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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 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
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12 b-20. Yes [ ] No [X]
The number of shares of common stock, par value $.01 per share of the
registrant outstanding as of March 31, 2003 was 100, all of which were owned,
directly or indirectly, by Loral Space & Communications Ltd.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H
(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING WITH THE REDUCED DISCLOSURE
FORMAT PURSUANT TO GENERAL INSTRUCTION H (2) OF FORM 10-Q.
DOCUMENTS INCORPORATED BY REFERENCE
None
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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 AMOUNT)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 31,663 $ 42,964
Accounts receivable, net................................................... 11,289 7,615
Prepaid expenses and other current assets.................................. 8,130 13,213
Due from Loral companies................................................... -- 52,577
----------- -----------
Total current assets................................................... 51,082 116,369
Satellites and related equipment, net......................................... 491,816 524,699
Other assets, net............................................................. 14,875 17,318
----------- -----------
Total assets........................................................... $ 557,773 $ 658,386
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Current portion of long-term debt.......................................... $ 927,141 $ 64,727
Accounts payable........................................................... 1,409 2,387
Customer advances.......................................................... 4,516 3,731
Due to Loral companies..................................................... 37,310 46,723
Accrued interest and other current liabilities............................. 4,750 4,700
----------- -----------
Total current liabilities.............................................. 975,126 122,268
Customer advances............................................................. 8,982 8,765
Long-term debt................................................................ -- 894,829
Note payable to Loral SpaceCom................................................ 33,126 31,540
Commitments and contingencies (Notes 2 and 6)
Stockholder's deficit:
Common stock, $.01 par value............................................... -- --
Paid-in capital............................................................ 604,166 604,166
Due from Loral companies................................................... (52,483) --
Retained deficit........................................................... (1,011,144) (1,003,182)
----------- -----------
Total stockholder's deficit............................................ (459,461) (399,016)
----------- -----------
Total liabilities and stockholder's deficit............................ $ 557,773 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
2003 2002 2003 2002
------- ---------- -------- ---------
Revenues from satellite services............................. $24,712 $ 27,579 $ 49,909 $ 57,200
Operating expenses:
Cost of satellite services................................ 23,507 22,529 47,177 45,295
Selling, general and administrative expenses.............. 681 3,235 4,931 6,343
------- ---------- -------- ---------
Operating income (loss)...................................... 524 1,815 (2,199) 5,562
Interest expense............................................. (2,760) (3,492) (5,648) (6,750)
Interest income.............................................. -- 81 5 301
------- ---------- -------- ---------
Loss before income taxes and cumulative
effect of change in accounting principle................... (2,236) (1,596) (7,842) (887)
Income tax (provision) benefit............................... (106) (938) (120) 1,369
------- ---------- -------- ---------
(Loss) income before cumulative effect of
change in accounting principle............................. (2,342) (2,534) (7,962) 482
Cumulative effect of change in accounting
principle (Note 7)......................................... -- -- -- (562,201)
------- ---------- -------- ---------
Net loss..................................................... $(2,342) $ (2,534) $ (7,962) $(561,719)
======= ========== ======== =========
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)
SIX MONTHS ENDED
JUNE 30,
------------------------
2003 2002
---------- ----------
Operating activities:
Net loss.................................................. $ (7,962) $ (561,719)
Non-cash items:
Depreciation and amortization......................... 37,647 37,647
Interest.............................................. 740 (529)
Provisions for bad debts.............................. 838 864
Cumulative effect of change in accounting principle -- 562,201
Changes in operating assets and liabilities:
Accounts receivable................................... (4,512) 1,128
Prepaid expenses and other current assets............. 4,071 2,324
Other assets.......................................... 2,443 1,698
Accounts payable...................................... (978) (2,064)
Accrued interest and other current liabilities........ 50 2,811
Customer advances..................................... 1,002 (3,260)
Due from Loral companies, net......................... (9,319) (4,782)
---------- ----------
Net cash provided by operating activities.................... 24,020 36,319
---------- ----------
Investing activities:
Capital expenditures...................................... (3,752) --
---------- ----------
Net cash used in investing activities........................ (3,752) --
---------- ----------
Financing activities:
Interest payments on 10% senior notes..................... (30,634) --
Payment of satellite incentive obligation................. (935) (918)
---------- ----------
Net cash used in financing activities........................ (31,569) (918)
---------- ----------
Net (decrease) increase in cash and cash equivalents......... (11,301) 35,401
Cash and cash equivalents at beginning of period............. 42,964 19,399
---------- ----------
Cash and cash equivalents at end of period................... $ 31,663 $ 54,800
========== ==========
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. RECENT EVENTS--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,
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 4). 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.
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.
3. BASIS OF PRESENTATION
The 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
5
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 accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules of the Securities and
Exchange Commission ("SEC") and, in the opinion of the Company, include all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of the results of operations, financial position, and cash flows
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 six months ended June
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
financial statements be read in conjunction with the Company's latest Annual
Report on Form 10-K.
Income Taxes
The Company continued to maintain a 100% valuation allowance against its
deferred tax assets under the criteria of SFAS No. 109, Accounting for Income
Taxes, and recorded no benefit in 2003 under the tax sharing agreement with
Loral Space and Communications Corporation for its loss. For the three and six
months ended June 30, 2002, the Company recorded a provision of $0.9 million and
a benefit of $1.4 million, respectively, under the tax sharing agreement.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
4. DEBT
Debt consists of the following (in thousands):
JUNE 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)...... 39,430 39,762
12.50% senior discount notes due 2007 (principal amount at
maturity and accreted principal amount $49 million) 53,469 53,982
Satellite incentive obligations.................................. 7,092 8,028
---------- ----------
Total debt.................................................... 927,141 959,556
Less, current portion............................................ 927,141 64,727
---------- ----------
Long-term debt................................................ $ --- $ 894,829
========== ==========
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 and have been reclassified to current liabilities. 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.
5. RELATED PARTY TRANSACTIONS
Due (to) from Loral companies consist of the following (in thousands):
JUNE 30, DECEMBER 31,
2003 2002
-------- --------
Loral Space & Communications Corporation $43,700 $ 43,772
Loral Cyberstar, Inc...................... 8,783 8,805
Loral SpaceCom Corporation ("LSC")........ (24,443) (23,977)
Loral Skynet.............................. (6,314) (7,854)
Space Systems/Loral ("SS/L").............. (6,553) (14,892)
------- --------
$15,173 $ 5,854
======= ========
6
As a result of the uncertainty regarding collectibility, due to Loral Space
& Communications Corporation and Loral CyberStar, L.P. filing voluntary
petitions for reorganization, the Company's receivables due from Loral Space &
Communications Corporation and Loral CyberStar, L.P., (aggregating $52.5
million) have been reflected as debit balances in stockholder's deficit.
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 new 10% senior notes. As of June 30, 2003,
the balance of the note was $33.1 million, including accrued interest.
6. COMMITMENTS AND CONTINGENCIES
On September 20, 2002, Loral Orion entered into an agreement with APT
Satellite Company Limited ("APT") for the 50/50 joint acquisition of the Apstar
V satellite, a satellite under construction by SS/L for APT. Loral Orion's
aggregate purchase price for its 50% interest in the satellite will be 50% of
the project cost of constructing, launching and insuring the satellite. At
launch, Loral Orion will obtain title to 25% of the satellite, in return for
payment by Loral Orion of half of its purchase price, a portion of which is
funded by existing launch vehicle deposits. At June 30, 2003, the total purchase
price for Loral Orion's 50% interest in the satellite was estimated at $113
million. Subject to certain acceleration rights on the part of Loral Orion, the
remainder of the estimated purchase price will be paid by and title will
transfer to Loral Orion as follows: $7 million for 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.
In March 2003, as a result of finalizing launch arrangements for the
satellite, Loral Orion agreed to take two fewer transponders (resulting in a
reduction in the satellite percentage ownership allocation between APT and Loral
Orion from 50/50 to 54/46), without changing the 50/50 cost allocation in the
satellite as described above. Loral SpaceCom has agreed to purchase from Loral
Orion 4.75 transponders on the satellite, 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. More
recently and in response to concerns regarding the timely receipt of necessary
export licenses to transfer title of the satellite from SS/L to APT, Loral Orion
and APT have been engaged in discussions to revise their existing arrangement to
provide for transfer at launch of a prepaid leasehold interest, instead of
title, to APT. Under this arrangement, Loral Orion would hold title to the
satellite, with APT leasing on a prepaid basis 77% of the transponders on the
satellite commencing at launch. APT's leasehold interest in the satellite would
be reduced over time (ultimately to 54%) as Loral Orion makes additional
payments towards its share of the satellite project cost. This new arrangement
may be subject to Bankruptcy Court approval.
In November 1995, a component on Telstar 11 malfunctioned, resulting in a
2-hour service interruption. The malfunctioning component supported nine
transponders serving the European portion of Telstar 11's footprint. Full
service was restored using a back-up component. If that back-up component fails,
Telstar 11 would lose a significant amount of usable capacity. In such event,
while the Company would be entitled to insurance proceeds of approximately $195
million as of June 30, 2003, and could lease replacement capacity and function
as a reseller with respect to such capacity, the loss of capacity would have a
material adverse effect on the Company.
Telstar 12, 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 75%
or more. The Company believes that the insurers will require either
7
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.
7. 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 Accounting Principles Board Opinion No. 17, Intangible Assets, 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 Accounting Principles Board
Opinion No. 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
and were as follows at June 30, 2003 and December 31, 2002 (in millions):
JUNE 30, 2003 DECEMBER 31, 2002
-------------------------- ----------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
------- ------------ ------- ------------
Customer relations $ 7.0 $ (5.0) $ 7.0 $ (4.5)
Trademarks.......... 6.0 (4.3) 6.0 (3.9)
Regulatory.......... 2.5 (1.6) 2.5 (1.4)
------- -------- ------- ------
Total............ $ 15.5 $ (10.9) $ 15.5 $ (9.8)
======= ======== ======= ======
As of June 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 June 30, 2003 and 2002 and $1.1 million
for both the six months ended June 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):
2003.................... $ 2.0
2004.................... 2.0
2005.................... 1.2
2006.................... --
2007.................... --
8
8. 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 results of operations or its
financial position upon the adoption of SFAS 143 on January 1, 2003.
FIN 45
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others ("FIN 45"). FIN 45 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 has determined that
there was no effect on its consolidated results of operations or its financial
position.
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 must be applied for the first
interim or annual period beginning after June 15, 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 derivates) 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. The Company
believes that there will be no effect on its consolidated results of operation
or financial position upon the adoption of SFAS 149 on July 1, 2003.
SFAS 150
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
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. SFAS 150 is effective for the
Company beginning on July 1, 2003. The Company believes that there will be no
effect on its consolidated results of operation or financial position upon the
adoption of SFAS 150 on July 1, 2003.
9
9. 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 the Parent
Company and 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 Parent Company, the Guarantor Subsidiaries
and substantially all of the other wholly-owned subsidiaries (the "Other
Subsidiaries"). The Parent Company, 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 June 30, 2003 and December 31, 2002 and for the three and six
months ended June 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.
10
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 30, 2003
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------ ------------
Current assets:
Cash and cash equivalents $ 31,663 $ 4,351 $ - $ - $ (4,351) $ 31,663
Accounts receivable, net 11,259 - 30 - - 11,289
Prepaid expenses and other current assets 5,182 6,221 3,872 - (7,145) 8,130
----------- ----------- ---------- ------------ ----------- -----------
Total current assets 48,104 10,572 3,902 - (11,496) 51,082
Property, plant and equipment, net 297,622 - 194,194 - - 491,816
Notes (payable to) receivable from
unconsolidated subsidiary (33,126) 140,216 - - (140,216) (33,126)
Due to (from) unconsolidated subsidiaries (155,776) 36,754 130,195 - (48,493) (37,310)
Investments in unconsolidated subsidiaries - (137,082) - - 137,082 -
Investments in and advances to affiliates 313,234 8,223 (271,698) - (49,759) -
Other assets, net 14,241 2,676 647 - (2,689) 14,875
----------- ----------- ---------- ------------ ----------- -----------
Total assets $ 484,309 $ 61,359 $ 57,240 $ - $ (115,571) $ 487,337
=========== =========== ========== ============ =========== ===========
Current liabilities:
Current portion of long-term debt $ 927,141 $ 350,000 $ - $ - $ (350,000) $ 927,141
Accounts payable 447 1,445 962 - (1,445) 1,409
Customer advances 4,223 - 293 - - 4,516
Accrued interest, preferred dividends
and other current liabilities 4,750 27,559 - - (27,559) 4,750
Income taxes payable - 8,123 - - (8,123) -
----------- ----------- ---------- ------------ ----------- -----------
Total current liabilities 936,561 387,127 1,255 - (387,127) 937,816
Long-term liabilities 7,979 51,972 15,964 - (66,933) 8,982
Stockholder's (deficit) equity:
6% Series C convertible redeemable preferred
stock - 184,753 - - (184,753) -
6% Series D convertible redeemable preferred
stock - 35,624 - - (35,624) -
Common stock, par value $.01 - 4,409 - - (4,409) -
Paid-in capital 604,166 3,392,821 - - (3,392,821) 604,166
Treasury stock, at cost - (3,360) - - 3,360 -
Unearned compensation - (208) - - 208 -
Due from Loral companies (52,483) - - - - (52,483)
Retained deficit (1,011,914) (3,932,790) 40,021 - 3,893,539 (1,011,144)
Accumulated other comprehensive income - (58,989) - - 58,989 -
----------- ----------- ---------- ------------ ----------- -----------
Total stockholder's (deficit) equity (460,231) (377,740) 40,021 - 338,489 (459,461)
----------- ----------- ---------- ------------ ----------- -----------
Total liabilities and stockholder's
(deficit) equity $ 484,309 $ 61,359 $ 57,240 $ - $ (115,571) $ 487,337
=========== =========== ========== ============ =========== ===========
11
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- ------------ ------------ ------------ ------------
Revenues from satellite services $ 22,949 $ - $ 9,732 $ - $ (7,969) $ 24,712
Costs of satellite services 23,594 - 7,882 - (7,969) 23,507
Selling, general and administrative
expenses 385 2,762 296 - (2,762) 681
Management fee expense - 109 - - (109) -
-------- --------- --------- ----------- ----------- --------
Operating (loss) income (1,030) (2,871) 1,554 - 2,871 524
Interest and investment income - 5,781 - - (5,781) -
Interest expense (2,760) (9,859) - - 9,859 (2,760)
-------- --------- --------- ----------- ----------- --------
(Loss) income before income taxes and
equity in net losses of unconsolidated
subsidiaries and affiliates (3,790) (6,949) 1,554 - 6,949 (2,236)
Income tax (provision) benefit (698) (1,732) (543) - 2,867 (106)
-------- --------- --------- ----------- ----------- --------
(Loss) income before equity in net losses
of unconsolidated subsidiaries and affiliates (4,488) (8,681) 1,011 - 9,816 (2,342)
Equity in net income (losses) of unconsolidated
subsidiaries 1,011 (79,621) - - 78,610 -
Equity in net (losses) income of affiliates - (7,487) - - 7,487 -
-------- --------- --------- ----------- ----------- --------
Net (loss) income $ (3,477) $ (95,789) $ 1,011 $ - $ 95,913 $ (2,342)
======== ========= ========= =========== =========== ========
12
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ---------- ------------ ------------ ------------ ------------
Revenues from satellite services $ 46,024 $ - $20,669 $ - $ (16,784) $ 49,909
Costs of satellite services 48,196 - 15,765 - (16,784) 47,177
Selling, general and administrative expenses 4,361 4,184 570 - (4,184) 4,931
Management fee expense - 109 - - (109) -
-------- --------- ------- ------- ---------- --------
Operating income (loss) (6,533) (4,293) 4,334 - 4,293 (2,199)
Interest and investment income 5 11,328 - - (11,328) 5
Interest expense (5,648) (19,669) - - 19,669 (5,648)
-------- --------- ------- ------- ---------- --------
(Loss) income before income taxes and equity
in net losses of unconsolidated subsidiaries
and affiliates (12,176) (12,634) 4,334 - 12,634 (7,842)
Income tax (provision) benefit (890) (3,395) (1,515) - 5,680 (120)
-------- --------- ------- ------- ---------- --------
(Loss) income before equity in net losses of
unconsolidated subsidiaries and affiliates (13,066) (16,029) 2,819 - 18,314 (7,962)
Equity in net income (losses) of
unconsolidated subsidiaries 2,819 (115,141) - - 112,322 -
Equity in net (losses) income of affiliates - (12,793) - - 12,793 -
-------- --------- ------- ------- ---------- --------
Net (loss) income $(10,247) $(143,963) $ 2,819 $ - $ 143,429 $ (7,962)
======== ========= ======= ======= ========== ========
13
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- ------------ ------------ ------------ ------------
Operating activities:
Net (loss) income $(10,247) $(143,963) $ 2,819 $ - $ 143,429 $ (7,962)
Non-cash items:
Equity in net losses of affiliates 12,793 (12,793) -
Equity in net losses of unconsolidated
subsidiaries (2,819) 115,141 (112,322) -
Deferred taxes - 3,395 2,285 - (5,680) -
Depreciation and amortization 27,140 28 10,507 - (28) 37,647
Provisions for bad debt 802 - 36 - - 838
Interest 740 - - - - 740
Accounts receivable, net (4,584) - 72 - - (4,512)
Prepaid expenses and other current assets (1,565) - 5,636 - - 4,071
Due to (from) Loral companies, net 11,586 (306) (20,905) - 306 (9,319)
Other assets 2,381 (4,883) 62 - 4,883 2,443
Accounts payable (746) - (232) - - (978)
Accrued expenses and other current
liabilities 50 (960) - - 960 50
Customer advances 1,282 - (280) - - 1,002
-------- --------- -------- -------- --------- --------
Net cash provided by (used in) operating
activities 24,020 (18,755) - - 18,755 24,020
-------- --------- -------- -------- --------- --------
Investing activities:
Capital expenditures (3,752) - - - - (3,752)
Investments in and advances to unconsolidated
subsidiaries - 491 - - (491) -
-------- --------- -------- -------- --------- --------
Net cash (used in) provided by in investing
activities (3,752) 491 - - (491) (3,752)
-------- --------- -------- -------- --------- --------
Financing activities:
Interest payments on 10% senior notes (30,634) - - - - (30,634)
Repayments of other long-term obligations (935) - - - - (935)
Note receivable from unconsolidated affiliate - 17,284 - - (17,284) -
Proceeds from stock issuances - 3,817 - - (3,817) -
-------- --------- -------- -------- --------- --------
Net cash (used in) provided by financing
activities (31,569) 21,101 - - (21,101) (31,569)
-------- --------- -------- -------- --------- --------
(Decrease) increase in cash and cash equivalents (11,301) 2,837 - - (2,837) (11,301)
Cash and cash equivalents--beginning of period 42,964 1,514 - - (1,514) 42,964
-------- --------- -------- -------- --------- --------
Cash and cash equivalents--end of period $ 31,663 $ 4,351 $ - $ - $ (4,351) $ 31,663
======== ========= ======== ======== ========= ========
14
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
Property, plant and 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 and Loral companies... (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................... $ 64,727 $ -- $ -- $ -- $ -- $ 64,727
Accounts payable................... 1,194 2,404 1,193 -- (2,404) 2,387
Customer advances.................. 1,208 -- 521 -- 2,002 3,731
Accrued interest and preferred
dividends......................... 4,700 20,840 -- -- (20,840) 4,700
Other current liabilities.......... 1,968 -- 35 (2,003) --
Income taxes payable............... -- 8,123 -- -- (8,123) --
----------- ----------- ---------- ---- ----------- -----------
Total current liabilities........ 73,797 31,367 1,749 -- (31,368) 75,545
Long-term liabilities............... 7,743 48,577 11,387 -- (58,942) 8,765
Long-term debt...................... 894,829 350,000 -- -- (350,000) 894,829
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, par value $.01....... -- 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
=========== =========== ========== ==== =========== ===========
15
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
Revenues from satellite services.. $ 24,971 $ -- $ 11,281 $-- $ (8,673) $ 27,579
Costs of satellite services....... 24,104 -- 7,098 -- (8,673) 22,529
Selling, general and
administrative expenses........ 2,925 2,438 310 -- (2,438) 3,235
Management fee expense............ -- (264) -- -- 264 --
-------- -------- -------- --- -------- --------
Operating (loss) income........... (2,058) (2,174) 3,873 -- 2,174 1,815
Interest and investment income.... 81 5,387 -- -- (5,387) 81
Interest expense.................. (3,492) (9,805) -- -- 9,805 (3,492)
-------- -------- -------- --- -------- --------
(Loss) income before income taxes
and equity in net loss of
unconsolidated subsidiaries and
affiliates..................... (5,469) (6,592) 3,873 -- 6,592 (1,596)
Income tax (provision) benefit.... (1,815) (1,605) (1,371) -- 3,853 (938)
-------- -------- -------- --- -------- --------
(Loss) income before equity in
net loss of unconsolidated
subsidiaries and affiliates.... (7,284) (8,197) 2,502 -- 10,445 (2,534)
Equity in net income (loss) of
unconsolidated subsidiaries, net
of taxes....................... 2,502 6,287 -- -- (8,789) --
Equity in net loss of affiliates,
net of taxes................... -- (20,659) -- -- 20,659 --
-------- -------- -------- --- -------- --------
Net (loss) income................. $ (4,782) $(22,569) $ 2,502 $-- $ 22,315 $ (2,534)
======== ======== ======== === ======== ========
16
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- -------- ------------ ------------ ------------ ------------
Revenues from satellite services.. $ 51,807 $ -- $ 24,173 $-- $ (18,780) $ 57,200
Costs of satellite services....... 49,879 14,196 -- (18,780) 45,295
Selling, general and
administrative expenses........ 5,629 2,457 714 -- (2,457) 6,343
Management fee expense............ -- 27 -- -- (27) --
--------- ---------- -------- --- --------- ---------
Operating (loss) income........... (3,701) (2,484) 9,263 -- 2,484 5,562
Interest and investment income.... 301 10,617 -- -- (10,617) 301
Interest expense.................. (6,750) (19,652) -- -- 19,652 (6,750)
--------- ---------- -------- --- --------- ---------
(Loss) income before income
taxes, equity in net loss of
unconsolidated subsidiaries
and affiliates and cumulative
effect of change in accounting
principle....................... (10,150) (11,519) 9,263 -- 11,519 (887)
Income tax benefit (provision).... 2,349 (3,154) (3,228) -- 5,402 1,369
--------- ---------- -------- --- --------- ---------
(Loss) income before equity in
net loss of unconsolidated
subsidiaries and affiliates
and cumulative effect of change
in accounting principle......... (7,801) (14,673) 6,035 -- 16,921 482
Equity in net income (loss) of
unconsolidated subsidiaries,
net of taxes.................. 6,035 (868,000) -- -- 861,965 --
Equity in net loss of affiliates,
net of taxes................. -- (36,256) -- -- 36,256 --
--------- ---------- -------- --- --------- ---------
(Loss) income before cumulative
effect of change in accounting
principle.................... (1,766) (918,929) 6,035 -- 915,142 482
Cumulative effect of change in
accounting principle......... (562,201) -- -- -- -- (562,201)
--------- ---------- -------- --- --------- ---------
Net (loss) income............... $(563,967) $ (918,929) $ 6,035 $-- $ 915,142 $(561,719)
========= ========== ======== === ========= =========
17
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Operating activities:
Net (loss) income................ $(563,967) $ (918,929) $ 6,035 $-- $ 915,142 $(561,719)
Non-cash items:
Cumulative effect of change
in accounting principle...... 562,201 -- -- -- -- 562,201
Equity in net loss of
affiliates, net of taxes..... -- 36,256 -- -- (36,256) --
Equity in net loss of
unconsolidated subsidiaries,
net of taxes................. (6,035) 868,000 -- -- (861,965) --
Deferred taxes................. -- 3,135 2,248 -- (5,383) --
Depreciation and amortization.. 27,141 -- 10,506 -- 37,647
Non-cash interest income....... (529) -- -- -- -- (529)
Provisions for bad debts....... 674 -- 190 -- -- 864
Changes in operating assets
and liabilities:
Accounts receivable, net....... 1,507 -- (379) -- -- 1,128
Prepaid expenses and other
current assets............... 788 (1,719) 1,536 -- 1,719 2,324
Due to (from) Loral
companies, net............... 15,766 -- (20,151) -- (397) (4,782)
Due to (from) unconsolidated
subsidiaries................. (397) (6,129) -- -- 6,526 --
Other assets................... 1,587 (379) 111 -- 379 1,698
Accounts payable............... (2,065) (317) -- -- 318 (2,064)
Accrued expenses and other
current liabilities.......... 2,811 (1,897) -- -- 1,897 2,811
Customer advances.............. (1,192) -- (40) -- (1) (1,233)
Income taxes payable........... -- 19 -- -- (19) --
Deferred revenue............... (1,971) -- (56) -- -- (2,027)
Other.......................... -- 165 -- -- (165) --
--------- ---------- -------- --- --------- ---------
Net cash provided by (used in)
operating activities............. 36,319 (21,795) -- -- 21,795 36,319
--------- ---------- -------- --- --------- ---------
Investing activities:
Investments in and advances
to affiliates................ -- (2,162) -- -- 2,162 --
Investments in and advances
to unconsolidated
subsidiaries................. -- (857) -- -- 857 --
--------- ---------- -------- --- --------- ---------
Net cash used in investing
activities........................ -- (3,019) -- -- 3,019 --
--------- ---------- -------- --- --------- ---------
Financing activities:
Repayments of long-term
obligations.................. (918) -- -- -- -- (918)
Preferred dividends............ -- (20,878) -- -- 20,878 --
Proceeds from stock
issuances.................... -- 7,154 -- -- (7,154) --
--------- ---------- -------- --- --------- ---------
Net cash used in financing
activities..................... (918) (13,724) -- -- 13,724 (918)
--------- ---------- -------- --- --------- ---------
Increase (decrease) in cash
and cash equivalents............. 35,401 (38,538) -- -- 38,538 35,401
Cash and cash equivalents --
beginning of period.............. 19,399 46,068 -- -- (46,068) 19,399
--------- ---------- -------- --- --------- ---------
Cash and cash equivalents --
end of period.................... $ 54,800 $ 7,530 $ -- $-- $ (7,530) $ 54,800
========= ========== ======== === ========= =========
18
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters
discussed in the following Management's Narrative Analysis of Results of
Operations of Loral Orion, Inc. ("Loral Orion" or the "Company") are not
historical facts, but are "forward-looking statements," as that term is defined
in the Private Securities Litigation Reform Act of 1995. In addition, the
Company or its representatives have made and may continue to make
forward-looking statements, orally or in writing, in other contexts, such as in
reports filed with the SEC, press releases or statements made with the approval
of an authorized executive officer of the Company. These forward-looking
statements can be identified by the use of forward-looking terminology such as
"believes," "expects," "plans," "may," "will," "would," "could," "should,"
"anticipates," "estimates," "project," "intend," or "outlook" or the negative of
these words or other variations of these words or other comparable words, or by
discussion of strategy that involves risks and uncertainties. These
forward-looking statements are only predictions, and actual events or results
may differ materially as a result of a wide variety of factors and conditions,
many of which are beyond the Company's control. 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").
No restrictions exist on the ability of any of the subsidiaries of Loral
Orion ("Subsidiary Guarantors") other than inconsequential subsidiaries, to pay
dividends or make other distributions to the Company, except to the extent
provided by law generally (e.g., adequate capital to pay dividends under state
corporate laws).
RECENT EVENTS--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,
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 4 to the condensed consolidated financial
statements). As of 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. 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.
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.
19
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.
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 ("EBITDA") as a measure of
segment profit or loss. The following discusses the results of Loral Orion for
the three and six months ended June 30, 2003 and 2002.
EBITDA (1) (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------
2003 2002 2003 2002
-------- ------- ------ ------
Revenues............................. $ 24.7 $ 27.6 $ 49.9 $ 57.2
======== ======= ====== ======
EBITDA............................... $ 19.3 $ 20.6 $ 35.4 $ 43.2
Depreciation and amortization........ (18.8) (18.8) (37.6) (37.6)
-------- ------- ------ ------
Operating income (loss).............. $ 0.5 $ 1.8 $ (2.2) $ 5.6
======== ======= ====== ======
(1) EBITDA is provided because it is a measure commonly used in the
communications industry to analyze companies on the basis of operating
performance, leverage and liquidity and is presented to enhance the
understanding of the Company's operating results. However, EBITDA
should not be construed as an alternative to net income as an
indicator of a company's operating performance, or cash flow from
operations as a measure of a company's liquidity. EBITDA may be
calculated differently and, therefore, may not be comparable to
similarly titled measures reported by other companies.
THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH JUNE 30, 2002
Revenues were $24.7 million and $27.6 million in 2003 and 2002,
respectively. Revenues decreased due to reduced prices and volume resulting from
the global economic downturn, which has caused a delay in demand for new
telecommunications applications and services.
EBIDTA was $19.3 million and $20.6 million in 2003 and 2002, respectively.
This decrease was primarily due to lower revenues, higher insurance costs
resulting from the renewal of a policy for one of the Company's satellites,
offset by lower bad debt expense.
Depreciation and amortization was $18.8 million in both 2003 and 2002.
As a result of the above, the Company had operating income of $0.5
million in 2003 as compared to operating income of $1.8 million in 2002.
Interest expense was $2.8 million, net of capitalized interest of $0.5
million in 2003 as compared to $3.5 million in 2002. As a result of the
Company's voluntary petitions for reorganization, interest expense will decrease
subsequent to July 14, 2003, since the Company does not expect to pay interest
on its debt obligations.
Interest income was zero and $0.1 million in 2003 and 2002, respectively.
20
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. The provision for income taxes from
continuing operations for the three months ended June 30, 2003 and 2002 was $0.1
million and $0.9 million on a pre-tax loss of $2.2 million and $1.6 million,
respectively. In 2003, the Company continued to maintain a full valuation
allowance against its deferred tax asset and recorded no benefit under the tax
sharing agreement for its loss. In 2002, the Company recorded a provision of
$0.9 million under the tax sharing agreement.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH JUNE 30, 2002
Revenues were $49.9 million and $57.2 million in 2003 and 2002,
respectively. Revenues decreased due to reduced prices and volume resulting from
the global economic downturn, which has caused a delay in demand for new
telecommunications applications and services.
EBIDTA was $35.4 million and $43.2 million in 2003 and 2002, respectively.
This decrease was primarily due to lower revenues and renewing the insurance on
one of the Company's satellites, offset by lower marketing expenses.
Depreciation and amortization was $37.6 million in both 2003 and 2002.
As a result of the above, the Company had an operating loss of $2.2 million
in 2003, as compared to operating income of $5.6 million in 2002.
Interest expense was $5.6 million, net of capitalized interest of $0.8
million in 2003 as compared to $6.8 million in 2002. As a result of the
Company's voluntary petitions for reorganization, interest expense will decrease
subsequent to July 14, 2003, since the Company does not expect to pay interest
on its debt obligations.
Interest income was $5,000 and $301,000 in 2003 and 2002, respectively. The
decrease in 2003 as compared to 2002 was primarily due to a reduction in the
balances held for investment.
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. The (provision) benefit for income
taxes from continuing operations for the six months ended June 30, 2003 and 2002
was $(0.1) million and $1.4 million on a pre-tax loss of $7.8 million and $0.9
million, respectively. In 2003, the Company continued to maintain a full
valuation allowance against its deferred tax asset and recorded no benefit under
the tax sharing agreement for its loss. In 2002, the Company recorded a benefit
of $1.4 million under the tax sharing agreement.
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).
Operational Matters
At June 30, 2003, the Company had contracted backlog of approximately $373
million (which includes $39 million to Loral companies), as compared to $453
million at December 31, 2002 (which included $42 million to Loral companies).
On September 20, 2002, Loral Orion entered into an agreement with APT
Satellite Company Limited ("APT") for the 50/50 joint acquisition of the Apstar
V satellite, a satellite under construction by SS/L for APT. Loral Orion's
aggregate purchase price for its 50% interest in the satellite will be 50% of
the project cost of constructing, launching and insuring the satellite. At
launch, Loral Orion will obtain title to 25% of the satellite, in return for
payment by Loral Orion of half of its purchase price, a portion of which is
funded by existing launch vehicle deposits. At June 30, 2003, the total
purchase price for Loral Orion's 50% interest in the satellite was estimated at
$113 million. Subject to certain acceleration rights on the part of Loral Orion,
the remainder of the estimated purchase price will be paid by and title will
transfer to Loral Orion as follows: $7 million for 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.
In March 2003, as a result of finalizing launch arrangements for the
satellite, Loral Orion agreed to take two fewer transponders (resulting in a
reduction in the satellite percentage ownership allocation between APT and Loral
Orion from 50/50 to 54/46), without changing the 50/50 cost allocation in the
satellite as described above. Loral SpaceCom has agreed to purchase from Loral
Orion 4.75 transponders on the satellite, 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. More
recently and in response to concerns regarding the timely receipt of necessary
export licenses to transfer title of the satellite from SS/L to APT, Loral Orion
and APT have been engaged in discussions to revise their existing arrangement to
provide for transfer at launch of a prepaid leasehold interest, instead of
title, to APT. Under this arrangement, Loral Orion would hold title to the
satellite, with APT leasing on a prepaid basis 77% of the transponders on the
satellite commencing at launch. APT's leasehold interest in the satellite would
be reduced over time (ultimately to 54%) as Loral Orion makes additional
payments towards its share of the satellite project cost. This new arrangement
may be subject to Bankruptcy Court approval.
21
In November 1995, a component on Telstar 11 malfunctioned, resulting in a
2-hour service interruption. The malfunctioning component supported nine
transponders serving the European portion of Telstar 11's footprint. Full
service was restored using a back-up component. If that back-up component fails,
Telstar 11 would lose a significant amount of usable capacity. In such event,
while the Company would be entitled to insurance proceeds of approximately
$195 million as of June 30, 2003 and could lease replacement capacity and
function as a reseller with respect to such capacity, the loss of capacity would
have a material adverse effect on the Company.
Telstar 12, 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 our 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 75% 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. See Part II, Item 1,
Legal Proceedings.
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.
22
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 Accounting Principles Board Opinion No. 17, Intangible Assets, 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 Accounting Principles Board
Opinion No. 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, 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 results of operations or its
financial position upon the adoption of SFAS 143 on January 1, 2003.
FIN 45
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others ("FIN 45"). FIN 45 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 has determined that
there was no effect on its consolidated results of operations or its financial
position.
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 must be applied for the first
interim or annual period beginning after June 15, 2003. The Company is currently
evaluating the provisions of FIN 46.
SFAS 149
23
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 derivates) 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. The Company
believes that there will be no effect on its consolidated results of operation
or financial position upon the adoption of SFAS 149 on July 1, 2003.
SFAS 150
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity ("SFAS 150").
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
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. SFAS 150 is effective for the
Company beginning on July 1, 2003. The Company believes that there will be no
effect on its consolidated results of operation or financial position upon the
adoption of SFAS 150 on July 1, 2003.
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 June 30, 2003, have
concluded that as of June 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 June 30, 2003, that have materially effected, are
reasonably likely to materially effect, the Company's control over financial
reporting.
24
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 4 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 6 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 4 to
the condensed consolidated financial statements). As of 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
25
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: August 14, 2003 /s/ RICHARD J. TOWNSEND
------------------------------------
Richard J. Townsend
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Registrant's
Authorized Officer)
26
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