-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MJXMpeC0tf75aLYK24Zr+Z7sKGjlt94LNeQqdiAYLv0NYES0Ri48nwsaoJVj5cUc LKVpqRqAPm6+gvfEF/hc9g== 0000950123-03-006118.txt : 20030515 0000950123-03-006118.hdr.sgml : 20030515 20030515163241 ACCESSION NUMBER: 0000950123-03-006118 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LORAL ORION INC CENTRAL INDEX KEY: 0001029850 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 522008654 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22085 FILM NUMBER: 03705223 BUSINESS ADDRESS: STREET 1: 2440 RESEARCH BLVD STE 400 CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3012588101 MAIL ADDRESS: STREET 1: 2440 RESEARCH BLVD STREET 2: SUITE 400 CITY: ROCKVILLE STATE: MD ZIP: 20850 FORMER COMPANY: FORMER CONFORMED NAME: LORAL CYBERSTAR INC DATE OF NAME CHANGE: 19991202 FORMER COMPANY: FORMER CONFORMED NAME: LORAL ORION INC DATE OF NAME CHANGE: 19990809 FORMER COMPANY: FORMER CONFORMED NAME: ORION NETWORK SYSTEMS INC/NEW/ DATE OF NAME CHANGE: 19970404 10-Q 1 y86570e10vq.txt LORAL ORION, INC. ================================================================================ 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 MARCH 31, 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 I (1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION I (2) OF FORM 10-Q. DOCUMENTS INCORPORATED BY REFERENCE None ================================================================================ PART 1. FINANCIAL INFORMATION LORAL ORION, INC. AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR AMOUNT) (UNAUDITED)
MARCH 31, DECEMBER 31, 2003 2002 ----------- ------------ ASSETS Current assets: Cash and cash equivalents............................................... $ 18,662 $ 42,964 Accounts receivable, net................................................ 9,448 7,615 Prepaid expenses and other current assets............................... 10,773 13,213 Due from Loral companies................................................ 55,677 57,477 ----------- ------------ Total current assets................................................ 94,560 121,269 Satellites and related equipment, net...................................... 507,980 524,699 Other assets, net.......................................................... 16,107 17,318 ----------- ------------ Total assets........................................................ $ 618,647 $ 663,286 =========== ============ LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY Current liabilities: Current portion of long-term debt....................................... $ 64,628 $ 64,727 Accounts payable........................................................ 1,187 2,387 Customer advances....................................................... 4,829 3,731 Due to Loral companies.................................................. 45,427 51,623 Accrued interest........................................................ 2,136 4,700 ----------- ------------ Total current liabilities........................................... 118,207 127,168 Customer advances.......................................................... 8,633 8,765 Long-term debt............................................................. 863,317 894,829 Note payable to Loral SpaceCom............................................. 33,126 31,540 Commitments and contingencies (Note 5) Stockholder's (deficit) equity: Common stock, $.01 par value............................................ -- -- Paid-in capital......................................................... 604,166 604,166 Retained deficit........................................................ (1,008,802) (1,003,182) ----------- ------------ Total stockholder's deficit......................................... (404,636) (399,016) ----------- ------------ Total liabilities and stockholder's deficit......................... $ 618,647 $ 663,286 =========== ============
See notes to condensed consolidated financial statements 2 LORAL ORION, INC. AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------------- 2003 2002 ---------- ---------- Revenues from satellite services.......................... $ 25,197 $ 29,621 Operating expenses: Cost of satellite services............................. 23,670 22,766 Selling, general and administrative expenses........... 4,250 3,108 ---------- ---------- Operating (loss) income................................... (2,723) 3,747 Interest income........................................... 37 220 Interest expense.......................................... (2,920) (3,258) ---------- ---------- (Loss) income before income taxes and cumulative effect of change in accounting principle...................... (5,606) 709 Income tax (provision) benefit............................ (14) 2,307 ---------- ----------- (Loss) income before cumulative effect of change in accounting principle................................... (5,620) 3,016 Cumulative effect of change in accounting principle (Note 6)............................................... -- (562,201) ---------- ---------- Net loss.................................................. $ (5,620) $ (559,185) ========== ==========
See notes to condensed consolidated financial statements 3 LORAL ORION, INC. AND SUBSIDIARIES (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, ------------------------- 2003 2002 ----------- ---------- Operating activities: Net loss.................................................. $ (5,620) $ (559,185) Non-cash items: Depreciation and amortization......................... 18,823 18,823 Interest, net......................................... 1,165 (141) Provision for bad debts............................... 2,135 626 Cumulative effect of change in accounting principle -- 562,201 Changes in operating assets and liabilities: Accounts receivable................................... (3,968) 691 Prepaid expenses and other current assets............. 1,935 1,617 Other assets.......................................... 1,211 (1,089) Accounts payable and interest payable................. (3,764) (1,923) Customer advances..................................... 966 (1,043) Due from Loral companies, net......................... (4,396) (3,375) ----------- ---------- Net cash provided by operating activities.................... 8,487 17,202 ----------- ---------- Investing activities: Capital expenditures...................................... (1,599) -- ----------- ---------- Net cash used in investing activities........................ (1,599) -- ----------- ---------- Financing activities: Interest payments on 10% senior notes..................... (30,634) -- Payment of satellite incentive obligation................. (556) (324) ----------- ---------- Net cash used in financing activities........................ (31,190) (324) ----------- ---------- Net (decrease) increase in cash and cash equivalents......... (24,302) 16,878 Cash and cash equivalents at beginning of period............. 42,964 19,399 ----------- ---------- Cash and cash equivalents at end of period................... $ 18,662 $ 36,277 =========== ==========
See notes to condensed consolidated financial statements 4 LORAL ORION, INC. AND SUBSIDIARIES (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. BASIS OF PRESENTATION 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 months ended March 31, 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. Risks and Uncertainties The Company had total long-term debt of $928 million, including current portion of $65 million, outstanding at March 31, 2003, most of which matures in 2006. In addition to its debt service requirements, the Company's business is capital intensive and requires substantial investment. Much of this investment has already been incurred, primarily to launch the Company's three satellites. At March 31, 2003, the Company had incurred costs of approximately $20 million (of which it has paid $5 million) related to the construction of Telstar 18/Apstar V which it intends to launch in 2003. The Company will need to incur approximately $9 million of additional costs to complete the construction, launch and insure Telstar 18/Apstar V and an additional $58 million to acquire additional transponders in the future on Telstar 18/Apstar V over the second through fifth anniversaries of the launch. At March 31, 2003 the Company had a retained deficit of $1 billion and stockholder's deficit of $405 million. The Company has generated cash from operating activities of $8 million and $17 million in the three months ended March 31, 2003 and 2002, respectively. The Company believes its cash and net cash provided by operating activities will be adequate to meet its expected cash requirements through at least March 31, 2004. If the Company does not generate sufficient cash to satisfy its debt service and operating requirements, the Company may be required to seek alternative financing. Current market conditions present uncertainty as to the ability of the Company to secure additional financing, if needed, and there can be no assurances as to the availability of additional financing or whether the terms of such financing, if it is available, would be acceptable to the Company. Income Taxes The Company continued to maintain a 100% valuation allowance against its deferred tax asset under the criteria of SFAS No. 109, Accounting for Income Taxes, and recorded no benefit under the tax sharing agreement with Loral Space and Communications Corporation for its loss. In the first quarter of 2002, the Company recorded a benefit of $2.3 million under the tax sharing agreement for its loss. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. 3. LONG-TERM DEBT Long-term debt consists of the following (in thousands): 5
MARCH 31, 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)............ 39,597 39,762 12.50% senior discount notes due 2007 (principal amount at maturity and accreted principal amounted to $49 million) 53,727 53,982 Satellite incentive obligations........................................ 7,471 8,028 ----------- ------------- Total debt.......................................................... 927,945 959,556 Less, current portion.................................................. 64,628 64,727 ----------- ------------- Long-term debt...................................................... $ 863,317 $ 894,829 =========== =============
4. RELATED PARTY TRANSACTIONS Due (to) from Loral companies consist of the following (in thousands):
MARCH 31, DECEMBER 31, 2003 2002 ----------- ------------ Loral Space and Communications Corp....... $ 48,672 $ 48,672 Loral Cyberstar, Inc...................... 7,004 8,805 Loral SpaceCom............................ (28,815) (28,877) Loral Skynet.............................. (3,139) (7,854) Space Systems/Loral ("SS/L").............. (13,473) (14,892) CyberStar, L.P............................ 1 -- ----------- ------------ $ 10,250 $ 5,854 =========== ============
In connection with the completion of the Company's debt exchange offers in December 2001, LSC canceled its $79.7 million intercompany note issued to it by Loral Orion which ranked pari passu to senior debt in exchange for the transfer of Loral Orion's data services business and the issuance of a new note to LSC in the principal amount of $29.7 million due 2006, having an interest rate of 10% per annum payable in kind, subordinated to Loral Orion's new 10% senior notes. Loral Orion's data services business was transferred to a newly-formed subsidiary of Loral, which assumed the name Loral Cyberstar, Inc. As of March 31, 2003, the balance of the note was $33.1 million, including accrued interest. 5. COMMITMENTS AND CONTINGENCIES On September 20, 2002, Loral Orion entered into an agreement with APT Satellite Company Limited ("APT") pursuant to which Loral Orion will purchase a 50% interest in the Telstar 18/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 is $115.1 million, representing 50% of the estimated project cost of constructing, launching and insuring the Telstar 18/Apstar V satellite, which purchase price will be adjusted if the actual project cost should be greater or less than $230.2 million. Pursuant to Loral Orion's agreement with APT, Loral Orion will pay one-half the purchase price prior to launch for 13.5 transponders on the satellite. The corresponding cumulative costs relating to these transponders have been reflected as satellites under construction on Loral Orion's condensed consolidated balance sheet as of March 31, 2003. Subject to certain acceleration rights on the part of Loral Orion, the remainder of the purchase price for the second 13.5 transponders will be paid by Loral Orion as follows: on the second anniversary of the satellite's in-service date, $10.66 million for 2.5 additional transponders; on the third anniversary of the satellite's in-service date, $12.79 million for three additional transponders; and on each of the fourth and fifth anniversaries of the satellite's in-service date, $17.05 million for four additional transponders. Title to these transponders will pass to Loral Orion upon its payment thereon. As a result of finalizing the Telstar 18/Apstar V launch arrangements in March 2003, Loral Orion agreed to take two fewer transponders without any corresponding change to the transponder cost borne by each of the parties. Loral Orion and APT are in the process of finalizing the definitive documents to reflect this change. Loral SpaceCom has agreed to purchase from Loral Orion 4.75 transponders on Telstar 18/Apstar V, together with a lease of an additional transponder for an approximate two year period from the Telstar 18/Apstar V in-service date for approximately $29 million. 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 March 31, 2003, and could lease replacement 6 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. Telstar 10/Apstar IIR has experienced minor losses of power from its solar arrays. Although, to date, Telstar 10/Apstar IIR has not experienced any degradation in performance, there can be no assurance that Telstar 10/Apstar IIR will not experience additional power loss that could result in performance degradation, including loss of transponder capacity. In the event of additional power loss, the extent of the performance degradation, if any, will depend on numerous factors, including the amount of the additional power loss, when in the life of Telstar 10/Apstar IIR the loss occurred, and the number and type of use being made of transponders then in service. It is also possible that one or more transponders on a satellite may need to be removed from service to accommodate the power loss and to preserve full performance capabilities of the remaining transponders. A complete or partial loss of Telstar 10/Apstar IIR could result in a loss of revenues and profits. Based upon information currently available, including design redundancies to accommodate small power losses and that no pattern has been identified as to the timing or specific location within the solar arrays of the failures, the Company believes that this matter will not have a material adverse effect on its consolidated financial position or results of operations. 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. Telstar 10/Apstar IIR, has 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 Telstar 10/Apstar IIR. The insurance coverage for Telstar 10/Apstar IIR provides for coverage of losses due to solar array failures only in the event of a capacity loss of 75% or more. One other satellite owned by Loral Orion has the same solar array configuration as Telstar 10/Apstar IIR. There can be no assurance that the insurers will not require either exclusions of, or similar limitations on, coverage due to solar array failures in connection with the renewal of insurance for this 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. Some of Loral Orion's bondholders have questioned whether this limitation is in compliance with the insurance covenant in the Loral Orion indenture. Loral Orion believes that it is in compliance with the covenant as properly interpreted. If, however, Loral Orion's bondholders were to give notice of a default under the indenture because of such limitations, and a court ruled against Loral Orion on this matter, the maturity of Loral Orion's 10% senior notes could be accelerated. The Company is party to various litigation arising in the normal course of its operations. In the opinion of management, the ultimate liability for these matters, if any, will not have a material adverse effect on the Company's financial position or results of operations. 6. 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, 7 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. 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 March 31, 2003 and December 31, 2002 (in millions):
MARCH 31, 2003 DECEMBER 31, 2002 ------------------------- -------------------------- GROSS ACCUMULATED GROSS ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION ------- ------------ ------- ------------ Customer relations $ 7.0 $ (4.7) $ 7.0 $ (4.5) Trademarks.......... 6.0 (4.1) 6.0 (3.9) Regulatory.......... 2.5 (1.5) 2.5 (1.4) ------- ------- ------- ------ Total.......... $ 15.5 $ (10.3) $ 15.5 $ (9.8) ======= ======= ======= ======
As of March 31, 2003, the weighted average remaining amortization period for customer relations and trademarks was two years and for regulatory fees was seven and a half years. Total amortization expense for other acquired intangible assets for both the three months ended March 31, 2003 and 2002 was $0.5 million. 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... --
7. 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 8 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 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are 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, except as stated in the statement for hedging relationships designated after June 30, 2003. The Company is currently evaluating the provisions of SFAS 149. 8. FINANCIAL INFORMATION FOR PARENT, ISSUER'S PARENT, GUARANTOR SUBSIDIARIES AND OTHER SUBSIDIARIES Loral Orion's (the "Parent Company") 10% Senior Notes due 2006 ("New Senior Notes") 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"). Presented below is condensed consolidating financial information for the Parent Company, Issuer's Parent, the Guarantor Subsidiaries and the Other Subsidiaries as of March 31, 2003 and December 31, 2002 and for the three months ended March 31, 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 the intercompany payables and receivables between its subsidiaries. 9 CONDENSED CONSOLIDATING BALANCE SHEET MARCH 31, 2003 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ----------- ------------ ------------ ------------ ------------ Current assets: Cash and cash equivalents $ 18,662 $ 2,556 $ - $ - $ (2,556) $ 18,662 Accounts receivable, net 9,327 - 121 - - 9,448 Prepaid expenses and other current assets 6,370 206 6,224 - (2,027) 10,773 ----------- ----------- ----------- ----------- ------------ ----------- Total current assets 34,359 2,762 6,345 - (4,583) 38,883 Property, plant and equipment, net 308,533 - 199,447 - - 507,980 Note (payable) receivable from unconsolidated subsidiary (33,126) 140,216 - - (140,216) (33,126) Due to (from) unconsolidated subsidiaries and Loral companies (108,741) 40,855 118,025 - (39,889) 10,250 Investments in unconsolidated subsidiaries 306,398 (44,436) (271,698) - 9,736 - Investments in and advances to affiliates - 16,006 - - (16,006) - Other assets, net 15,439 2,934 666 - (2,932) 16,107 ----------- ----------- ----------- ----------- ------------ ----------- Total assets $ 522,862 $ 158,337 $ 52,785 $ - $ (193,890) $ 540,094 =========== =========== =========== =========== ============ =========== Current liabilities: Current portion of long-term debt $ 64,628 $ - $ - $ - $ - $ 64,628 Accounts payable 224 1,327 963 - (1,327) 1,187 Customer advances 1,453 - 248 - - 1,701 Accrued interest and preferred dividends 2,136 15,887 - - (15,887) 2,136 Other current liabilities - - - - 57 57 Deferred revenue 3,030 - 41 - - 3,071 Income taxes payable - 8,123 - - (8,123) - ----------- ----------- ---------- ----------- ------------ ----------- Total current liabilities 71,471 25,337 1,252 - (25,280) 72,780 Long-term liabilities 7,624 50,240 12,523 - (61,754) 8,633 Long-term debt 863,317 350,000 - - (350,000) 863,317 6% Series C convertible redeemable preferred stock - 116,901 - - (116,901) - 6% Series D convertible redeemable preferred stock - 22,913 - - (22,913) - Stockholder's (deficit) equity: 6% Series C convertible redeemable preferred stock - 67,852 - - (67,852) - 6% Series D convertible redeemable preferred stock - 12,711 - - (12,711) - Common stock, par value $.01 - 4,356 - - (4,356) - Paid-in capital 604,166 3,391,220 - - (3,391,220) 604,166 Treasury stock, at cost - (3,360) - - 3,360 - Unearned compensation - (228) - - 228 - Retained deficit (1,023,716) (3,833,641) 39,010 - 3,809,545 (1,008,802) Accumulated other comprehensive income - (45,964) - - 45,964 - ----------- ----------- ----------- ----------- ----------- ----------- Total stockholder's (deficit) equity (419,550) (407,054) 39,010 - 382,958 (404,636) ----------- ----------- ----------- ----------- ----------- ----------- Total liabilities and stockholder's (deficit) equity $ 522,862 $ 158,337 $ 52,785 $ - $ (193,890) $ 540,094 =========== =========== =========== =========== =========== ===========
10 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ ------------ Revenues from satellite services $ 23,075 $ - $ 10,937 $ - $ (8,815) $ 25,197 Costs of satellite services 24,602 - 7,883 - (8,815) 23,670 Selling, general and administrative expenses 3,976 1,422 274 - (1,422) 4,250 ------------ ------------ ------------ ------------ ------------ ------------ Operating income (loss) (5,503) (1,422) 2,780 - 1,422 (2,723) Interest and investment income 37 5,547 - - (5,547) 37 Interest expense (2,920) (10,917) - - 10,917 (2,920) Gain on investment - 1,107 - - (1,107) - ------------ ------------ ------------ ------------ ------------ ------------ (Loss) income before income taxes and equity in net losses of unconsolidated subsidiaries and affiliates (8,386) (5,685) 2,780 - 5,685 (5,606) Income tax benefit (provision) (192) (1,663) (972) - 2,813 (14) ------------ ------------ ------------ ------------ ------------ ------------ (Loss) income before equity in net losses of unconsolidated subsidiaries and affiliates (8,578) (7,348) 1,808 - 8,498 (5,620) Equity in net income (losses) of unconsolidated subsidiaries 1,808 (35,520) - - 33,712 - Equity in net income (losses) of affiliates - (5,306) - - 5,306 - ------------ ------------ ------------ ------------ ------------ ------------ Net (loss) income $ (6,770) $ (48,174) $ 1,808 $ - $ 47,516 $ (5,620) ============ ============ ============ ============ ============ ============
11 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2003 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- --------- ------------ ------------ ------------ ------------ Operating activities: Net (loss) income $ (6,770) $(48,174) $ 1,808 $ - $ 47,516 $ (5,620) Non-cash items: Equity in net losses of affiliates - 5,306 - - (5,306) - Equity in net losses of unconsolidated subsidiaries (1,808) 35,520 - - (33,712) - Deferred taxes - 1,663 1,150 - (2,813) - Depreciation and amortization 13,569 14 5,254 - (14) 18,823 Provisions for bad debts 2,146 - (11) - - 2,135 Interest expense 1,165 - - - - 1,165 Changes in operating assets and liabilities: Accounts receivable, net (3,996) - 28 - - (3,968) Prepaid expenses and other current assets (425) - 2,360 - - 1,935 Due to (from) unconsolidated subsidiaries and Loral companies, net 5,713 710 (10,109) - (710) (4,396) Other assets 1,182 874 29 - (874) 1,211 Accounts payable (3,532) - (232) - - (3,764) Accrued expenses and other current liabilities - (9,389) - - 9,389 - Customer advances 1,243 - (277) - - 966 -------- -------- -------- ------------ ------------ ---------- Net cash provided by (used in) operating activities 8,487 (13,476) - - 13,476 8,487 -------- -------- -------- ------------ ------------ ---------- Investing activities: Capital expenditures (1,599) - - - - (1,599) Investments in and advances to unconsolidated subsidiaries - 195 - - (195) - -------- -------- -------- ------------ ------------ ---------- Net cash (used in) provided by in investing activities (1,599) 195 - - (195) (1,599) -------- -------- -------- ------------ ------------ ---------- Financing activities: Interest payments on 10% senior notes (30,634) - - - - (30,634) Repayments of other long-term obligations (556) - - - - (556) Note receivable from unconsolidated affiliate - 17,284 - - (17,284) - Proceeds from stock issuances - 2,157 - - (2,157) - -------- -------- -------- ------------ ------------ ---------- Net cash used in financing activities (31,190) 19,441 - - (19,441) (31,190) -------- -------- -------- ------------ ------------ ---------- Increase (decrease) in cash and cash equivalents (24,302) 6,160 - - (6,160) (24,302) Cash and cash equivalents--beginning of period 42,964 1,514 - - (1,514) 42,964 -------- -------- -------- ------------ ------------ ---------- Cash and cash equivalents--end of period $ 18,662 $ 7,674 $ - $ - $ (7,674) $ 18,662 ======== ======== ======== ============ ============ ==========
12 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 Note (payable) 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 ============= ============= ============= ============= ============= =============
13 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------- ------------- ------------- ------------ ------------- ------------- Revenues from satellite services... $ 26,836 $ -- $ 12,892 $ -- $ (10,107) $ 29,621 Costs of satellite services........ 25,775 -- 7,098 -- (10,107) 22,766 Selling, general and administrative expenses.......... 2,704 19 404 -- (19) 3,108 Management fee expense............. -- 291 -- -- (291) -- ------------- ------------- ------------- ------------ ------------- ------------- Operating (loss) income............ (1,643) (310) 5,390 -- 310 3,747 Interest and investment income..... 220 5,230 -- -- (5,230) 220 Interest expense................... (3,258) (9,847) -- -- 9,847 (3,258) ------------- ------------- ------------- ------------ ------------- ------------- (Loss) income before income taxes, equity in net loss of unconsolidated subsidiaries and affiliates and cumulative effect of change in accounting principle (4,681) (4,927) 5,390 -- 4,927 709 Income tax benefit (provision)..... 3,412 (1,549) (1,857) -- 2,301 2,307 ------------- ------------- ------------- ------------ ------------- ------------- (Loss) income before equity in net loss of unconsolidated subsidiaries and affiliates and cumulative effect of change in accounting principle............. (1,269) (6,476) 3,533 -- 7,228 3,016 Equity in net income (loss) of unconsolidated subsidiaries, net of taxes......................... 3,533 (874,287) -- -- 870,754 -- Equity in net loss of affiliates, net of taxes..................... -- (15,597) -- -- 15,597 -- ------------- ------------- ------------- ------------ ------------- ------------- (Loss) income before cumulative effect of change in accounting principle........................ 2,264 (896,360) 3,533 -- 893,579 3,016 Cumulative effect of change in accounting principle............. (562,201) -- -- -- -- (562,201) ------------- ------------- ------------- ------------ ------------- ------------- Net (loss) income.................. $ (559,937) $ (896,360) $ 3,533 $ -- $ 893,579 $ (559,185) ============= ============= ============= ============ ============= =============
14 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2002 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- --------- ---------- ------------ ------------ ------------ Operating activities: (Loss) income from continuing operations................................. $(559,937) $(896,360) $ 3,533 $ -- $ 893,579 $(559,185) Non-cash items: Cumulative effect of change in accounting Principle.................................. 562,201 -- -- -- -- 562,201 Equity in net losses of affiliates, net of taxes................... -- 15,597 -- -- (15,597) -- Equity in net losses of unconsolidated subsidiaries, net of taxes............................... (3,533) 874,287 -- -- (870,754) -- Deferred taxes.............................. -- 1,536 752 -- (2,288) -- Depreciation and amortization............... 13,570 -- 5,253 -- -- 18,823 Non-cash interest income.................... (141) -- -- -- -- (141) Provision for bad debts..................... 434 192 626 Changes in operating assets and liabilities: Accounts receivable, net................... 2,513 -- (1,822) -- -- 691 Prepaid expenses and other current assets............................ 817 165 800 -- (165) 1,617 Due to (from) unconsolidated subsidiaries and Loral companies.......... 6,463 (4,300) (9,838) 4,300 (3,375) Other assets............................... (1,089) 290 -- -- (290) (1,089) Accounts payable and interest payable................................... (2,170) (277) -- -- 277 (2,170) Accrued expenses and other current liabilities....................... 247 (8,312) -- -- 8,312 247 Customer advances.......................... (487) -- -- -- -- (487) Income taxes payable....................... -- 13 -- -- (13) -- Deferred revenue........................... (1,686) -- 1,130 -- -- (556) Other...................................... -- (166) -- -- 166 -- --------- --------- --------- --------- --------- --------- Net cash (used in) provided by operating activities........................ 17,202 (17,527) -- -- 17,527 17,202 --------- --------- --------- --------- --------- --------- Investing activities: Investments in and advances to affiliates................................. -- (1,557) -- -- 1,557 -- Investments in and advances to unconsolidated subsidiaries................ -- 172 -- -- (172) -- --------- --------- --------- --------- --------- --------- Net cash used in investing activities........ -- (1,385) -- -- 1,385 -- --------- --------- --------- --------- --------- --------- Financing activities: Repayments of long-term obligations............................... (324) -- -- -- -- (324) Preferred dividends........................ -- (11,963) -- -- 11,963 -- Proceeds from stock issuances.............. -- 2,857 -- -- (2,857) -- --------- --------- --------- --------- --------- --------- Net cash used in financing activities.................................. (324) (9,106) -- -- 9,106 (324) --------- --------- --------- --------- --------- --------- Increase (decrease) in cash and cash equivalents........................ 16,878 (28,018) -- -- 28,018 16,878 Cash and cash equivalents-- beginning of period......................... 19,399 46,068 -- -- (46,068) 19,399 --------- --------- --------- --------- --------- --------- Cash and cash equivalents -- end of period............................... $ 36,277 $ 18,050 $ -- $ -- $ (18,050) $ 36,277 ========= ========= ========= ========= ========= =========
15 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. Some of the factors and conditions that could affect the outcome of forward-looking statements relate to (i) the Company's financial structure, and (ii) operational matters. For a detailed discussion of these factors and conditions, please refer to the section of 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). 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 a segment's profit or loss. The following discusses the results of Loral Orion for the three months ended March 2003 and 2002. EBITDA (1) (in millions):
THREE MONTHS ENDED MARCH 31, ----------------------- 2003 2002 ------- ------- Revenues................. $ 25.2 $ 29.6 ======= ======= EBITDA................... $ 16.1 $ 22.6 Depreciation and amortization........... (18.8) (18.8) ------- ------- Operating (loss) income.. $ (2.7) $ 3.8 ======= =======
(1) EBITDA (which is equivalent to operating income (loss) before depreciation and amortization) 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. 16 FIRST QUARTER 2003 COMPARED WITH 2002 Revenues were $25.2 million and $29.6 million in the first quarter of 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 as reported was $16.1 million and $22.6 million in the first quarter of 2003 and 2002, respectively. This decrease was primarily due to renewing the insurance on one of the Company's satellites and higher bad debt expense in the first quarter of 2003. Depreciation and amortization was $18.8 million in both the first quarter of 2003 and 2002. As a result of the above, the Company had an operating loss of $2.7 million in the first quarter of 2003 as compared to operating income of $3.7 million in the first quarter of 2002. Interest income was $40,000 and $200,000 in the first quarter of 2003 and 2002, respectively. The decrease in the first quarter of 2003 as compared to the first quarter of 2002 was primarily due to a reduction in the balances held for investment. Interest expense was $2.9 million, net of capitalized interest of $0.4 million in the first quarter of 2003 as compared to $3.3 million in the first quarter of 2002. 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 in the first quarter of 2003 and 2002 was $0.01 million and $(2.3) million on a pre-tax (loss) income of $(5.6) million and $0.7 million, respectively. In the first quarter of 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 the first quarter of 2002, the Company recorded a benefit of $2.3 million under the tax sharing agreement for its loss. 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 March 31, 2003, the Company had contracted backlog of approximately $444 million (which includes $40 million to Loral companies), as compared to $453 million at December 31, 2002 (which included $42 million to Loral companies). The Company had total long-term debt of $928 million, including current portion of $65 million, outstanding at March 31, 2003, most of which matures in 2006. In addition to its debt service requirements, the Company's business is capital intensive and requires substantial investment. Much of this investment has already been incurred primarily to launch the Company's three satellites. At March 31, 2003, the Company had incurred costs of approximately $20 million (of which it has paid $5 million) related to the construction of Telstar 18/Apstar V which it intends to launch in 2003. The Company will need to incur approximately $9 million of additional costs to complete the construction, launch and insure Telstar 18/Apstar V and an additional $58 million to acquire additional transponders in the future on Telstar 18/Apstar V over the second through fifth anniversaries of the launch. At March 31, 2003 the Company had a retained deficit of $1 billion and stockholder's deficit of $405 million. The Company has generated cash from operating activities of $8 million and $17 million in the first quarter of 2003 and 2002, respectively. The Company believes its cash and net cash provided by operating activities will be adequate to meet its expected cash requirements through at least March 31, 2004. If the Company does not generate sufficient cash to satisfy its debt service and operating requirements, the Company may be required to seek alternative financing. Current market conditions present uncertainty as to the ability of the Company to secure additional financing, if needed, and there can be no assurances as to the availability of additional financing or whether the terms of such financing, if it is available, would be acceptable to the Company. Loral Orion's 10% senior notes are guaranteed by Loral. If Loral fails to pay interest on its 9.5% senior notes when due, this will, upon expiration of a 30-day cure period, constitute an event of default under Loral's senior note indenture, which in turn would result in an event of default under the Loral SpaceCom Amended Credit Agreement and the Loral Satellite Credit Agreement. If the holders of the 9.5% senior notes, the lenders under the Loral SpaceCom credit facility or the lenders under the Loral Satellite 17 credit facility were to accelerate their related debt following such event of default, an event of default would also occur with respect to Loral Orion's 10% senior notes. 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 March 31, 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. Telstar 10/Apstar IIR has experienced minor losses of power from its solar arrays. Although, to date, Telstar 10/Apstar IIR has not experienced any degradation in performance, there can be no assurance that Telstar 10/Apstar IIR will not experience additional power loss that could result in performance degradation, including loss of transponder capacity. In the event of additional power loss, the extent of the performance degradation, if any, will depend on numerous factors, including the amount of the additional power loss, when in the life of Telstar 10/Apstar IIR the loss occurred, and the number and type of uses being made of transponders then in service. It is also possible that one or more transponders on a satellite may need to be removed from service to accommodate the power loss and to preserve full performance capabilities of the remaining transponders. A complete or partial loss of Telstar 10/Apstar IIR could result in a loss of revenues and profits. Based upon information currently available, including design redundancies to accommodate small power losses and the fact that no pattern has been identified as to the timing or specific location within the solar arrays of the failures, the Company believes that this matter will not have a material adverse effect on its consolidated financial position or our results of operations. 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. Telstar 10/Apstar IIR, manufactured by SS/L and owned by Loral Orion, has 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 Telstar 10/Apstar IIR. The insurance coverage for Telstar 10/Apstar IIR provides for coverage of losses due to solar array failures only in the event of a capacity loss of 75% or more. One other satellite owned by Loral Orion has the same solar array configuration as Telstar 10/Apstar IIR. There can be no assurance that the insurers will not require either exclusions of, or similar limitations on, coverage due to solar array failures in connection with the renewal of insurance for this 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. Some of Loral Orion's bondholders have questioned whether this limitation is in compliance with the insurance covenant in the Loral Orion indenture. Loral Orion believes that it is in compliance with the covenant as properly interpreted. If, however, Loral Orion's bondholders were to give notice of a default under the indenture because of such limitations, and a court ruled against Loral Orion on this matter, the maturity of Loral Orion's 10% senior notes could be accelerated. On September 20, 2002, Loral Orion entered into an agreement with APT Satellite Company Limited ("APT") pursuant to which Loral Orion will purchase a 50% interest in the Telstar 18/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 is $115.1 million, representing 50% of the estimated project cost of constructing, launching and insuring the Telstar 18/Apstar V satellite, which purchase price will be adjusted if the actual project cost is greater or less than $230.2 million. Telstar 18/Apstar V will have a total of 54 transponders, comprised of 24 standard C-band transponders, 14 extended C-band transponders and 16 Ku-band transponders. Under this transaction, Loral Orion has agreed to purchase 12 standard C-band, 7 extended C-band and 8 Ku-band transponders on Telstar 18/Apstar V, which capacity will be 18 designated Telstar 18. Loral Orion will also have the option to enter into similar arrangements with APT on replacement satellites upon the end of life of Telstar 18/Apstar V. To be located at 138 degrees East Longitude, Telstar 18/ Apstar V is currently scheduled to be launched in the third quarter of 2003 and will be capable of providing Ku-band voice, video and data services to China, India and East Asia, and broadbeam C-band services throughout the Asia-Pacific region, including Australia and Hawaii. To ensure a timely launch of Telstar 18/ Apstar V, Loral Orion, APT and SS/L have agreed that a non-Chinese launch provider will be used. Pursuant to Loral Orion's agreement with APT, Loral Orion will pay one-half the purchase price prior to launch for 13.5 transponders on the satellite. The corresponding cumulative costs relating to these transponders have been reflected as satellites under construction on Loral Orion's condensed consolidated balance sheet as of March 31, 2003. Subject to certain acceleration rights on the part of Loral Orion, the remainder of the purchase price for the second 13.5 transponders will be paid by Loral Orion as follows: on the second anniversary of the satellite's in-service date, $10.66 million for 2.5 additional transponders; on the third anniversary of the satellite's in-service date, $12.79 million for three additional transponders; and on each of the fourth and fifth anniversaries of the satellite's in-service date, $17.05 million for four additional transponders. Title to these transponders will pass to Loral Orion upon its payments thereon. As a result of finalizing the Telstar 18/Apstar V launch arrangements in March 2003, the Company agreed to take two fewer transponders without any corresponding change to the transponder cost borne by each of the parties. Loral Orion and APT are in the process of finalizing the definitive documents to reflect this change. Loral SpaceCom has agreed to purchase from Loral Orion 4.75 transponders on Telstar 18/Apstar V, together with a lease of an additional transponder for an approximate two year period from the Telstar 18/Apstar V in-service date for approximately $29 million. The Company, like others in the satellite industry, are faced with significantly higher premiums on launch and in-orbit insurance, increasing thresholds in determining total losses for satellites in orbit and significantly shorter coverage periods than those that have been available in the past, which was due in part to the events of September 11, 2001. This development in the insurance industry has increased the Company's cost of doing business. The Company intends to pass on some of the increased cost to its customers. There can be no assurance, however, that the Company will be able to do so. Insurance market conditions have historically been cyclical in nature. While the Company anticipates that these conditions will improve in the future, there can be no assurance that they will. Accounting Pronouncements SFAS 142 On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. SFAS 142 also changed the evaluation criteria for testing goodwill for impairment from an undiscounted cash flow approach, which was previously utilized under the guidance in 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 19 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 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for financial statements of interim or annual reports ending after December 15, 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, except as stated in the statement for hedging relationships designated after June 30, 2003. The Company is currently evaluating the provisions of SFAS 149. ITEM 4. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES (a) Evaluation of 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-14(c) and 15-d-14(c)) as of a date (the "Evaluation Date") within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, the Company's disclosure controls and procedures were adequate 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) Changes in internal controls. There were no significant changes in the Company's internal or, in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the Evaluation Date. 20 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 99.1 -- 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 99.2 -- 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: DATE OF REPORT DESCRIPTION --------------------- NONE 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LORAL ORION, INC. Registrant Date: May 15, 2003 /s/ RICHARD J. TOWNSEND ----------------------- Richard J. Townsend Senior Vice President and Chief Financial Officer (Principal Financial Officer and Registrant's Authorized Officer) 22 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Loral Orion, Inc,. (the "registrant") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Quarterly Report"), I, Bernard L. Schwartz, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that: (1) I have reviewed this Quarterly Report on Form 10-Q of Loral Orion, Inc.; (2) Based on my knowledge, this Quarterly Report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; (3) Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this Quarterly Report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Bernard L. Schwartz - -------------------------- Bernard L. Schwartz Chief Executive Officer May 15, 2003 23 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Loral Orion, Inc. (the "registrant") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Quarterly Report"), I, Richard J. Townsend, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, that: (1) I have reviewed this Quarterly Report on Form 10-Q of Loral Orion, Inc.; (2) Based on my knowledge, this Quarterly Report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Quarterly Report; (3) Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this Quarterly Report; (4) The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c) presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; (5) The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and (6) The registrant's other certifying officers and I have indicated in this Quarterly Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses /s/ Richard J. Townsend - ---------------------------- Richard J. Townsend Senior Vice President and Chief Financial Officer May 15, 2003 24 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------------ ---------------------------------------------------------------------- Exhibit 99.1 -- 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 99.2 -- 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
25 EX-99.1 3 y86570exv99w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Loral Orion, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bernard L. Schwartz, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Bernard L. Schwartz - ---------------------------- Bernard L. Schwartz Chief Executive Officer May 15, 2003 26 EX-99.2 4 y86570exv99w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Loral Orion, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard J. Townsend, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Richard J. Townsend - ---------------------------- Richard J. Townsend Senior Vice President and Chief Financial Officer May 15, 2003 27 -----END PRIVACY-ENHANCED MESSAGE-----