10-Q 1 y91705e10vq.txt LORAL ORION, INC. ================================================================================ 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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 COMMISSION FILE NUMBER 0-22085 LORAL ORION, INC. DELAWARE 52-1564318 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 500 HILLS DRIVE, BEDMINSTER, NJ 07921 TELEPHONE: (908) 470-2300 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: 11 1/4% SENIOR NOTES DUE 2007 12 1/2% SENIOR DISCOUNT NOTES DUE 2007 10% SENIOR NOTES DUE 2006 The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12 b-2). Yes [ ] No [X] The number of shares of common stock, par value $.01 per share of the registrant outstanding as of September 30, 2003 was 100, all of which were owned, directly or indirectly, by Loral Space & Communications Ltd. ================================================================================ PART 1. FINANCIAL INFORMATION LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR VALUE) (UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 2003 2002 -------------- -------------- ASSETS Current assets: Cash and cash equivalents...................................... $ 52,798 $ 42,964 Accounts receivable, net....................................... 7,936 7,615 Prepaid expenses and other current assets...................... 5,072 13,213 Due from Loral companies....................................... -- 52,577 -------------- -------------- Total current assets....................................... 65,806 116,369 Satellites and related equipment, net............................. 474,497 524,699 Other assets, net................................................. 11,865 17,318 -------------- -------------- Total assets............................................... $ 552,168 $ 658,386 ============== ============== LIABILITIES AND STOCKHOLDER'S DEFICIT Liabilities not subject to compromise: Current liabilities: Current portion of long-term debt............................ $ -- $ 62,996 Accounts payable............................................. 461 2,387 Customer advances............................................ 1,448 3,731 Due to Loral companies....................................... 3,806 46,723 Accrued interest and other current liabilities............... -- 6,431 -------------- -------------- Total current liabilities.................................. 5,715 122,268 Customer advances............................................... 4,089 8,765 Long-term liabilities........................................... -- 6,297 Long-term debt.................................................. -- 888,532 Note payable to Loral SpaceCom.................................. -- 31,540 -------------- -------------- Total liabilities not subject to compromise....................... 9,804 1,057,402 Liabilities subject to compromise................................. 1,012,062 -- Commitments and contingencies (Notes 2,5,6 and 9) Stockholder's deficit: Common stock, $.01 par value................................... -- -- Paid-in capital................................................ 604,166 604,166 Due from Loral companies....................................... (57,747) -- Retained deficit............................................... (1,016,117) (1,003,182) -------------- -------------- Total stockholder's deficit................................ (469,698) (399,016) -------------- -------------- Total liabilities and stockholder's deficit................ $ 552,168 $ 658,386 ============== ==============
See notes to condensed consolidated financial statements 2 LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- ---------------------- 2003 2002 2003 2002 --------- --------- --------- --------- Revenues from satellite services ............................. $ 24,398 $ 25,776 $ 74,307 $ 82,976 Operating expenses: Cost of satellite services ................................ 23,587 22,639 70,764 67,934 Selling, general and administrative expenses .............. 3,559 2,804 8,490 9,147 --------- --------- --------- --------- Operating (loss) income before reorganization expenses due to bankruptcy .......................................... (2,748) 333 (4,947) 5,895 Reorganization expenses due to bankruptcy .................... (1,575) -- (1,575) -- --------- --------- --------- --------- Operating (loss) income ...................................... (4,323) 333 (6,522) 5,895 Interest expense ............................................. (657) (3,062) (6,305) (9,812) Interest income .............................................. 14 208 19 509 --------- --------- --------- --------- Loss before, income taxes and cumulative effect of change in accounting principle .................................... (4,966) (2,521) (12,808) (3,408) Income tax (provision) benefit ............................... (7) 3,274 (127) 4,643 --------- --------- --------- --------- (Loss) income before cumulative effect of change in accounting principle ....................................... (4,973) 753 (12,935) 1,235 Cumulative effect of change in accounting principle (Note 4).. -- -- -- (562,201) --------- --------- --------- --------- Net loss (income) ............................................ $ (4,973) $ 753 $ (12,935) $(560,966) ========= ========= ========= =========
See notes to condensed consolidated financial statements 3 LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ---------------------- 2003 2002 --------- --------- Operating activities: Net loss .............................................. $ (12,935) $(560,966) Non-cash items: Deferred taxes .................................... -- 3,388 Depreciation and amortization ..................... 56,470 56,469 Interest .......................................... 669 909 Provisions for bad debts .......................... 1,578 1,093 Cumulative effect of change in accounting principle........................................ -- 562,201 Changes in operating assets and liabilities: Accounts receivable ............................... (1,899) 1,602 Prepaid expenses and other current assets ......... 8,141 3,102 Other assets ...................................... 3,936 2,902 Accounts payable .................................. (135) (2,113) Accrued interest and other current liabilities .... 384 42 Customer advances ................................. (2,333) (3,885) Other long-term liabilities ....................... (1,284) (1,325) Due to Loral companies, net ....................... (7,372) 2,724 --------- --------- Net cash provided by operating activities ................ 45,220 66,143 --------- --------- Investing activities: Capital expenditures .................................. (4,751) (14,628) --------- --------- Net cash used in investing activities .................... (4,751) (14,628) --------- --------- Financing activities: Interest payments on 10% senior notes ................. (30,635) (45,952) --------- --------- Net cash used in financing activities .................... (30,635) (45,952) --------- --------- Net increase in cash and cash equivalents ................ 9,834 5,563 Cash and cash equivalents at beginning of period ......... 42,964 19,399 --------- --------- Cash and cash equivalents at end of period ............... $ 52,798 $ 24,962 ========= ========= Supplemental information - cash received (paid) for reorganization items: Professional fees..................................... $ (68) $ -- Interest income....................................... 84 -- --------- --------- $ 16 $ -- ========= =========
See notes to condensed consolidated financial statements 4 LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS The principal business of Loral Orion, Inc. (the "Company" or "Loral Orion"), is providing fixed satellite services, including video distribution and other satellite transmission services by leasing transponder capacity on its satellites to its customers for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television ("DTH"). Loral Skynet, a division of Loral SpaceCom Corporation ("Loral SpaceCom" or "LSC"), which is a subsidiary of Loral Space & Communications Corporation, which is in turn a subsidiary of Loral Space & Communications Ltd. ("Loral"), manages the Company's business. The Company operates in one business segment, Fixed Satellite Services ("FSS"). 2. BANKRUPTCY FILINGS On July 15, 2003, Loral, Loral Orion and certain of its subsidiaries, including Loral Asia Pacific Satellite (HK) Limited ("Loral Asia Pacific"), (the "Debtor Subsidiaries"), filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") (Lead Case No. 03-41716 (RDD), Case Nos. 03-41717 (RDD) through 03-41723 (RDD)) (the "Chapter 11 Cases"). Loral Orion and its Debtor Subsidiaries continue to manage their properties and operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the provisions of the Bankruptcy Code. As a result of Loral Orion's and the Debtor Subsidiaries' voluntary petitions for reorganization, Loral Orion's prepetition debt obligations (aggregating $827 million), including its 10% senior notes obligations, have been accelerated and are immediately due and Loral Orion's other prepetition debt obligations of $93 million are subject to acceleration (see Note 5). On July 15, 2003, Loral Orion failed to make interest payments of $30.6 million on its 10% Senior Notes due 2006, $2.1 million on its 11.25% Senior Notes due 2007 and $3.1 million on its 12.50% Senior Notes due 2007. A creditors' committee has been appointed in the Chapter 11 Cases to represent all unsecured creditors, including all holders of Loral Orion's senior unsecured notes, and, in accordance with the provisions of the Bankruptcy Code, will have the right to be heard on all matters that come before the Bankruptcy Court. As provided by the Bankruptcy Code, Loral Orion and its Debtor Subsidiaries have the exclusive right to submit their plan or plans of reorganization for 120 days from the date of the filing of the voluntary petitions. On November 12, 2003, the Bankruptcy Court extended this exclusive period to March 12, 2004. Further extension may be sought and may be granted or rejected by the Bankruptcy Court. If Loral Orion and its Debtor Subsidiaries fail to file their plan or plans of reorganization during such period, or if such plan or plans is not accepted by the required number of creditors and equity holders within the required period, any party in interest may subsequently file its own plan or plans of reorganization for Loral Orion and its Debtor Subsidiaries. A plan of reorganization must be confirmed by the Bankruptcy Court, upon certain findings being made by the Bankruptcy Court which are required by the Bankruptcy Code. The Bankruptcy Court may confirm a plan or plans of reorganization notwithstanding an objection to the plan by an impaired class of creditors or equity holders if certain requirements of the Bankruptcy Code are met. Although Loral Orion and its Debtor Subsidiaries expect to file a reorganization plan or plans that provide for emergence from bankruptcy sometime during 2004, there can be no assurance that a reorganization plan or plans will be proposed by Loral Orion and its Debtor Subsidiaries or confirmed by the Bankruptcy Court or that any such plan will be consummated. During the pendency of the Chapter 11 Cases, Loral Orion's business will be subject to risks and uncertainties relating to the Chapter 11 Cases. For example, the Chapter 11 Cases could adversely affect relationships with Loral Orion's customers and suppliers, which could adversely affect the going concern value of the business and of its assets, particularly if the Chapter 11 Cases are protracted. Also, transactions outside the ordinary course of business will be subject to the prior approval of the Bankruptcy Court which may limit Loral Orion's ability to respond to certain market events or take advantage of certain market opportunities, and, as a result, Loral Orion's operations could be materially adversely affected. As a result of the commencement of the Chapter 11 Cases, the pursuit of all pending claims and litigation against Loral Orion and its Debtor Subsidiaries arising prior to or relating to events which occurred prior to the commencement of the Chapter 11 Cases is 5 generally subject to an automatic stay under Section 362 of the Bankruptcy Code, and, absent further order of the Bankruptcy Court, no party may take any action to recover any prepetition claims, enforce any lien against or obtain possession of any property from Loral Orion or its Debtor Subsidiaries. In addition, pursuant to Section 365 of the Bankruptcy Code, Loral Orion and its Debtor Subsidiaries may reject or assume prepetition executory contracts and unexpired leases, and parties affected by rejections of these contracts or leases may file claims with the Bankruptcy Court which will be addressed in the context of the Chapter 11 Cases. 3. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company in its current structure will continue as a going concern. The factors mentioned in Note 2 above, however, among other things, raise substantial doubt about Loral Orion's ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The ability of the Company to continue as a going concern is dependent on a number of factors including, but not limited to, the Company's development of a plan of reorganization, confirmation of the plan by the Bankruptcy Court, customer retention and the Company's ability to continue to provide high quality services. If a plan of reorganization is not confirmed and implemented, the Company may be forced to liquidate under applicable provisions of the Bankruptcy Code. There can be no assurance of the level of recovery that the Company's creditors would receive in such liquidation. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities if the Company is forced to liquidate. The condensed consolidated financial statements have been prepared by the Company pursuant to the rules of the Securities and Exchange Commission ("SEC") and, in the opinion of the Company, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of results of operations, financial position, and cash flows as of and for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules. The Company believes that the disclosures made are adequate to keep the information presented from being misleading. The results of operations for the three and nine months ended September 30, 2003, are not necessarily indicative of the results to be expected for the full year. The December 31, 2002 balance sheet has been derived from the audited consolidated financial statements at that date. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto of Loral Orion in Loral Orion's latest Annual Report on Form 10-K. The condensed consolidated financial statements have been prepared in accordance with Statement of Position No. 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code ("SOP 90-7"). SOP 90-7 requires an entity to distinguish prepetition liabilities subject to compromise from postpetition liabilities in the Company's condensed consolidated balance sheet. The caption "liabilities subject to compromise" reflects the Company's best current estimate of the amount of prepetition claims that will be restructured in Loral Orion's and its Debtor Subsidiaries' Chapter 11 Cases. In addition, the Company's condensed consolidated statement of operations portrays the results of operations of the reporting entity during Chapter 11 proceedings. As a result, any revenue, expenses, realized gains and losses, and provision for losses resulting directly from the reorganization and restructuring of the organization are reported separately as reorganization items, except those required to be reported as discontinued operations and extraordinary items in conformity with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS 144") and SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections ("SFAS 145"). The Company did not prepare condensed combined financial statements for Loral Orion and the Debtor Subsidiaries, since the subsidiaries that did not file voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code were immaterial to the Company's consolidated financial position and results of operations. In accordance with SOP 90-7, the Company stopped accruing interest expense on its liabilities subsequent to July 14, 2003. Income Taxes At December 31, 2002, the Company recorded a 100% valuation allowance against its deferred tax assets under the criteria of SFAS No. 109, Accounting for Income Taxes. The Company continued to maintain the 100% valuation allowance during 2003 and recorded no benefit in 2003 under the tax sharing agreement with Loral Space and Communications Corporation for its loss. The tax provision for 2003 represents foreign income taxes. For the three and nine months ended September 30, 2002, the Company recorded a tax benefit of $3.3 million and $4.6 million, respectively, under the tax sharing agreement. 6 Reclassifications Certain reclassifications have been made to conform prior year amounts to the current year's presentation. 4. ACCOUNTING FOR GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. SFAS 142 also changed the evaluation criteria for testing goodwill for impairment from an undiscounted cash flow approach, which was previously utilized under the guidance in SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121") and Accounting Principles Board Opinion No. 17, Intangible Assets ("APB 17"), to a test based on fair value. Fair value is determined by the amount at which an asset or liability could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Quoted market prices in active markets are the best evidence of fair value and must be used as the basis for the measurement, if available. If quoted market prices are not available, the estimate of fair value must be based on the best information available, including prices for similar assets and liabilities and the results of using other valuation techniques, such as public company trading multiples and future discounted cash flows. Goodwill In accordance with SFAS 142, the Company's previously recognized cost in excess of net assets acquired ("goodwill") of $562 million (at December 31, 2001) from the acquisition of the Company by Loral in 1998 was reviewed under the new transitional guidance as of January 1, 2002. The Company hired professionals in the valuation consulting business to determine the fair value of the Company. Since there were no quoted market prices in active markets for the Company, the measurement of fair value was based on the best information available in the circumstances, including reasonable and supportable assumptions and projections, to determine that the most appropriate method of fair value was public company trading multiples. Based on the fair values concluded on by those professionals, management determined that the Company's goodwill under the new guidance in SFAS 142 was fully impaired. Accordingly, as of January 1, 2002, the Company recorded a non-cash charge for the cumulative effect of the change in accounting principle of $562 million. The charge is the result of a change in the evaluation criteria for goodwill from an undiscounted cash flow approach, which was previously utilized under the guidance in SFAS 121 and APB 17, to the fair value approach which is stipulated in SFAS 142. Other Acquired Intangible Assets The Company evaluated the useful lives of its other acquired intangible assets in connection with the adoption of SFAS 142 and determined that no changes to the useful lives were necessary. Other acquired intangible assets are included in other assets in the Company's condensed consolidated balance sheets as follows (in millions):
SEPTEMBER 30, 2003 DECEMBER 31, 2002 -------------------------- ------------------------ GROSS ACCUMULATED GROSS ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION ------- ------------ ------- ------------ Customer relations $ 7.0 $ (5.3) $ 7.0 $ (4.5) Trademarks.......... 6.0 (4.5) 6.0 (3.9) Regulatory.......... 2.5 (1.6) 2.5 (1.4) ------- -------- ------- ------ Total............ $ 15.5 $ (11.4) $ 15.5 $ (9.8) ======= ======== ======= ======
As of September 30, 2003, the weighted average remaining amortization period for customer relations and trademarks was two years and for regulatory fees was seven years. Total amortization expense for other acquired intangible assets was $0.5 million for both the three months ended September 30, 2003 and 2002 and $1.5 million for both the nine months ended September 30, 2003 and 2002. Annual amortization expense for other acquired intangible assets for the five years ending December 31, 2007 is estimated to be as follows (in millions): 7 2003................ $ 2.0 2004................ 2.0 2005................ 1.2 2006................ -- 2007................ --
5. DEBT Debt consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 2003 2002 ----------- ----------- 10.00% senior notes due 2006: Principal amount.............................................. $ 612,704 $ 612,704 Accrued interest (deferred gain on debt exchanges)............ 214,446 245,080 11.25% senior notes due 2007 (principal amount $37 million)...... 39,401 39,762 12.50% senior discount notes due 2007 (principal amount at maturity and accreted principal amount $49 million)........... 53,426 53,982 ----------- --------- Total debt.................................................... 919,977 951,528 Less, current maturities as of December 31, 2002 and amounts included in liabilities subject to compromise as of September 30, 2003............................................ 919,977 62,996 ----------- ---------- $ -- $ 888,532 =========== ==========
As a result of Loral Orion's and the Debtor Subsidiaries' voluntary petitions for reorganization, Loral Orion's prepetition debt obligations (aggregating $827 million), including its 10% senior notes obligations, have been accelerated and are immediately due and Loral Orion's other prepetition debt obligations of $93 million are subject to acceleration. On July 15, 2003, Loral Orion failed to make interest payments of $30.6 million on its 10% Senior Notes due 2006, $2.1 million on its 11.25% Senior Notes due 2007 and $3.1 million on its 12.50% Senior Notes due 2007. A creditors' committee has been appointed in the Chapter 11 Cases to represent all unsecured creditors, including all holders of Loral Orion's senior unsecured notes, and, in accordance with the provisions of the Bankruptcy Code, will have the right to be heard on all matters that come before the Bankruptcy Court. 6. LIABILITIES SUBJECT TO COMPROMISE As discussed in Note 2, the Company has been operating as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the provisions of the Bankruptcy Code. In the condensed consolidated balance sheet, the caption "liabilities subject to compromise" reflects Loral Orion's current estimate of the amount of prepetition claims that will be restructured in Loral Orion's and its Debtor Subsidiaries' Chapter 11 Cases. Pursuant to court order, Loral Orion has been authorized to pay certain prepetition operating liabilities incurred in the ordinary course of business (e.g. insurance). Since July 15, 2003, as permitted under the Bankruptcy Code, the Company has rejected certain of its prepetition obligations. Loral Orion is in the process of calculating its estimated liability to the unsecured creditors affected by these contract rejections. Loral Orion will notify all known claimants subject to the bar date of their need to file a proof of claim with the 8 Bankruptcy Court. A bar date is the date by which claims against Loral Orion and its Debtor Subsidiaries must be filed if the claimants wish to receive any distribution in the Chapter 11 Cases. No bar date has yet been set by the Bankruptcy Court. Differences between liability amounts estimated by the Company and claims filed by creditors will be investigated and the Bankruptcy Court will make a final determination of the allowable claim. The determination of how liabilities will ultimately be settled and treated cannot be made until the Bankruptcy Court approves a Chapter 11 plan of reorganization. Loral Orion and its Debtor Subsidiaries will continue to evaluate the amount and classification of their prepetition liabilities in general through the remainder of their Chapter 11 Cases. Should Loral or its Debtor Subsidiaries, through this ongoing evaluation, identify additional liabilities subject to compromise, such amounts will be recognized accordingly. As a result, "liabilities subject to compromise" are subject to change. Claims classified as "liabilities subject to compromise" represent secured as well as unsecured claims. Liabilities subject to compromise at September 30, 2003 consisted of the following (in thousands): Debt obligations......................................... $ 919,977 Accounts payable......................................... 1,791 Customer advances........................................ 4,626 Accrued interest and other current liabilities........... 6,815 Other long term liabilities ............................. 5,013 Due to Loral companies................................... 40,714 Note payable to Loral SpaceCom........................... 33,126 ----------- Total liabilities subject to compromise.............. $ 1,012,062 ===========
7. REORGANIZATION EXPENSES DUE TO BANKRUPTCY Reorganization expenses due to bankruptcy for the period from July 15, 2003 (filing date) to September 30, 2003 include professional fees associated with developing a plan of reorganization and for bankruptcy services and interest income and were as follows (in thousands): Professional fees.................................... $ 1,659 Interest income...................................... (84) --------- Total reorganization expenses due to bankruptcy.... $ 1,575 =========
8. RELATED PARTY TRANSACTIONS Due from (to) Loral companies consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 2003 2002 ------------- ------------ Loral Space & Communications Corporation....... $ 46,424 $ 43,772 Loral Skynet Network Services, Inc............. 10,442 8,805 Loral SpaceCom Corporation ("LSC")............. (28,009) (23,977) Loral Skynet................................... (9,581) (7,854) Space Systems/Loral ("SS/L")................... (6,049) (14,892) ----------- ---------- $ 13,227 $ 5,854 =========== ==========
As a result of the uncertainty regarding collectibility, due to Loral Space & Communications Corporation and Loral Skynet Network Services, Inc. (formerly known as Loral Cyberstar, Inc.) filing voluntary petitions for reorganization, the Company's receivables due from Loral Space & Communications Corporation, Loral Skynet Network Services, Inc. and SS/L (aggregating $57.7 million as of September 30, 2003) have been reflected as debit balances in stockholder's deficit. Liabilities due to related parties of $40.7 million have been included in liabilities subject to compromise as of September 30, 2003 (see Note 6). Loral Skynet Agreements Effective January 1, 1999, Loral Orion and Loral Skynet entered into agreements (the "Loral Skynet Agreements"), whereby Loral Skynet provides to Loral Orion (i) marketing and sales of satellite capacity services on the Loral Orion satellite network and related billing and administration of customer contracts for those services (the "Sales Services") and (ii) telemetry, tracking and control services for the Loral Orion satellite network (the "Technical Services", and together with the Sales Services, the "Services"). Loral Orion is charged Loral Skynet's estimated costs for providing these services plus a 5 percent administrative fee. Effective September 1, 2003, the Loral Skynet Agreements were amended to reflect a price increase, which is expected to increase the cost to Loral Orion by approximately $3.5 million per quarter. The increase in the cost to Loral Orion during the quarter ended September 30, 2003 was approximately $1.1 million. 9 Note Payable to LSC The Company has a note payable outstanding with LSC in the principal amount of $29.7 million due 2006, having an interest rate of 10% per annum payable in kind, subordinated to Loral Orion's 10% senior notes. As of September 30, 2003, the balance of the note was $33.1 million, including accrued interest which is included in liabilities subject to compromise (see Note 6). 9. COMMITMENTS AND CONTINGENCIES On September 20, 2002, and as further amended in March 2003, Loral and Loral Orion agreed with APT Satellite Company Limited ("APT") to jointly acquire the Apstar V satellite, a satellite then under construction by SS/L for APT pursuant to which Loral Orion and APT agreed to share, on a 50/50 basis, the project cost of constructing, launching and insuring the satellite. Under this agreement, Loral Orion would initially acquire 23% of the satellite in return for paying 25% of the project cost, and would pay to APT over time an additional 25% of the project cost to acquire an additional 23% interest in the satellite. Of the 12.5 transponders initially acquired by Loral Orion, Loral SpaceCom has agreed to purchase from Loral Orion 4.75 of such transponders, together with a lease of an additional transponder for an approximate two-year period from the satellite's in-service date, at a price equal to 12.5% of the project cost of the satellite. In August 2003, in order to expedite the receipt of necessary export licenses from the U.S. government, Loral Orion and APT amended their various agreements to convert their arrangement from a joint ownership arrangement to a lease arrangement, but leaving unchanged the cost allocation between the parties relating to the project cost of the satellite and the arrangement between Loral Orion and Loral SpaceCom described above. Under this arrangement approved by the Bankruptcy Court in October 2003, Loral Orion will retain title to the entire satellite, now known as Telstar 18, and will lease to APT transponders representing initially 77% of the transponder capacity on the satellite. The number of transponders leased to APT would be reduced over time upon repayment by Loral Orion of the second 25% of the satellite's project cost. Upon payment in full by Loral Orion of 50% of the project cost of the satellite, the lease to APT would be reduced from 77% to 54% of the satellite's transponder capacity. At September 30, 2003 the project cost of the satellite was estimated at $230 million. The second 25% of the project cost of the satellite to be repaid by Loral Orion to APT as termination fees are estimated as follows: $7 million to terminate APT's leasehold interest in 2.5 additional transponders on the second anniversary of the satellite's in-service date; $13 million for three additional transponders on the third anniversary; and $18 million for four additional transponders on each of the fourth and fifth anniversary. Loral Orion may at its option, elect to accelerate the termination of APT's leasehold interest in certain of the foregoing transponders upon earlier payment of the related termination fee. Loral Orion has agreed that if so requested by APT, it will seek further government approval to transfer a portion of the satellite to APT. If it is successful in doing so, the parties will revert back to the original joint ownership arrangement. As a result of the above changes to the agreement, whereby Loral Orion will retain title and provide capacity to APT under a lease arrangement, in the fourth quarter of 2003 Loral Orion will record 100% of the satellite cost, deferred revenue to APT for the capacity that APT will be leasing, and a long-term liability to APT for the leasehold interests to be acquired by Loral Orion from APT in the future (which will be based on the present value of such obligations). In October 2003, Loral and APT have engaged in discussions to further revise their existing arrangement. Under this proposed arrangement, Loral would accelerate the termination of APT's leasehold interest in 4.5 transponders by assuming $20.4 million of project cost which otherwise would have been initially borne by APT, increasing Loral's initial economic interest in the satellite from 23% to 31%. In addition, Loral Orion would provide to APT, free of charge, available capacity on Telstar 10/Apstar IIR, during an interim period and provide APT with certain rights to exchange Ku-band transponder capacity, on Telstar 18 for Ku-band transponder capacity on Telstar 10/Apstar IIR. The effectiveness of any revised arrangement agreed to between APT and Loral will be subject to the approval of the Bankruptcy Court. In November 1995, a component on Telstar 11 malfunctioned, resulting in a 2-hour service interruption. The malfunctioning component supported nine transponders serving the European portion of Telstar 11's footprint. Full service was restored using a back-up component. If that back-up component fails, Telstar 11 would lose a significant amount of usable capacity. In such event, the Company could lease replacement capacity and function as a reseller with respect to such capacity. In addition, Loral Orion did not renew its in-orbit insurance policy due to the high cost of such insurance and the relative age of the satellite. As of September 30, 2003, the net book value of the satellite was $65 million. A loss of the satellite, would have a material adverse effect on the Company. Telstar 12, originally intended to operate at 12 degrees W.L., was launched aboard an Ariane launch vehicle in October 1999 into the orbital slot located at 15 degrees W.L., and commenced operations in January 2000. Under an agreement reached with Eutelsat, Loral Orion agreed to operate Telstar 12 at 15 degrees W.L. while Eutelsat continues to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority rights at such location on Loral Orion's behalf. As part of this coordination effort, Loral Orion agreed to provide to Eutelsat four 54 MHz transponders on Telstar 12 for the 10 life of the satellite and has retained risk of loss with respect to those transponders. Eutelsat also has the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. As part of the international coordination process, Loral Orion continues to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees W.L. If these discussions are not successful, Telstar 12's useable capacity may be reduced. While the Company has in the past, consistent with industry practice and the requirements of the Company's indenture, typically obtained in-orbit insurance for its satellites, the Company cannot guarantee that, upon a policy's expiration, the Company will be able to renew the insurance on acceptable terms, especially on satellites that have, or that are part of a family of satellites that have, experienced problems in the past. Two satellites owned by Loral Orion have the same solar array configuration as two other 1300-class satellites manufactured by SS/L that have experienced solar array failures. SS/L believes that these failures are isolated events and do not reflect a systemic problem in either the satellite design or manufacturing process. Accordingly, the Company does not believe that these anomalies will affect these satellites. The insurance coverage for Telstar 10/Apstar IIR, however, provides for coverage of losses due to solar array failures only in the event of a capacity loss of 80% or more. The Company believes that the insurers will require either exclusions of, or limitations on, coverage due to solar array failures in connection with the renewal of insurance for the Company's other satellite in 2004. An uninsured loss of a satellite would have a material adverse effect on the Company's consolidated financial position and results of operations. The Company is subject to various other legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Although the outcome of these claims cannot be predicted with certainty, the Company does not believe that any of these other existing legal matters will have a material adverse effect on its consolidated financial position or results of operations. These claims against the Company are subject to the automatic stay as a result of the commencement of the Chapter 11 Cases. 10. NEW ACCOUNTING PRONOUNCEMENTS SFAS 143 In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. The Company has determined that there was no effect on its consolidated financial position or results of operations upon the adoption of SFAS 143 on January 1, 2003. FIN 45 In November 2002, the FASB issued FIN 45 which elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation were applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements were effective for financial statements of interim or annual reports ending after December 15, 2002. The Company adopted the disclosure provisions of FIN 45 during the fourth quarter of 2002. The Company adopted the recognition provisions of FIN 45 on January 1, 2003 and determined that there was no effect on its consolidated financial position or results of operations. FIN 46 In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 ("FIN 46"). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 will be applied by the Company as of December 31, 2003. The Company is currently evaluating the provisions of FIN 46. 11 SFAS 149 In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003, except for certain provisions that relate to SFAS 133 Implementation Issues that have been effective for fiscal quarters prior to June 15, 2003. Management determined that the adoption of SFAS 149 did not have an impact on its consolidated financial position or results of operations. SFAS 150 In May 2003, the FASB issued SFAS 150 which establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within the scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Management has determined that there was no effect on its consolidated financial position or results of operations upon the adoption of SFAS 150 on July 1, 2003. EITF 00-21 In November 2002, the Emerging Issues Task Force of the FASB ("EITF") reached a consensus on Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). EITF 00-21 addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the related revenues should be measured and allocated to the separate units of accounting. EITF 00-21 applies to revenue arrangements entered into after June 30, 2003; however, upon adoption, the EITF allows the guidance to be applied on a retroactive basis, with the change, if any, reported as a cumulative effect of accounting change in the statement of operations. Management determined that the adoption of EITF 00-21 did not have an effect on the Company's consolidated financial position or results of operations. 11. FINANCIAL INFORMATION FOR PARENT, ISSUER'S PARENT, GUARANTOR SUBSIDIARIES AND OTHER SUBSIDIARIES Loral Orion's (the "Parent Company") 10% Senior Notes due 2006 are fully and unconditionally guaranteed, on a joint and several basis, by several of its wholly-owned subsidiaries (the "Guarantor Subsidiaries") and Loral ("Issuer's Parent"). The Company's remaining original senior notes and senior discount notes are fully and unconditionally guaranteed, on a joint and several basis, by the Guarantor Subsidiaries and substantially all of the other wholly-owned subsidiaries (the "Other Subsidiaries"). The Parent Company, Issuer's Parent, the Guarantor Subsidiaries and certain other non-guarantor subsidiaries of Loral Orion filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code on July 15, 2003. Presented below is condensed consolidating financial information for the Parent Company, Issuer's Parent, the Guarantor Subsidiaries and the Other Subsidiaries as of September 30, 2003 and December 31, 2002 and for the three and nine months ended September 30, 2003 and 2002. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of the Parent Company, Issuer's Parent, Guarantor Subsidiaries and Other Subsidiaries. The supplemental condensed consolidating financial information reflects the investments of the Parent Company in the Guarantor Subsidiaries and the Other Subsidiaries using the equity method of accounting. The Company's significant transactions with its subsidiaries, other than the investment account and related equity in net loss of unconsolidated subsidiaries, are intercompany payables and receivables between its subsidiaries. 12 CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 30, 2003 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ----------- ---------- ------------ ------------ ------------ Current assets: Cash and cash equivalents ................. $ 52,798 $ 4,545 $ -- $ -- $ (4,545) $ 52,798 Accounts receivable, net .................. 7,418 -- 518 -- -- 7,936 Prepaid expenses and other current assets . 4,505 4,301 1,532 -- (5,266) 5,072 ----------- ----------- ---------- ------------ ------------ ------------ Total current assets ................... 64,721 8,846 2,050 -- (9,811) 65,806 Property, plant and equipment, net .......... 285,556 -- 188,941 -- -- 474,497 Due (to) from unconsolidated subsidiaries ... (10,909) (849) 18,105 -- (10,153) (3,806) Investments in unconsolidated subsidiaries .. 309,853 (199,628) (271,698) -- 161,473 -- Investments in and advances to affiliates ... -- (30,120) -- -- 30,120 -- Other assets, net ........................... 11,274 4,253 591 -- (4,253) 11,865 ----------- ----------- ---------- ------------ ------------ ------------ Total assets ........................... $ 660,495 $ (217,498) $ (62,011) $ -- $ 167,376 $ 548,362 =========== =========== ========== ============ ============ ============ Liabilities not subject to compromise: Current liabilities: Accounts payable .......................... $ 249 $ -- $ 212 $ -- $ -- $ 461 Customer advances ......................... 1,443 -- 5 -- -- 1,448 Accrued interest, preferred dividends and other current liabilities ................ -- 1,792 -- -- (1,792) -- ----------- ----------- ---------- ------------ ------------ ------------ Total current liabilities .............. 1,692 1,792 217 -- (1,792) 1,909 Long-term liabilities ...................... 4,089 52,233 13,812 -- (66,045) 4,089 ----------- ----------- ---------- ------------ ------------ ------------ Total liabilities not subject to compromise............................. 5,781 54,025 14,029 -- (67,837) 5,998 Liabilities subject to compromise ........... 1,128,725 434,306 (116,663) -- (434,306) 1,012,062 Stockholder's (deficit) equity: Common stock .............................. -- 4,413 -- -- (4,413) -- Paid-in capital ........................... 604,166 3,392,867 -- -- (3,392,867) 604,166 Treasury stock, at cost ................... -- (3,360) -- -- 3,360 -- Unearned compensation ..................... -- (188) -- -- 188 -- Due from Loral companies .................. (57,747) -- -- -- -- (57,747) Retained deficit .......................... (1,020,430) (4,060,669) 40,623 -- 4,024,359 (1,016,117) Accumulated other comprehensive income .... -- (38,892) -- -- 38,892 -- ----------- ----------- ---------- ------------ ------------ ------------ Total stockholder's (deficit) equity ... (474,011) (705,829) 40,623 -- 669,519 (469,698) ----------- ----------- ---------- ------------ ------------ ------------ Total liabilities and stockholder's (deficit) equity....................... $ 660,495 $ (217,498) $ (62,011) $ -- $ 167,376 $ 548,362 =========== =========== ========== ============ ============ ============
13 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2003 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- --------- ---------- ------------ ------------ ------------ Revenues from satellite services .... $ 22,631 $ -- $ 9,906 $ -- $ (8,139) $ 24,398 Cost of satellite services .......... 23,721 -- 8,005 -- (8,139) 23,587 Selling, general and administrative expenses ........... 2,587 3,169 972 -- (3,169) 3,559 Management fee expense .............. -- (109) -- -- 109 -- --------- --------- ---------- ----- ------------ ------------ Operating (loss) income before reorganization expenses due to bankruptcy ........................ (3,677) (3,060) 929 -- 3,060 (2,748) Reorganization expenses due to bankruptcy ........................ (1,575) (814) -- -- 814 (1,575) --------- --------- ---------- ----- ------------ ------------ Operating (loss) income ............. (5,252) (3,874) 929 -- 3,874 (4,323) Interest expense .................... (657) (2,005) -- -- 2,005 (657) Interest and investment income ...... 14 873 -- -- (873) 14 --------- --------- ---------- ----- ------------ ------------ (Loss) income before income taxes, equity in net losses of unconsolidated subsidiaries and affiliates and cumulative effect of change in accounting principle (5,895) (5,006) 929 -- 5,006 (4,966) Income tax benefit (provision) ...... (788) (261) (327) -- 1,369 (7) --------- --------- ---------- ----- ------------ ------------ (Loss) income before equity in net losses of unconsolidated subsidiaries and affiliates and cumulative effect of change in accounting principle .............. (6,683) (5,267) 602 -- 6,375 (4,973) Equity in net (losses) income of unconsolidated subsidiaries ....... 602 (82,542) -- -- 81,940 -- Equity in net (losses) income of affiliates ........................ -- (38,100) -- -- 38,100 -- --------- --------- ---------- ----- ------------ ------------ (Loss) income before cumulative effect of change in accounting principle ......................... (6,081) (125,909) 602 -- 126,415 (4,973) Cumulative effect of change in accounting principle .............. -- (1,970) -- -- 1,970 -- --------- --------- ---------- ----- ------------ ------------ Net (loss) income ................... $ (6,081) $(127,879) $ 602 $ -- $ 128,385 $ (4,973) ========= ========= ========== ===== ============ ============
14 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2003 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- --------- ---------- ------------ ------------ ------------ Revenues from satellite services .. $ 68,655 $ -- $ 30,575 $ -- $ (24,923) $ 74,307 Cost of satellite services ........ 71,917 -- 23,770 -- (24,923) 70,764 Selling, general and administrative expenses ......................... 6,948 7,353 1,542 -- (7,353) 8,490 --------- --------- ---------- ----- --------- --------- Operating (loss) income before reorganization expenses due to bankruptcy ...................... (10,210) (7,353) 5,263 -- 7,353 (4,947) Reorganization expenses due to bankruptcy ...................... (1,575) (814) -- -- 814 (1,575) --------- --------- ---------- ----- --------- --------- Operating (loss) income ........... (11,785) (8,167) 5,263 -- 8,167 (6,522) Interest expense .................. (6,305) (21,674) -- -- 21,674 (6,305) Interest and investment income .... 19 12,201 -- -- (12,201) 19 --------- --------- ---------- ----- --------- --------- (Loss) income before income taxes, equity in net losses of unconsolidated subsidiaries and affiliates and cumulative effect of change in accounting principle ....................... (18,071) (17,640) 5,263 -- 17,640 (12,808) Income tax (provision) benefit .... (1,678) (3,656) (1,842) -- 7,049 (127) --------- --------- ---------- ----- --------- --------- (Loss) income before equity in net losses of unconsolidated subsidiaries and affiliates and cumulative effect of change in accounting principle ......... (19,749) (21,296) 3,421 -- 24,689 (12,935) Equity in net (losses) income of unconsolidated subsidiaries ..... 3,421 (197,683) -- -- 194,262 -- Equity in net (losses) income of affiliates ...................... -- (50,893) -- -- 50,893 -- --------- --------- ---------- ----- --------- --------- (Loss) income before cumulative effect of change in accounting principle ....................... (16,328) (269,872) 3,421 -- 269,844 (12,935) Cumulative effect of change in accounting principle ............ -- (1,970) -- -- 1,970 -- --------- --------- ---------- ----- --------- --------- Net (loss) income ................. $ (16,328) $(271,842) $ 3,421 $ -- $ 271,814 $ (12,935) ========= ========= ========== ===== ========= =========
15 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2003 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARY SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- --------- ---------- ------------ ------------ ------------ Operating activities: (Loss) income from continuing operations ................. $(16,328) $(271,842) $ 3,421 $ -- $ 271,814 $ (12,935) Non-cash items: Equity in net losses of affiliates ...................... -- 50,893 -- -- (50,893) -- Equity in net losses of unconsolidated subsidiaries ..... (3,421) 197,683 -- -- (194,262) -- Cumulative effect of change in accounting principle ..... -- 1,970 -- -- (1,970) -- Deferred taxes .......................................... -- 3,656 3,393 -- (7,049) -- Depreciation and amortization ........................... 40,710 -- 15,760 -- -- 56,470 Provisions for bad debt ................................. 1,423 -- 155 -- -- 1,578 Interest ................................................ 669 -- -- -- -- 669 Accounts receivable, net ................................ (1,364) -- (535) -- -- (1,899) Prepaid expenses and other assets ....................... 4,867 (2,924) 7,158 -- 2,976 12,077 Due (to) from Loral companies, net ...................... 21,733 152 (29,053) -- (204) (7,372) Accounts payable ........................................ (155) -- 20 -- -- (135) Accrued expenses and other current liabilities .......... 384 1,492 -- -- (1,492) 384 Customer advances ....................................... (2,014) -- (319) -- -- (2,333) Other long-term liabilities ............................. (1,284) -- -- -- -- (1,284) Interest ................................................ -- 64 -- -- (64) -- -------- --------- ------- --------- --------- --------- Net cash provided by (used in) operating activities ....... 45,220 (18,856) -- -- 18,856 45,220 -------- --------- ------- --------- --------- --------- Investing activities: Capital expenditures .................................... (4,751) -- -- -- -- (4,751) Investments in and advances to unconsolidated subsidiaries............................................ -- 734 -- -- (734) -- -------- -------- ------- --------- --------- --------- Net cash (used in) provided by in investing activities .... 4,751) 734 -- -- (734) (4,751) -------- -------- ------- --------- --------- --------- Financing activities: Interest payments on 10% senior notes ................... (30,635) -- -- -- -- (30,635) Note receivable from unconsolidated affiliate ........... -- 17,284 -- -- (17,284) -- Proceeds from stock issuances ........................... -- 3,869 -- -- (3,869) -- -------- -------- ------- ---------- --------- --------- Net cash (used in) provided by financing activities ....... (30,635) 21,153 -- -- (21,153) (30,635) -------- -------- ------- ---------- --------- --------- (Decrease) increase in cash and cash equivalents .......... 9,834 3,031 -- -- (3,031) 9,834 Cash and cash equivalents--beginning of period ............ 42,964 1,514 -- -- (1,514) 42,964 -------- --------- ------- ---------- --------- --------- Cash and cash equivalents--end of period .................. $ 52,798 $ 4,545 $ -- $ -- $ (4,545) $ 52,798 ======== ========= ========== ========== ========= =========
16 CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2002 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ----------- ------------ ------------ ------------ ------------ Current assets: Cash and cash equivalents ............ $ 42,964 $ 1,514 $ -- $ -- $ (1,514) $ 42,964 Accounts receivable, net ............. 7,477 -- 138 -- -- 7,615 Prepaid expenses and other current assets ..................... 5,540 823 8,584 -- (1,734) 13,213 ----------- ----------- ------------ ------ ------------ ---------- Total current assets ............. 55,981 2,337 8,722 -- (3,248) 63,792 Satellites and related equipment, net .. 319,998 -- 204,701 -- -- 524,699 Notes (payable to) receivable from unconsolidated subsidiary ............ (31,540) 157,500 -- -- (157,500) (31,540) Due (to) from unconsolidated subsidiaries ......................... (97,652) 36,448 107,917 -- (40,859) 5,854 Investments in unconsolidated subsidiaries ......................... 304,590 (20,185) (271,698) -- (12,707) -- Investments in and advances to affiliates ........................... -- 21,507 -- -- (21,507) -- Other assets, net ...................... 16,622 3,191 696 -- (3,191) 17,318 ----------- ----------- ------------ ------ ------------ ---------- Total assets ..................... $ 567,999 $ 200,798 $ 50,338 $ -- $ (239,012) $ 580,123 =========== =========== ============ ====== ============ ========== Current liabilities: Current portion of long-term debt .... $ 62,996 $ -- $ -- $ -- $ -- $ 62,996 Accounts payable ..................... 1,194 2,404 1,193 -- (2,404) 2,387 Customer advances .................... 3,176 -- 556 -- (1) 3,731 Accrued interest and preferred dividends .......................... 6,431 20,840 -- -- (20,840) 6,431 Income taxes payable ................. -- 8,123 -- -- (8,123) -- ----------- ----------- ------------ ------ ------------ ---------- Total current liabilities ........ 73,797 31,367 1,749 -- (31,368) 75,545 Long-term liabilities .................. 14,040 48,577 11,387 -- (58,942) 15,062 Long-term debt ......................... 888,532 350,000 -- -- (350,000) 888,532 6% Series C convertible redeemable preferred stock ...................... -- 104,582 -- -- (104,582) -- 6% Series D convertible redeemable preferred stock ...................... -- 20,499 -- -- (20,499) -- Stockholder's (deficit) equity: 6% Series C convertible redeemable preferred stock ......... -- 80,171 -- -- (80,171) -- 6% Series D convertible redeemable preferred stock ......... -- 15,125 -- -- (15,125) -- Common stock ......................... -- 4,293 -- -- (4,293) -- Paid-in capital ...................... 604,166 3,389,035 -- -- (3,389,035) 604,166 Treasury stock, at cost .............. -- (3,360) -- -- 3,360 -- Unearned compensation ................ -- (151) -- -- 151 -- Retained deficit ..................... (1,012,536) (3,782,107) 37,202 -- 3,754,259 (1,003,182) Accumulated other comprehensive income ............................. -- (57,233) -- -- 57,233 -- ----------- ----------- ------------ ------ ------------ ---------- Total stockholder's (deficit) equity ........................ (408,370) (354,227) 37,202 -- 326,379 (399,016) ----------- ----------- ------------ ------ ------------ ---------- Total liabilities and stockholder's (deficit) equity ......................... $ 567,999 $ 200,798 $ 50,338 $ -- $ (239,012) $ 580,123 =========== =========== ============ ====== ============ ==========
17 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2002 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- ------------ ------------ ------------ ------------ Revenues from satellite services $ 23,383 $ -- $ 12,052 $ -- $ (9,659) $ 25,776 Cost of satellite services ........ 25,208 -- 7,090 -- (9,659) 22,639 Selling, general and administrative expenses ......... 2,743 1,203 61 -- (1,203) 2,804 Management fee expense ............ -- (4) -- -- 4 -- -------- -------- ------------ ---- ------------ ------------ Operating (loss) income ........... (4,568) (1,199) 4,901 -- 1,199 333 Interest expense .................. (3,062) (9,831) -- -- 9,831 (3,062) Interest and investment income .... 208 5,341 -- -- (5,341) 208 -------- -------- ------------ ---- ------------ ------------ (Loss) income before income taxes and equity in net loss of unconsolidated subsidiaries and affiliates ...................... (7,422) (5,689) 4,901 -- 5,689 (2,521) Income tax (provision) benefit .... 3,848 (1,581) (1,714) -- 2,721 3,274 -------- -------- ------------ ---- ------------ ------------ (Loss) income before equity in net loss of unconsolidated subsidiaries and affiliates ..... (3,574) (7,270) 3,187 -- 8,410 753 Equity in net income (loss) of unconsolidated subsidiaries, net of taxes .................... 3,187 (20,951) -- -- 17,764 -- Equity in net loss of affiliates, net of taxes .................... -- (20,491) -- -- 20,491 -- -------- -------- ------------ ---- ------------ ------------ Net (loss) income ................. $ (387) $(48,712) $ 3,187 $ -- $ 46,665 $ 753 ======== ======== ============ ==== ============ ============
18 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2002 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------ ------------ ------------ ------------ ------------ Revenues from satellite services........ $ 75,190 $ -- $ 36,225 $ -- $ (28,439) $ 82,976 Cost of satellite services.............. 75,087 -- 21,286 -- (28,439) 67,934 Selling, general and administrative expenses.............................. 8,372 3,660 775 -- (3,660) 9,147 Management fee expense.................. -- 23 -- -- (23) -- --------- ---------- ----------- ----------- --------- ---------- Operating (loss) income................. (8,269) (3,683) 14,164 -- 3,683 5,895 Interest expense........................ (9,812) (29,483) -- -- 29,483 (9,812) Interest and investment income.......... 509 15,958 -- -- (15,958) 509 --------- ---------- ----------- ----------- --------- ---------- (Loss) income before income taxes, equity in net loss of unconsolidated subsidiaries and affiliates and cumulative effect of change in accounting principle...... ........... (17,572) (17,208) 14,164 -- 17,208 (3,408) Income tax benefit (provision).......... 6,197 (4,735) (4,942) -- 8,123 4,643 --------- ---------- ------------ ------------- --------- ---------- (Loss) income before equity in net loss of unconsolidated subsidiaries and affiliates and cumulative effect of change in accounting principle........ (11,375) (21,943) 9,222 -- 25,331 1,235 Equity in net income (loss) of unconsolidated subsidiaries, net of taxes................................. 9,222 (888,951) -- -- 879,729 -- Equity in net loss of affiliates, net of taxes.............................. -- (56,747) -- -- 56,747 -- --------- ---------- ----------- ----------- --------- ---------- (Loss) income before cumulative effect of change in accounting principle..... (2,153) (967,641) 9,222 -- 961,807 1,235 Cumulative effect of change in accounting principle.................. (562,201) -- -- -- -- (562,201) --------- ---------- ----------- ----------- --------- ---------- Net (loss) income....................... $(564,354) $ (967,641) $ 9,222 $ -- $ 961,807 $ (560,966) ========= ========== =========== =========== ========= ==========
19 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 2002 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------- ------ ------------ ------------ ------------ ------------ Operating activities: Net (loss) income .............................. $(564,354) $(967,641) $ 9,222 $ -- $ 961,807 $(560,966) Non-cash items: Cumulative effect of change in accounting Principle ................................. 562,201 -- -- -- -- 562,201 Equity in net loss of affiliates, net of taxes -- 56,747 -- -- (56,747) -- Equity in net loss of unconsolidated subsidiaries, net of taxes ................. (9,222) 888,951 -- -- (879,729) -- Deferred taxes ............................... -- 4,735 3,388 -- (4,735) 3,388 Depreciation and amortization ................ 40,709 -- 15,760 -- 56,469 Non-cash interest income ..................... 909 -- -- -- -- 909 Provisions for bad debts ..................... 1,069 -- 24 -- -- 1,093 Changes in operating assets and liabilities: Accounts receivable, net ..................... 1,764 -- (162) -- -- 1,602 Prepaid expenses and other current assets .... 209 -- 2,893 -- -- 3,102 Due (to) from Loral companies, net ........... 37,384 -- (31,272) -- (3,388) 2,724 Due (to) from unconsolidated subsidiaries .... -- (12,899) -- -- 12,899 -- Other assets ................................. 2,780 (446) 122 -- 446 2,902 Accounts payable ............................. (2,363) 171 250 -- (171) (2,113) Accrued expenses and other current liabilities ................................ 42 (10,210) -- -- 10,210 42 Customer advances ............................ (3,660) -- (225) -- -- (3,885) Other long-term liabilities .................. (1,325) -- -- -- -- (1,325) Other ........................................ -- 97 -- -- (97) -- --------- --------- --------- ------- --------- --------- Net cash provided by (used in) operating activities ...................................... 66,143 (40,495) -- -- 40,495 66,143 --------- --------- --------- ------- --------- --------- Investing activities: Capital expenditures ........................... (14,628) -- -- -- -- (14,628) Investments in and advances to affiliates ...... -- (12,092) -- -- 12,092 -- Investments in and advances to unconsolidated subsidiaries .................. -- (2,240) -- -- 2,240 -- --------- --------- --------- ------- --------- --------- Net cash used in investing activities ............. (14,628) (14,332) -- -- 14,332 (14,628) --------- --------- --------- ------- --------- --------- Financing activities: Interest payment on 10% notes .................. (45,952) -- -- -- -- (45,952) Note payable to Loral Satellite ................ -- 29,500 -- -- (29,500) -- Preferred dividends ............................ -- (29,485) -- -- 29,485 -- Proceeds from stock issuances .................. -- 9,967 -- -- (9,967) -- --------- --------- --------- ------- --------- --------- Net cash used in financing activities ............. (45,952) 9,982 -- -- (9,982) (45,952) --------- --------- --------- ------- --------- --------- Increase (decrease) in cash and cash equivalents ..................................... 5,563 (44,845) -- -- 44,845 5,563 Cash and cash equivalents -- beginning of period ......................................... 19,399 46,068 -- -- (46,068) 19,399 --------- --------- --------- ------- --------- --------- Cash and cash equivalents -- end of period ........ $ 24,962 $ 1,223 $ -- $ -- $ (1,223) $ 24,962 ========= ========= ========= ======= ========= =========
20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Except for the historical information contained herein, the matters discussed in the following Management's Narrative Analysis of Results of Operations of Loral Orion, Inc. ("Loral Orion" or the "Company") are not historical facts, but are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. In addition, the Company or its representatives have made and may continue to make forward-looking statements, orally or in writing, in other contexts, such as in reports filed with the SEC, press releases or statements made with the approval of an authorized executive officer of the Company. These forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "plans," "may," "will," "would," "could," "should," "anticipates," "estimates," "project," "intend," or "outlook" or the negative of these words or other variations of these words or other comparable words, or by discussion of strategy that involves risks and uncertainties. These forward-looking statements are only predictions, and actual events or results may differ materially as a result of a wide variety of factors and conditions, many of which are beyond the Company's control. These include the Company developing a plan of reorganization, confirmation of the plan by the Bankruptcy Court, customer retention and the Company's ability to continue to provide high quality services. For a detailed discussion of additional factors and conditions, please also refer to the section of the Company's latest Annual Report on Form 10-K titled "Certain Factors that May Affect Future Results" beginning on page 4 and to the other periodic reports filed with the SEC by Loral Orion. In addition, we caution you that the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the Company's control. The Company undertakes no obligation to update any forward-looking statements. GENERAL The principal business of Loral Orion is leasing transponder capacity on its satellites to its customers for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television ("DTH"). Loral Skynet, a division of Loral SpaceCom Corporation ("Loral SpaceCom" or "LSC"), which is a subsidiary of Loral Space & Communications Corporation, which is in turn a subsidiary of Loral Space and Communications Ltd. ("Loral"), manages the Company's business. The Company operates in one segment, Fixed Satellite Services ("FSS"). BANKRUPTCY FILINGS On July 15, 2003, Loral, Loral Orion and certain of its subsidiaries, including Loral Asia Pacific Satellite (HK) Limited ("Loral Asia Pacific"), (the "Debtor Subsidiaries"), filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") (Lead Case No. 03-41716 (RDD), Case Nos. 03-41717 (RDD) through 03-41723 (RDD)) (the "Chapter 11 Cases"). Loral Orion and its Debtor Subsidiaries continue to manage their properties and operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the provisions of the Bankruptcy Code. As a result of Loral Orion's and the Debtor Subsidiaries' voluntary petitions for reorganization, Loral Orion's prepetition debt obligations (aggregating $827 million), including its 10% senior notes obligations, have been accelerated and are immediately due and Loral Orion's other prepetition debt obligations of $93 million are subject to acceleration (see Note 5 to the condensed consolidated financial statements). On July 15, 2003, Loral Orion failed to make interest payments of $30.6 million on its 10% Senior Notes due 2006, $2.1 million on its 11.25% Senior Notes due 2007 and $3.1 million on its 12.50% Senior Notes due 2007. A creditors' committee has been appointed in the Chapter 11 Cases to represent all unsecured creditors, including all holders of Loral Orion's senior unsecured notes, and, in accordance with the provisions of the Bankruptcy Code, will have the right to be heard on all matters that come before the Bankruptcy Court. As provided by the Bankruptcy Code, Loral Orion and its Debtor Subsidiaries have the exclusive right to submit their plan or plans of reorganization for 120 days from the date of the filing of the voluntary petitions. On November 12, 2003, the Bankruptcy Court extended this exclusive period to March 12, 2004. Further extension may be sought and may be granted or rejected by the Bankruptcy Court. If Loral Orion and its Debtor Subsidiaries fail to file their plan or plans of reorganization during such period, or if such plan or plans is not accepted by the required number of creditors and equity holders within the required period, any party in interest may subsequently file its own plan or plans of reorganization for Loral Orion and its Debtor Subsidiaries. A plan of reorganization must be 21 confirmed by the Bankruptcy Court, upon certain findings being made by the Bankruptcy Court which are required by the Bankruptcy Code. The Bankruptcy Court may confirm a plan or plans of reorganization notwithstanding an objection to the plan by an impaired class of creditors or equity holders if certain requirements of the Bankruptcy Code are met. Although Loral Orion and its Debtor Subsidiaries expect to file a reorganization plan or plans that provide for emergence from bankruptcy sometime during 2004, there can be no assurance that a reorganization plan or plans will be proposed by Loral Orion and its Debtor Subsidiaries or confirmed by the Bankruptcy Court or that any such plan will be consummated. During the pendency of the Chapter 11 Cases, Loral Orion's business will be subject to risks and uncertainties relating to the Chapter 11 Cases. For example, the Chapter 11 Cases could adversely affect relationships with Loral Orion's customers and suppliers, which could adversely affect the going concern value of the business and of its assets, particularly if the Chapter 11 Cases are protracted. Also, transactions outside the ordinary course of business will be subject to the prior approval of the Bankruptcy Court which may limit Loral Orion's ability to respond to certain market events or take advantage of certain market opportunities, and, as a result, Loral Orion's operations could be materially adversely affected. As a result of the commencement of the Chapter 11 Cases, the pursuit of all pending claims and litigation against Loral Orion and its Debtor Subsidiaries arising prior to or relating to events which occurred prior to the commencement of the Chapter 11 Cases is generally subject to an automatic stay under Section 362 of the Bankruptcy Code, and, absent further order of the Bankruptcy Court, no party may take any action to recover any prepetition claims, enforce any lien against or obtain possession of any property from Loral Orion or its Debtor Subsidiaries. In addition, pursuant to Section 365 of the Bankruptcy Code, Loral Orion and its Debtor Subsidiaries may reject or assume prepetition executory contracts and unexpired leases, and parties affected by rejections of these contracts or leases may file claims with the Bankruptcy Court which will be addressed in the context of the Chapter 11 Cases. As part of its Chapter 11 Cases, Loral and its Debtor Subsidiaries routinely file pleadings, documents and reports with the Bankruptcy Court, which may contain updated, additional or more detailed information about the Company, its assets and liabilities or financial performance. Copies of the filings for Loral's Chapter 11 Cases are available, for a fee, during regular business hours at the office of the Clerk of the Bankruptcy Court or from the Bankruptcy Court's website located at http://www.nysb.uscourts.gov. The condensed consolidated financial statements have been prepared assuming the Company in its current structure will continue as a going concern. The factors mentioned above, however, among other things, raise substantial doubt about Loral Orion's ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The ability of the Company to continue as a going concern is dependent on a number of factors including, but not limited to, the Company's development of a plan of reorganization, confirmation of the plan by the Bankruptcy Court, customer retention and the Company's ability to continue to provide high quality services. If a plan of reorganization is not confirmed and implemented, the Company may be forced to liquidate under applicable provisions of the Bankruptcy Code. There can be no assurance of the level of recovery that the Company's creditors would receive in such liquidation. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities if the Company is forced to liquidate. CRITICAL ACCOUNTING MATTERS See the Company's latest Annual Report on Form 10-K filed with the SEC and Accounting Pronouncements below. RESULTS OF OPERATIONS In evaluating financial performance, management uses revenues and operating income (loss) before depreciation and amortization and reorganization expenses due to bankruptcy ("Adjusted EBITDA" see note 1 to table below) as a measure of its businesses' profit or loss. The following discusses the results of Loral Orion for the three and nine months ended September 30, 2003 and 2002. REVENUE AND ADJUSTED EBITDA(1) (IN MILLIONS):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ---------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Revenues......................................... $ 24.4 $ 25.8 $ 74.3 $ 83.0 ======== ======== ======== ======== Adjusted EBITDA.................................. $ 16.1 $ 19.2 $ 51.6 $ 62.4
22 Depreciation and amortization.................... (18.8) (18.9) (56.5) (56.5) Reorganization expenses due to bankruptcy........ (1.6) -- (1.6) -- -------- -------- -------- -------- Operating (loss) income.......................... (4.3) 0.3 (6.5) 5.9 Interest expense................................. (0.7) (3.0) (6.3) (9.8) Interest income.................................. -- 0.2 -- 0.5 Income tax benefit (provision)................... -- 3.3 (0.1) 4.6 Cumulative effect of change in accounting principle.......................... -- -- -- (562.2) -------- -------- -------- -------- Net (loss) income................................ $ (5.0) $ 0.8 $ (12.9) $ (561.0) ======== ======== ======== ========
(1) The common definition of EBITDA is "Earnings Before Interest, Taxes, Depreciation and Amortization." The Company defines "Adjusted EBITDA" as EBITDA before amortization of stock compensation; reorganization expenses due to bankruptcy; gain on investment; equity in net losses of affiliates, net of tax; minority interest, net of tax; cumulative effect of change in accounting principle, net of tax, and extraordinary gain on acquisition of minority interest, net of tax. Adjusted EBITDA should be used in conjunction with GAAP financial measures and is not presented as an alternative to cash flow from operations as a measure of the Company's liquidity or as an alternative to net income as an indicator of the Company's operating performance. The Company believes the use of Adjusted EBITDA along with GAAP financial measures enhances the understanding of the Company's operating results and is useful to investors in comparing performance with competitors, estimating enterprise value and making investment decisions. Adjusted EBITDA allows investors to compare operating results of competitors exclusive of depreciation and amortization, a useful tool given the significant variation that can result from the timing of capital expenditures, the amount of intangible assets and the differences in assets' lives. Adjusted EBITDA as used here may not be comparable to similarly titled measures reported by other companies. The Company also uses Adjusted EBITDA to evaluate operating performance, to allocate resources and capital, and to evaluate future growth opportunities. See the above table for reconciliations of Adjusted EBITDA to net loss. THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH SEPTEMBER 30, 2002 Revenues were $24.4 million and $25.8 million in 2003 and 2002, respectively. Revenues decreased due to reduced prices of $3 million resulting form the global economic downturn, which has caused a delay in demand for new telecommunications applications and services, offset by increased volume of $2 million. Cost of satellite services were $23.6 million and $22.6 million in 2003 and 2002, respectively. This increase was primarily due to higher insurance costs resulting from a higher premium on renewal (including changes in coverage requirements) for one of the Company's satellites. Selling, general and administrative expenses were $3.6 million and $2.8 million in 2003 and 2002, respectively. This increase was primarily due to an increase in bad debt expense. Reorganization expenses due to bankruptcy in 2003 were $1.6 million for the period from July 15, 2003 (date of filing) to September 30, 2003, which includes professional fees of $1.7 million, offset by interest and investment income earned of $0.1 million (which represents the interest earned subsequent to filing bankruptcy). As a result of the above, the Company had an operating loss of $4.3 million in 2003 as compared to operating income of $0.3 million in 2002. Interest expense was $0.7 million, net of capitalized interest of $0.1 million in 2003, as compared to $3.1 million in 2002. The decrease was primarily as a result of the Company's voluntary petitions for reorganization as the Company does not pay interest on its debt obligations subsequent to July 15, 2003. 23 The Company is included in the consolidated U.S. federal income tax return of Loral Space & Communications Corporation. Pursuant to a tax sharing agreement for 2003 with Loral Space & Communications Corporation, the Company is entitled to reimbursement for the use of its current period tax losses to the extent such losses are utilized by the consolidated group in the current period; otherwise the Company is required to pay its separate Company income tax liability to Loral Space & Communications Corporation. At December 31, 2002, Loral Orion recorded a 100% valuation allowance against its net deferred tax assets under the criteria of SFAS No. 109, Accounting for Income Taxes. During 2003, the Company continued to maintain the 100% valuation allowance and recorded no benefit under the tax sharing agreement for its loss. In 2002, the Company recorded a nominal tax provision for foreign income taxes on a pre-tax loss of $5.0 million. In 2002, the Company recorded a tax benefit of $3.3 million under the tax sharing agreement on a pre-tax loss of $2.5 million. As a result of the above, net (loss) income was $(5.0) million and $0.8 million for the three months ended September 30, 2003 and 2002, respectively. NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH SEPTEMBER 30, 2002 Revenues were $74.3 million and $83.0 million in 2003 and 2002, respectively. Revenues decreased due to reduced prices of $12 million resulting from the global economic downturn, which has caused a delay in demand for new telecommunications applications and services, offset by increased volume of $4 million. Cost of satellite services were $70.8 million and $67.9 million in 2003 and 2002, respectively. This increase was primarily due to higher insurance costs resulting from a higher premium on renewal (including changes in coverage requirements) for one of the Company's satellites. Selling, general and administrative expenses were $8.5 million and $9.1 million in 2003 and 2002, respectively. This decrease was primarily due to lower incurred and allocated marketing expenses from Loral Skynet. Reorganization expenses due to bankruptcy in 2003 were $1.6 million for the period from July 15, 2003 (date of filing) to September 30, 2003, which includes professional fees of $1.7 million, offset by interest and investment income earned of $0.1 million (which represents the interest earned subsequent to filing bankruptcy). As a result of the above, the Company had an operating loss of $6.5 million in 2003, as compared to operating income of $5.9 million in 2002. Interest expense was $6.3 million, net of capitalized interest of $0.9 million in 2003 as compared to $9.8 million in 2002. The decrease was primarily as a result of the Company's voluntary petitions for reorganization as the Company does not pay interest on its debt obligations subsequent to July 15, 2003. The Company is included in the consolidated U.S. federal income tax return of Loral Space & Communications Corporation. Pursuant to a tax sharing agreement for 2003 with Loral Space & Communications Corporation, the Company is entitled to reimbursement for the use of its current period tax losses to the extent such losses are utilized by the consolidated group in the current period; otherwise the Company is required to pay its separate Company income tax liability to Loral Space & Communications Corporation. At December 31, 2002, Loral Orion recorded a 100% valuation allowance against its net deferred tax assets under the criteria of SFAS No. 109, Accounting for Income Taxes. During 2003, the Company continued to maintain the 100% valuation allowance and recorded no benefit under the tax sharing agreement for its loss. In 2003, the Company recorded a tax provision of $(0.1) million for foreign income tax on a pre-tax loss of $12.8 million. In 2002, the Company recorded a tax benefit of $4.6 million under the tax sharing agreement on a pre-tax loss of $3.4 million. On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which resulted in the Company recording a charge for the cumulative effect of change in accounting principle of $562 million (see Accounting Pronouncements). As a result of the above, net loss was $(12.9) million and $(561.0) million for the nine months ended September 30, 2003 and 2002, respectively. 24 Backlog The Company had contracted backlog of approximately $352 million and $453 million at September 30, 2003 and December 31, 2002, which includes $38 million and $42 million, respectively, to Loral companies. LIQUIDITY AND CAPITAL RESOURCES Loral Orion's principal challenge has been to overcome a confluence of events that have severely affected the satellite industry in recent years. These include a downturn in the global economy in general, the inability of Loral Orion's customers to access the capital markets which led to the declining utilization of services by existing customers and a lack of new customers, in particular telecommunications and Internet access providers entering the market, and reduced demand resulting in an overabundance of transponder capacity for satellite services. As a result of these and other factors, on July 15, 2003, Loral, Loral Orion and certain of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. As a result of Loral Orion's and the Debtor Subsidiaries' voluntary petitions for reorganization, Loral Orion's prepetition debt obligations (aggregating $827 million), including its 10% senior notes obligations, have been accelerated and are immediately due and Loral Orion's other prepetition debt obligations of $93 million are subject to acceleration (see Note 5 to the condensed consolidated financial statements). On July 15, 2003, Loral Orion failed to make interest payments of $30.6 million on its 10% Senior Notes due 2006, $2.1 million on its 11.25% Senior Notes due 2007 and $3.1 million on its 12.50% Senior Notes due 2007. A creditors' committee has been appointed in the Chapter 11 Cases to represent all unsecured creditors, including all holders of Loral Orion's senior unsecured notes, and, in accordance with the provisions of the Bankruptcy Code, will have the right to be heard on all matters that come before the Bankruptcy Court. During the pendency of the Chapter 11 Cases, Loral Orion's business will be subject to risks and uncertainties relating to the Chapter 11 Cases. For example, the Chapter 11 Cases could adversely affect relationships with Loral Orion's customers and suppliers, which could adversely affect the going concern value of the business and of its assets, particularly if the Chapter 11 Cases are protracted. Also, transactions outside the ordinary course of business will be subject to the prior approval of the Bankruptcy Court which may limit Loral Orion's ability to respond to certain market events or take advantage of certain market opportunities, and, as a result, Loral Orion's operations could be materially adversely affected. As a result of the commencement of the Chapter 11 Cases, the pursuit of all pending claims and litigation against Loral Orion and its Debtor Subsidiaries arising prior to or relating to events which occurred prior to the commencement of the Chapter 11 Cases is generally subject to an automatic stay under Section 362 of the Bankruptcy Code, and, absent further order of the Bankruptcy Court, no party may take any action to recover any prepetition claims, enforce any lien against or obtain possession of any property from Loral Orion or its Debtor Subsidiaries. In addition, pursuant to Section 365 of the Bankruptcy Code, Loral Orion and its Debtor Subsidiaries may reject or assume prepetition executory contracts and unexpired leases, and parties affected by rejections of these contracts or leases may file claims with the Bankruptcy Court which will be addressed in the context of the Chapter 11 Cases. Liabilities Subject to Compromise As discussed above, the Company has been operating as a debtor-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the provisions of the Bankruptcy Code. In the condensed consolidated balance sheet, the caption "liabilities subject to compromise" reflects Loral Orion's current estimate 25 of the amount of prepetition claims that will be restructured in Loral Orion's and its Debtor Subsidiaries' Chapter 11 Cases. Pursuant to court order, Loral Orion has been authorized to pay certain prepetition operating liabilities incurred in the ordinary course of business (e.g. insurance). Since July 15, 2003, as permitted under the Bankruptcy Code, the Company has rejected certain of its prepetition obligations. Loral Orion is in the process of calculating its estimated liability to the unsecured creditors affected by these contract rejections. Loral Orion will notify all known claimants subject to the bar date of their need to file a proof of claim with the Bankruptcy Court. A bar date is the date by which claims against Loral Orion and its Debtor Subsidiaries must be filed if the claimants wish to receive any distribution in the Chapter 11 Cases. No bar date has yet been set by the Bankruptcy Court. Differences between liability amounts estimated by the Company and claims filed by creditors will be investigated and the Bankruptcy Court will make a final determination of the allowable claim. The determination of how liabilities will ultimately be settled and treated cannot be made until the Bankruptcy Court approves a Chapter 11 plan of reorganization. Loral Orion and its Debtor Subsidiaries will continue to evaluate the amount and classification of their prepetition liabilities in general through the remainder of their Chapter 11 Cases. Should Loral or its Debtor Subsidiaries, through this ongoing evaluation, identify additional liabilities subject to compromise, such amounts will be recognized accordingly. As a result, "liabilities subject to compromise" are subject to change. Claims classified as "liabilities subject to compromise" represent secured as well as unsecured claims. Liabilities subject to compromise at September 30, 2003 consisted of the following (in thousands): Debt obligations............................................................ $ 919,977 Accounts payable............................................................ 1,791 Customer advances........................................................... 4,626 Accrued interest and other current liabilities.............................. 6,815 Other long term liabilities ................................................ 5,013 Due to Loral companies...................................................... 40,714 Note payable to Loral SpaceCom.............................................. 33,126 ----------- Total liabilities subject to compromise................................. $ 1,012,062 ===========
Contractual Obligations Contractual obligations as previously disclosed in the Company's Latest Annual Report on Form 10-K have not materially changed. However, as a result of the Company's Chapter 11 filing, debt obligations of approximately $920 million have been accelerated or are subject to acceleration. Net Cash Provided by Operating Activities Net cash provided by operating activities for the nine months ended September 30, 2003 was $45 million. This was primarily due to net income as adjusted for non-cash items of $46 million (primarily depreciation and amortization). Net cash provided by operating activities for the nine months ended September 30, 2002 was $66 million, primarily due to net income as adjusted for non-cash items of $63 million (primarily depreciation and amortization). Net Cash Used in Investing Activities Net cash used in investing activities was $5 million and $15 million for the nine months ended September 30, 2003 and 2002, respectively, primarily for capital expenditures for the construction of satellites and related equipment. Net Cash Used in Financing Activities Net cash used in financing activities was $31 million and $46 million for the nine months ended September 30, 2003 and September 30, 2002, respectively, resulting from interest payments on the 10% senior notes. COMMITMENTS AND CONTINGENCIES On September 20, 2002, and as further amended in March 2003, Loral and Loral Orion agreed with APT Satellite Company Limited ("APT") to jointly acquire the Apstar V satellite, a satellite then under construction by SS/L for APT pursuant to which Loral Orion and APT agreed to share, on a 50/50 basis, the project cost of constructing, launching and insuring the satellite. Under this 26 agreement, Loral Orion would initially acquire 23% of the satellite in return for paying 25% of the project cost, and would pay to APT over time an additional 25% of the project cost to acquire an additional 23% interest in the satellite. Of the 12.5 transponders initially acquired by Loral Orion, Loral SpaceCom has agreed to purchase from Loral Orion 4.75 of such transponders, together with a lease of an additional transponder for an approximate two-year period from the satellite's in-service date, at a price equal to 12.5% of the project cost of the satellite. In August 2003, in order to expedite the receipt of necessary export licenses from the U.S. government, Loral Orion and APT amended their various agreements to convert their arrangement from a joint ownership arrangement to a lease arrangement, but leaving unchanged the cost allocation between the parties relating to the project cost of the satellite and the arrangement between Loral Orion and Loral SpaceCom described above. Under this arrangement approved by the Bankruptcy Court in October 2003, Loral Orion will retain title to the entire satellite, now known as Telstar 18, and will lease to APT transponders representing initially 77% of the transponder capacity on the satellite. The number of transponders leased to APT would be reduced over time upon repayment by Loral Orion of the second 25% of the satellite's project cost. Upon payment in full by Loral Orion of 50% of the project cost of the satellite, the lease to APT would be reduced from 77% to 54% of the satellite's transponder capacity. At September 30, 2003 the project cost of the satellite was estimated at $230 million. The second 25% of the project cost of the satellite to be repaid by Loral Orion to APT as termination fees, are estimated as follows: $7 million to terminate APT's leasehold interest in 2.5 additional transponders on the second anniversary of the satellite's in-service date; $13 million for three additional transponders on the third anniversary; and $18 million for four additional transponders on each of the fourth and fifth anniversary. Loral Orion may at its option, elect to accelerate the termination of APT's leasehold interest in certain of the foregoing transponders upon earlier payment of the related termination fee. Loral Orion has agreed that if so requested by APT, it will seek further government approval to transfer a portion of the satellite to APT. If it is successful in doing so, the parties will revert back to the original joint ownership arrangement. As a result of the above changes to the agreement, whereby Loral Orion will retain title and provide capacity to APT under a lease arrangement, in the fourth quarter of 2003 Loral Orion will record 100% of the satellite cost, deferred revenue to APT for the capacity that APT will be leasing, and a long-term liability to APT for the leasehold interests to be acquired by Loral Orion from APT in the future (which will be based on the present value of such obligations). In October 2003, Loral and APT have engaged in discussions to further revise their existing arrangement. Under this proposed arrangement, Loral would accelerate the termination of APT's leasehold interest in 4.5 transponders by assuming $20.4 million of project cost which otherwise would have been initially borne by APT, increasing Loral's initial economic interest in the satellite from 23% to 31%. In addition, Loral Orion would provide to APT, free of charge, available capacity on Telstar 10/Apstar IIR, during an interim period and provide APT with certain rights to exchange Ku-band transponder capacity on Telstar 18 for Ku-band transponder capacity on Telstar 10/Apstar IIR. The effectiveness of any revised arrangement agreed to between APT and Loral will be subject to the approval of the Bankruptcy Court. In November 1995, a component on Telstar 11 malfunctioned, resulting in a 2-hour service interruption. The malfunctioning component supported nine transponders serving the European portion of Telstar 11's footprint. Full service was restored using a back-up component. If that back-up component fails, Telstar 11 would lose a significant amount of usable capacity. In such event, the Company could lease replacement capacity and function as a reseller with respect to such capacity. In addition, Loral Orion did not renew its in-orbit insurance policy due to the high cost of such insurance and the relative age of the satellite. As of September 30, 2003, the net book value of the satellite was $65 million. A loss of the satellite, would have a material adverse effect on the Company. Telstar 12, originally intended to operate at 12 degrees W.L., was launched aboard an Ariane launch vehicle in October 1999 into the orbital slot located at 15 degrees W.L., and commenced operations in January 2000. Under an agreement reached with Eutelsat, Loral Orion agreed to operate Telstar 12 at 15 degrees W.L. while Eutelsat continues to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority rights at such location on Loral Orion's behalf. As part of this coordination effort, Loral Orion agreed to provide to Eutelsat four 54 MHz transponders on Telstar 12 for the life of the satellite and has retained risk of loss with respect to those transponders. Eutelsat also has the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. As part of the international coordination process, Loral Orion continues to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees W.L. If these discussions are not successful, Telstar 12's useable capacity may be reduced. While the Company has in the past, consistent with industry practice and the requirements of the Company's indenture, typically obtained in-orbit insurance for its satellites, the Company cannot guarantee that, upon a policy's expiration, the Company will be able to renew the insurance on acceptable terms, especially on satellites that have, or that are part of a family of satellites that have, experienced problems in the past. Two satellites owned by Loral Orion have the same solar array configuration as two other 1300-class satellites manufactured by SS/L that have experienced solar array failures. SS/L believes that these failures are isolated events and do not reflect a systemic problem in either the satellite design or manufacturing process. Accordingly, the Company does not believe that these anomalies will affect these satellites. The insurance coverage for Telstar 10/Apstar IIR, however, provides for coverage of losses due to solar array failures only in the event of a capacity loss of 80% or more. The Company believes that the 27 insurers will require either exclusions of, or limitations on, coverage due to solar array failures in connection with the renewal of insurance for the Company's other satellite in 2004. An uninsured loss of a satellite would have a material adverse effect on the Company's consolidated financial position and results of operations. The Company is subject to various other legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Although the outcome of these claims cannot be predicted with certainty, the Company does not believe that any of these other existing legal matters will have a material adverse effect on its consolidated financial position or results of operations. These claims against the Company are subject to the automatic stay as a result of the commencement of the Chapter 11 Cases. See Part II, Item 1, Legal Proceedings. OTHER MATTERS Insurance Matters The Company, like others in the satellite industry, are faced with significantly higher premiums on launch and in-orbit insurance, increasing thresholds in determining total losses for satellites in orbit and significantly shorter coverage periods than those that have been available in the past, which was due in part to the events of September 11, 2001. This development in the insurance industry has increased the Company's cost of doing business. The Company intends to pass on some of the increased cost to its customers. There can be no assurance, however, that the Company will be able to do so. Insurance market conditions have historically been cyclical in nature. While the Company anticipates that these conditions will improve in the future, there can be no assurance that they will. Accounting Pronouncements SFAS 142 On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. SFAS 142 also changed the evaluation criteria for testing goodwill for impairment from an undiscounted cash flow approach, which was previously utilized under the guidance in SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121") and Accounting Principles Board Opinion No. 17, Intangible Assets ("APB 17"), to a test based on fair value. Fair value is determined by the amount at which an asset or liability could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Quoted market prices in active markets are the best evidence of fair value and must be used as the basis for the measurement, if available. If quoted market prices are not available, the estimate of fair value must be based on the best information available, including prices for similar assets and liabilities and the results of using other valuation techniques, such as public company trading multiples and future discounted cash flows. In accordance with SFAS 142, the Company's previously recognized cost in excess of net assets acquired ("goodwill") of $562 million (at December 31, 2001) from the acquisition of the Company by Loral in 1998 was reviewed under the new transitional guidance as of January 1, 2002. The Company hired professionals in the valuation consulting business to determine the fair value of the Company. Since there were no quoted market prices in active markets for the Company, the measurement of fair value was based on the best information available in the circumstances, including reasonable and supportable assumptions and projections, to determine that the most appropriate method of fair value was public company trading multiples. Based on the fair values concluded on by those professionals, management determined that the Company's goodwill under the new guidance in SFAS 142 was fully impaired. Accordingly, as of January 1, 2002, the Company recorded a non-cash charge for the cumulative effect of the change in accounting principle of $562 million. The charge is the result of a change in the evaluation criteria for goodwill from an undiscounted cash flow approach which was previously utilized under the guidance in SFAS 121 and APB 17 to the fair value approach which is stipulated in SFAS 142. SFAS 143 In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, 28 construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. The Company has determined that there was no effect on its consolidated financial position or results of operations upon the adoption of SFAS 143 on January 1, 2003. FIN 45 In November 2002, the FASB issued FIN 45 which elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation were applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements were effective for financial statements of interim or annual reports ending after December 15, 2002. The Company adopted the disclosure provisions of FIN 45 during the fourth quarter of 2002. The Company adopted the recognition provisions of FIN 45 on January 1, 2003 and determined that there was no effect on its consolidated financial position or results of operations. FIN 46 In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 ("FIN 46"). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 will be applied by the Company as of December 31, 2003. The Company is currently evaluating the provisions of FIN 46. SFAS 149 In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003, except for certain provisions that relate to SFAS 133 Implementation Issues that have been effective for fiscal quarters prior to June 15, 2003. Management determined that the adoption of SFAS 149 did not have an impact on its consolidated financial position or results of operations. SFAS 150 In May 2003, the FASB issued SFAS 150 which establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires that an issuer classify a financial instrument that is within the scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. Management has determined that there was no effect on its consolidated financial position or results of operations upon the adoption of SFAS 150 on July 1, 2003. EITF 00-21 In November 2002, the Emerging Issues Task Force of the FASB ("EITF") reached a consensus on Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). EITF 00-21 addresses determination of whether an arrangement involving more than one deliverable contains more than one unit of accounting and how the related revenues should be measured and allocated to the separate units of accounting. EITF 00-21 applies to revenue arrangements entered into after June 30, 2003; however, upon adoption, the EITF allows the guidance to be applied on a retroactive basis, with the change, if any, reported as a cumulative effect of accounting change in the statement of operations. Management determined that the adoption of EITF 00-21 did not have an effect on the Company's consolidated financial position or results of operations 29 ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES (a) Disclosure controls and procedures. Loral Orion's chief executive officer and its chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities and Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of September 30, 2003, have concluded that as of September 30, 2003, the Company's disclosure controls and procedures were effective and designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities. (b) Internal control over financial reporting. There were no significant changes in the Company's internal control over financial reporting during the quarterly period ended September 30, 2003, that have materially effected, are reasonably likely to materially effect, the Company's control over financial reporting. 30 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On July 15, 2003, Loral, Loral Orion and certain of its subsidiaries, including Loral Asia Pacific Satellite (HK) Limited ("Loral Asia Pacific"), (the "Debtor Subsidiaries"), filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") (Lead Case No. 03-41716 (RDD), Case Nos. 03-41717 (RDD) through 03-41723 (RDD)) (the "Chapter 11 Cases"). Loral Orion and its Debtor Subsidiaries continue to manage their properties and operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the provisions of the Bankruptcy Code. As a result of Loral Orion's and the Debtor Subsidiaries' voluntary petitions for reorganization, Loral Orion's prepetition debt obligations, including its 10% senior notes obligations, have been accelerated and are immediately due and payable and Loral Orion's other prepetition debt obligations are subject to acceleration (see Note 5 to the condensed consolidated financial statements). A creditors' committee has been appointed in the Chapter 11 Cases to represent all unsecured creditors, including all holders of Loral Orion's senior unsecured notes, and, in accordance with the provisions of the Bankruptcy Code, will have the right to be heard on all matters that come before the Bankruptcy Court. At this point, it is not possible to predict with certainty when a plan of reorganization will be confirmed by the Bankruptcy Court in the Chapter 11 Cases or how any such plan will treat the claims of prepetition creditors. See Note 9 to the condensed consolidated financial statements. ITEM 3. DEFAULTS UPON SENIOR SECURITIES (a) On July 15, 2003, Loral, Loral Orion, and certain of its subsidiaries, including Loral Asia Pacific, (the "Debtor Subsidiaries") filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") (Lead Case No. 03-41716 (RDD), Case Nos. 03-41717 (RDD) through 03-41723 (RDD)). As a result of Loral Orion's voluntary petitions for reorganization, Loral Orion's 10% senior notes obligations have been accelerated and are immediately due and payable and Loral Orion's other debt obligations are subject to acceleration (see Note 5 to the condensed consolidated financial statements). On July 15, 2003, Loral Orion failed to make interest payments of $30.6 million on its 10% Senior Notes due 2006, $2.1 million on its 11.25% Senior Notes due 2007 and $3.1 million on its 12.50% Senior Notes due 2007. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 31.1 -- Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 -- Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 -- Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2 -- Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K NONE 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LORAL ORION, INC. Registrant Date: November 14, 2003 /s/ RICHARD J. TOWNSEND --------------------------------------- Richard J. Townsend Executive Vice President and Chief Financial Officer (Principal Financial Officer and Registrant's Authorized Officer) 32 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ---------- ----------- Exhibit 31.1 -- Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 -- Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 -- Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2 -- Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 33