential for
component obsolescence in connection with long-term procurements. Significant
estimates also include the estimated useful lives of our satellites.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and highly liquid
investments with original maturities of three months or less.
Concentration of Credit Risk
Financial instruments which potentially subject us to concentrations of
credit risk consist principally of cash and cash equivalents, foreign exchange
contracts, contracts-in-process, long-term receivables and advances and loans to
affiliates. Our cash and cash equivalents are maintained with
high-credit-quality financial institutions. Historically, our customers have
been primarily large multinational corporations and U.S. and foreign governments
for which the creditworthiness was generally substantial. In recent years, we
have added commercial customers which include companies in emerging markets or
the development stage, some of which are highly leveraged or partially funded.
Management believes that its credit evaluation, approval and monitoring
processes combined with negotiated billing arrangements mitigate potential
credit risks with regard to our current customer base.
Inventories
Inventories consist principally of parts and subassemblies used in the
manufacture of satellites which have not been specifically identified to
contracts-in-process, and are valued at the lower of cost or market. Cost is
determined using the first-in-first-out (FIFO) or average cost method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided on
the straight-line method for satellites and related equipment over the estimated
useful lives of the related assets. Depreciation is provided primarily on an
accelerated method for other owned assets over the estimated useful life of the
related assets. Leasehold improvements are amortized over the shorter of the
lease term or the estimated useful life of the improvements.
Costs incurred in connection with the construction and successful deployment
of our satellites and related equipment are capitalized. Such costs include
direct contract costs, allocated indirect costs, launch costs, launch and
in-orbit test insurance and construction period interest. All capitalized
satellite costs are amortized over the estimated useful life of the related
satellite. The estimated useful life of the satellites (ranging from seven to 16
years) was determined by engineering analyses performed at the satellite's
in-service date. Satellite lives are reevaluated periodically. Losses from
unsuccessful launches and in-orbit failures of our satellites, net of insurance
proceeds (so long as such amounts are determinable and receipt is probable), are
recorded in the period a loss occurs.
On March 17, 2004 we sold our North American satellites and related assets.
During September 2004, our Telstar 18 satellite began commercial service and
we recognized $87 million of sales and $80 million of cost of sales relating to
the sales-type lease element of our agreement with APT. In addition, as of May
20, 2005, we have recorded $11 million of deferred revenue relating to the
operating lease and service elements of the agreement (primarily APT's lease of
four transponders for four years and four additional transponders for five years
and our providing APT with telemetry tracking and control services for the life
of the satellite), which will be recognized on a straight-line basis over the
life of the related element to be provided. Also, as of May 20, 2005, we have
recorded a long-term liability of $23 million, representing the present value of
our obligation to make future payments of $18.1 million to APT on each of the
fourth and fifth service anniversaries of Telstar 18, whereupon APT's leasehold
interest in the related transponders described in the preceding sentence, would
be terminated.
8
Valuation of Satellites, Long-Lived Assets and Investments in and Advances to
Affiliates
The carrying value of our satellites, long-lived assets and investments in
and advances to affiliates is reviewed for impairment in accordance with SFAS
144 and Accounting Principles Board ("APB") Opinion No. 18, Equity Method of
Accounting for Investments in Common Stock, respectively. We periodically
evaluate potential impairment loss relating to our satellites and other
long-lived assets, when a change in circumstances occurs, by assessing whether
the carrying amount of these assets can be recovered over their remaining lives
through future undiscounted expected cash flows generated by those assets
(excluding financing costs). If the expected undiscounted future cash flows were
less than the carrying value of the long-lived asset, an impairment charge would
be recorded. Changes in estimates of future cash flows could result in a
write-down of the asset in a future period. Estimated future cash flows could be
impacted by, among other things:
- Changes in estimates of the useful life of the satellite
- Changes in estimates of our ability to operate the satellite at expected
levels
- Changes in the manner in which the satellite is to be used
- The loss of one or several significant customer contracts on the satellite
If an impairment loss was indicated for a satellite, such amount would be
recognized in the period of occurrence, net of any insurance proceeds to be
received so long as such amounts are determinable and receipt is probable. If no
impairment loss was indicated in accordance with SFAS 144, and we received
insurance proceeds, the proceeds would be recognized in our consolidated
statement of operations. In the event that the insurance proceeds received
exceeded the carrying value of the satellite, the excess of the proceeds over
the carrying value of the satellite would be recognized in our consolidated
statement of operations.
Deposits
Deposits primarily represent prepaid amounts on satellite launch vehicles
which are expected to be utilized for the launch of customer or Company-owned
satellites.
Revenue Recognition
Revenue from satellite sales under long-term fixed-price contracts is
recognized following the provisions of Statement of Position 81-1, Accounting
for Performance of Construction-Type and Certain Production-Type Contracts,
using the cost-to-cost percentage-of-completion method. Revenue includes the
basic contract price and estimated amounts for penalties and incentive payments,
including award fees, performance incentives, and estimated orbital incentives
discounted to their present value at launch date. Costs include the development
effort required for the production of high-technology satellites, non-recurring
engineering and design efforts in early periods of contract performance, as well
as the cost of qualification testing requirements. Contracts are typically
subject to termination for convenience or for default. If a contract is
terminated for convenience by a customer or due to a customer's default, the
Company is generally entitled to its costs incurred plus a reasonable profit.
Revenue under cost-reimbursable type contracts is recognized as costs are
incurred; incentive fees are estimated and recognized over the contract term.
U.S. government contract risks include dependence on future appropriations
and administrative allotment of funds and changes in government policies. Costs
incurred under U.S. government contracts are subject to audit. Management
believes the results of such audits will not have a material effect on Loral's
financial position or its results of operations.
Losses on contracts are recognized when determined. Revisions in profit
estimates are reflected in the period in which the conditions that require the
revision become known and are estimable. In accordance with industry practice,
contracts-in-process include unbilled amounts relating to contracts and programs
with long production cycles, a portion of which may not be billable within one
year.
We provide satellite capacity and network services under lease agreements
that generally provide for the use of satellite transponders and, in certain
cases, earth stations and other terrestrial communications equipment for periods
generally ranging from one year to the end of life of the satellite. Some of
these agreements have certain obligations, including providing spare or
substitute capacity, if available, in the event of satellite failure. If no
spare or substitute capacity is available, the agreement may be terminated.
Revenue under transponder lease and network services agreements is recognized as
services are performed, provided that a contract exists, the price is fixed or
determinable and collectibility is reasonably assured. Revenues under contracts
that include fixed lease payment increases are recognized on a straight-line
basis over the life of the lease.
9
Lease contracts qualifying for capital lease treatment are accounted for as
sales-type leases.
Other terrestrial communications equipment represents network elements
(antennas, transmission equipment, etc.) necessary to enable communication
between multiple terrestrial locations through a customer-selected satellite
communications service provider. Revenue from equipment sales is primarily
recognized upon acceptance by the customer, provided that a contract exists, the
price is fixed or determinable and collectibility is reasonably assured. Revenue
from equipment sales under long-term fixed price contracts is recognized using
the cost-to-cost percentage-of-completion method. Losses on contracts are
recognized when determined and revisions in profit estimates are reflected in
the period in which the conditions that require the revision become known and
are estimable. Revenues under arrangements that include both services and
equipment elements are allocated based on the relative fair values of the
elements of the arrangement; otherwise, revenue is recognized as services are
provided over the life of the arrangement.
Foreign Exchange Contracts
Prior to filing Chapter 11, we entered into foreign exchange contracts as
hedges against exchange rate fluctuations of future accounts receivable and
accounts payable under contracts-in-process which are denominated in foreign
currencies. We follow SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities ("SFAS 133"), which among other things requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Upon filing Chapter 11, SS/L's hedges with counterparties (primarily yen
denominated forward contracts) were cancelled leaving SS/L vulnerable to foreign
currency fluctuations in the future. The inability to enter into forward
contracts exposes SS/L's future revenues, costs and cash associated with
anticipated yen denominated receipts and payments to currency fluctuations.
Income Taxes
As a Bermuda company, we are subject to U.S. federal, state and local income
taxation at regular corporate rates plus an additional 30% "branch profits" tax
on any income that is effectively connected with the conduct of a U.S. trade or
business. Loral's U.S. subsidiaries are subject to regular corporate tax on
their worldwide income.
Deferred income taxes reflect the future tax effect of temporary differences
between the carrying amount of assets and liabilities for financial and income
tax reporting and are measured by applying statutory tax rates in effect for the
year during which the differences are expected to reverse. The deferred tax
assets are reduced by a valuation allowance to the extent it is more likely than
not that the deferred tax assets will not be realized.
Our policy is to establish a tax contingency accrual for potential audit
issues. The tax contingency accrual is based on our estimate of whether
additional taxes will be due in the future. Any additional taxes due will be
determined only upon completion of current and future federal, state and
international tax audits. The timing of such payments cannot be determined but
we expect they will not be made within one year. Any such liability would be
unsecured pre-petition liabilities in our bankruptcy proceedings and will be
afforded the treatment set forth in the plan of reorganization approved by the
Bankruptcy Court. Therefore, the tax contingency liability is included in
"Liabilities Subject to Compromise" in the accompanying condensed consolidated
balance sheet (see Note 4).
As of May 20, 2005, Loral continues to maintain the 100% valuation allowance
against the net deferred tax assets of its U.S. consolidated group, established
at December 31, 2002 and recorded no benefit for its domestic loss. The income
tax provision for continuing operations includes any change to this valuation
allowance, any provision for current federal, state and foreign income taxes and
any adjustment to tax contingency accruals for potential audit issues. The tax
contingency accruals are based on our estimate of whether additional taxes will
be due in the future. Any additional taxes due will be determined only upon
completion of current and future federal, state and international tax audits.
The timing of such payments cannot be determined but we expect they will not be
made within one year. Any such liability would be unsecured pre-petition
liabilities in our bankruptcy proceedings and will be afforded the treatment set
forth in the plan of reorganization approved by the Bankruptcy Court. Therefore,
the tax contingency liability is included in "Liabilities Subject to Compromise"
in the accompanying Condensed Consolidated Balance Sheets.
4. LIABILITIES SUBJECT TO COMPROMISE
As discussed in Note 2, we and our Debtor Subsidiaries have been operating as
debtors in possession under the jurisdiction of the Bankruptcy Court and in
accordance with the provisions of the Bankruptcy Code.
On the condensed consolidated balance sheets, the caption "liabilities
subject to compromise" reflects our carrying value of prepetition claims that
will be restructured in our Chapter 11 Cases. Pursuant to court order, we have
been authorized to pay certain prepetition operating liabilities incurred in the
ordinary course of business (e.g. salaries and insurance). Since July 15, 2003,
as permitted under the Bankruptcy Code, we have rejected certain of our
prepetition contracts and are calculating our estimated liability
10
to the unsecured creditors affected by these rejections. The Bankruptcy Court
established January 26, 2004 as the bar date in the Debtors' Chapter 11 Cases,
which is the date by which prepetition claims against us and our Debtor
Subsidiaries were to have been filed for claimants to receive any distribution
in the Chapter 11 Cases. Differences between liability amounts estimated by us
and claims filed by our creditors are being investigated and the Bankruptcy
Court will make a final determination of the allowable claims. The determination
of how liabilities ultimately will be treated cannot be made until the
Bankruptcy Court approves a Chapter 11 plan of reorganization. (See Note 2). We
will continue to evaluate the amount and classification of our prepetition
liabilities through the remainder of our Chapter 11 Cases. Should we identify
additional liabilities subject to compromise, we will recognize them
accordingly. As a result, "liabilities subject to compromise" may change. Claims
classified as "liabilities subject to compromise" represent secured as well as
unsecured claims. Liabilities subject to compromise at May 20, 2005 consisted of
the following (in thousands):
Debt obligations (Note 4) ....................................... $1,270
Accounts payable ................................................ 55
Accrued employment costs ........................................ 1
Customer advances ............................................... 29
Accrued interest and preferred dividends ........................ 40
Income taxes payable ............................................ 41
Pension and other postretirement liabilities .................... 186
Other liabilities ............................................... 78
6% Series C convertible redeemable preferred stock .............. 187
6% Series D convertible redeemable preferred stock .............. 37
------
$1,924
======
DEBT OBLIGATION
Debt consists of the following at May 20, 2005 (in millions):
Loral Orion 10.00% senior notes due 2006:
Principal amount............................................................ $ 613
Accrued interest (deferred gain on debt exchanges).......................... 214
Loral 9.50% Senior notes due 2006............................................. 350
Loral Orion debt non-recourse to Loral:
11.25% Senior notes due 2007 (principal amount $37 million)................. 39
12.50% Senior discount notes due 2007 (principal amount $49 million)........ 54
-----------
Total debt.................................................................... 1,270
Less, current maturities included in liabilities subject to compromise (Note 4) 1,270
-----------
$ --
===========
As a result of our voluntary petitions for reorganization, all of our
prepetition debt obligations were accelerated. A creditors' committee was
appointed in the Chapter 11 Cases to represent all unsecured creditors,
including all of our debt holders and, in accordance with the provisions of the
Bankruptcy Code, the committee has the right to be heard on all matters that
come before the Bankruptcy Court (see Note 2).
On March 17, 2004, we repaid all $967 million of our outstanding secured
bank debt. As of May 20, 2005, the principal amounts of our prepetition debt
obligations were $1.049 billion.
Subsequent to our voluntary petitions for reorganization on July 15, 2003,
we only recognized and paid interest on our secured bank debt through March 18,
2004 and stopped recognizing and paying interest on all other outstanding debt
obligations. While we are in Chapter 11, we only recognize interest expense to
the extent paid. For the month ended May 20, 2005, we did not recognize
approximately $4 million of interest expense on our 9.5%, 11.25% and 12.5%
senior notes and approximately $5 million of a reduction to accrued interest on
our 10% senior notes as a result of the suspension of interest payments on our
debt obligations.
5. REORGANIZATION INCOME (EXPENSES) DUE TO BANKRUPTCY
Reorganization expenses due to bankruptcy for the period from April 22, 2005
to May 20, 2005, were as follows (in millions):
Professional fees ........................................................ $2
Vendor settlement (gain) ................................................. --
Facility closing costs ................................................... --
Interest income .......................................................... --
--
--
Total reorganization expenses due to bankruptcy ........................ $2
==
11
6. INSURANCE
Premiums to date for all insurance policies, including worker's compensation
and disability insurance, have been paid and are in full force and effect.
12
LORAL SPACE & COMMUNICATIONS LTD., ET AL., DEBTORS IN POSSESSION
INDEX OF BANKRUPTCY COURT REPORTING SCHEDULES BY DEBTOR
SCHEDULE
-----------
Gross salaries & wages I
Employer payroll taxes withheld I
Employer payroll taxes due I
Gross taxable sales II
Sales/VAT taxes collected II
Property taxes III
Other taxes IV
Total third party disbursements V
13
SCHEDULE I
LORAL SPACE & COMMUNICATIONS LTD., ET AL., DEBTORS IN POSSESSION
GROSS SALARIES & WAGES AND PAYROLL TAXES BY DEBTOR
FOR THE PERIOD FROM APRIL 22, 2005 TO MAY 20, 2005
(IN THOUSANDS)
EMPLOYEE
GROSS PAYROLL EMPLOYER
SALARIES & TAXES PAYROLL
LEGAL ENTITY CASE NUMBER WAGES WITHHELD TAXES DUE
- ------------ ----------- ----- -------- ---------
Loral Space & Communications Ltd. 03-41710 (RDD) $ -- $ -- $ --
Loral Space & Communications Corporation 03-41711 (RDD) -- -- --
Loral SpaceCom Corporation (a) 03-41709 (RDD) 2,489 718 136
Loral Satellite, Inc. 03-41712 (RDD) -- -- --
Space Systems/Loral, Inc. (b) 03-41713 (RDD) 10,154 2,707 729
Loral Communications Services, Inc. (b) 03-41714 (RDD) 294 84 20
Loral Ground Services, L.L.C 03-41715 (RDD) -- -- --
Loral Orion, Inc. 03-41716 (RDD) -- -- --
Loral CyberStar Global Services, Inc. 03-41717 (RDD) -- -- --
Loral CyberStar GmbH 03-41718 (RDD) -- -- --
Loral CyberStar Japan, Inc. 03-41719 (RDD) -- -- --
Loral CyberStar Services, Inc. 03-41720 (RDD) -- -- --
Loral CyberStar Holdings, L.L.C 03-41721 (RDD) -- -- --
Loral CyberStar International, Inc. 03-41722 (RDD) -- -- --
Loral Asia Pacific Satellite (HK) Limited 03-41723 (RDD) -- -- --
SS/L Export Corporation 03-41724 (RDD) -- -- --
CyberStar, L.P. 03-41725 (RDD) -- -- --
CyberStar, L.L.C 03-41726 (RDD) -- -- --
Loral Skynet Network Services, Inc. 03-41727 (RDD) 38 10 --
Loral Licensing Ltd. 03-41728 (RDD) -- -- --
------- ------ ----
$12,975 $3,519 $885
======= ====== ====
(a) Taxes for a division of the legal entity are remitted to a third party
vendor and paid by the third party vendor to the appropriate taxing
authorities.
(b) Taxes are remitted by the legal entity to a third party vendor and paid by
the third party vendor to the appropriate taxing authorities.
14
SCHEDULE II
LORAL SPACE & COMMUNICATIONS LTD., ET AL., DEBTORS IN POSSESSION
GROSS TAXABLE SALES AND SALES/VAT TAXES COLLECTED
FOR THE PERIOD FROM APRIL 22, 2005 TO MAY 20, 2005
(IN THOUSANDS)
GROSS SALES/VAT
TAXABLE TAXES
LEGAL ENTITY CASE NUMBER SALES COLLECTED
- ------------ ----------- ----- ---------
Loral Space & Communications Ltd. 03-41710 (RDD) $ -- $--
Loral Space & Communications Corporation 03-41711 (RDD) -- --
Loral SpaceCom Corporation 03-41709 (RDD) -- --
Loral Satellite, Inc. 03-41712 (RDD) -- --
Space Systems/Loral, Inc. 03-41713 (RDD) -- --
Loral Communications Services, Inc. 03-41714 (RDD) -- --
Loral Ground Services, L.L.C 03-41715 (RDD) -- --
Loral Orion, Inc. 03-41716 (RDD) -- --
Loral CyberStar Global Services, Inc. 03-41717 (RDD) -- --
Loral CyberStar GmbH 03-41718 (RDD) 123 20
Loral CyberStar Japan, Inc. 03-41719 (RDD) -- --
Loral CyberStar Services, Inc. 03-41720 (RDD) -- --
Loral CyberStar Holdings, L.L.C 03-41721 (RDD) -- --
Loral CyberStar International, Inc. 03-41722 (RDD) -- --
Loral Asia Pacific Satellite (HK) Limited 03-41723 (RDD) -- --
SS/L Export Corporation 03-41724 (RDD) -- --
CyberStar, L.P. 03-41725 (RDD) -- --
CyberStar, L.L.C 03-41726 (RDD) -- --
Loral Skynet Network Services, Inc. 03-41727 (RDD) 10 2
Loral Licensing Ltd. 03-41728 (RDD) -- --
---- ---
$133 $22
==== ===
15
SCHEDULE III
LORAL SPACE & COMMUNICATIONS LTD., ET AL., DEBTORS IN POSSESSION
PROPERTY TAXES BY DEBTOR
FOR THE PERIOD FROM APRIL 22, 2005 TO MAY 20, 2005
(IN THOUSANDS)
PROPERTY PROPERTY
TAXES TAXES
LEGAL ENTITY CASE NUMBER INCURRED PAID
- ------------ ----------- -------- ----
Loral Space & Communications Ltd. 03-41710 (RDD) $ -- $--
Loral Space & Communications Corporation 03-41711 (RDD) -- --
Loral SpaceCom Corporation 03-41709 (RDD) 14 4
Loral Satellite, Inc. 03-41712 (RDD) -- --
Space Systems/Loral, Inc. 03-41713 (RDD) 210 --
Loral Communications Services, Inc. 03-41714 (RDD) -- --
Loral Ground Services, L.L.C 03-41715 (RDD) -- --
Loral Orion, Inc. 03-41716 (RDD) -- --
Loral CyberStar Global Services, Inc. 03-41717 (RDD) -- --
Loral CyberStar GmbH 03-41718 (RDD) -- --
Loral CyberStar Japan, Inc. 03-41719 (RDD) -- --
Loral CyberStar Services, Inc. 03-41720 (RDD) -- --
Loral CyberStar Holdings, L.L.C 03-41721 (RDD) -- --
Loral CyberStar International, Inc. 03-41722 (RDD) -- --
Loral Asia Pacific Satellite (HK) Limited 03-41723 (RDD) -- --
SS/L Export Corporation 03-41724 (RDD) -- --
CyberStar, L.P. 03-41725 (RDD) -- --
CyberStar, L.L.C 03-41726 (RDD) -- --
Loral Skynet Network Services, Inc. 03-41727 (RDD) 20 80
Loral Licensing Ltd. 03-41728 (RDD) -- --
---- ---
$244 $84
==== ===
16
SCHEDULE IV
LORAL SPACE & COMMUNICATIONS LTD., ET AL., DEBTORS IN POSSESSION
OTHER TAXES BY DEBTOR
FOR THE PERIOD FROM APRIL 22, 2005 TO MAY 20, 2005
(IN THOUSANDS)
UNIVERSAL
SERVICE TOTAL
STATE/CITY FUND FEDERAL FOREIGN OTHER
LEGAL ENTITY CASE NUMBER TAXES TAXES TAXES TAXES TAXES
- ------------ ----------- ----- ----- ----- ----- -----
Loral Space & Communications Ltd. 03-41710 (RDD) $-- $ -- $ -- $ -- $ --
Loral Space & Communications Corporation 03-41711 (RDD) -- -- -- -- --
Loral SpaceCom Corporation 03-41709 (RDD) (1) 1 -- -- 1
Loral Satellite, Inc. 03-41712 (RDD) -- -- -- -- --
Space Systems/Loral, Inc. 03-41713 (RDD) -- -- -- -- --
Loral Communications Services, Inc. 03-41714 (RDD) -- -- -- -- --
Loral Ground Services, L.L.C 03-41715 (RDD) -- -- -- -- --
Loral Orion, Inc. 03-41716 (RDD) -- -- -- 0 0
Loral CyberStar Global Services, Inc. 03-41717 (RDD) -- -- -- -- --
Loral CyberStar GmbH 03-41718 (RDD) -- -- -- -- --
Loral CyberStar Japan, Inc. 03-41719 (RDD) -- -- -- -- --
Loral CyberStar Services, Inc. 03-41720 (RDD) -- -- -- -- --
Loral CyberStar Holdings, L.L.C 03-41721 (RDD) -- -- -- -- --
Loral CyberStar International, Inc. 03-41722 (RDD) -- -- -- -- --
Loral Asia Pacific Satellite (HK) Limited 03-41723 (RDD) -- -- -- -- --
SS/L Export Corporation 03-41724 (RDD) -- -- -- -- --
CyberStar, L.P. 03-41725 (RDD) -- -- -- -- --
CyberStar, L.L.C 03-41726 (RDD) -- -- -- -- --
Loral Skynet Network Services, Inc. 03-41727 (RDD) -- 4 -- (30) (26)
Loral Licensing Ltd. 03-41728 (RDD) -- -- -- -- --
--- ---- ---- ---- ----
$(1) $ 5 $ -- $(30) $(25)
=== ==== ==== ==== ====
17
SCHEDULE V
LORAL SPACE & COMMUNICATIONS LTD., ET AL., DEBTORS IN POSSESSION
TOTAL THIRD PARTY DISBURSEMENTS BY DEBTOR
FOR THE PERIOD FROM APRIL 22, 2005 TO MAY 20, 2005
(IN THOUSANDS)
LEGAL ENTITY CASE NUMBER DISBURSEMENTS
- ------------ ----------- -------------
Loral Space & Communications Ltd. 03-41710 (RDD) $ 51
Loral Space & Communications Corporation 03-41711 (RDD) --
Loral SpaceCom Corporation 03-41709 (RDD) 14,197
Loral Satellite, Inc. 03-41712 (RDD) --
Space Systems/Loral, Inc. 03-41713 (RDD) 30,735
Loral Communications Services, Inc. 03-41714 (RDD) 281
Loral Ground Services, L.L.C 03-41715 (RDD) --
Loral Orion, Inc. 03-41716 (RDD) --
Loral CyberStar Global Services, Inc. 03-41717 (RDD) --
Loral CyberStar GmbH 03-41718 (RDD) 94
Loral CyberStar Japan, Inc. 03-41719 (RDD) --
Loral CyberStar Services, Inc. 03-41720 (RDD) --
Loral CyberStar Holdings, L.L.C 03-41721 (RDD) --
Loral CyberStar International, Inc. 03-41722 (RDD) --
Loral Asia Pacific Satellite (HK) Limited 03-41723 (RDD) --
SS/L Export Corporation 03-41724 (RDD) --
CyberStar, L.P. 03-41725 (RDD) --
CyberStar, L.L.C 03-41726 (RDD) --
Loral Skynet Network Services, Inc. 03-41727 (RDD) --
Loral Licensing Ltd. 03-41728 (RDD) --
-------
$45,358
=======
18