10-Q 1 y89153e10vq.txt LORAL ORION, INC. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2003 COMMISSION FILE NUMBER 0-22085 LORAL ORION, INC. DELAWARE 52-1564318 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 HILLS DRIVE, BEDMINSTER, NJ 07921 TELEPHONE: (908) 470-2300 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: 11 1/4% SENIOR NOTES DUE 2007 12 1/2% SENIOR DISCOUNT NOTES DUE 2007 10% SENIOR NOTES DUE 2006 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-20. Yes [ ] No [X] The number of shares of common stock, par value $.01 per share of the registrant outstanding as of March 31, 2003 was 100, all of which were owned, directly or indirectly, by Loral Space & Communications Ltd. THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H (2) OF FORM 10-Q. DOCUMENTS INCORPORATED BY REFERENCE None ================================================================================ PART 1. FINANCIAL INFORMATION LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PAR AMOUNT) (UNAUDITED)
JUNE 30, DECEMBER 31, 2003 2002 ----------- ----------- ASSETS Current assets: Cash and cash equivalents.................................................. $ 31,663 $ 42,964 Accounts receivable, net................................................... 11,289 7,615 Prepaid expenses and other current assets.................................. 8,130 13,213 Due from Loral companies................................................... -- 52,577 ----------- ----------- Total current assets................................................... 51,082 116,369 Satellites and related equipment, net......................................... 491,816 524,699 Other assets, net............................................................. 14,875 17,318 ----------- ----------- Total assets........................................................... $ 557,773 $ 658,386 =========== =========== LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Current portion of long-term debt.......................................... $ 927,141 $ 64,727 Accounts payable........................................................... 1,409 2,387 Customer advances.......................................................... 4,516 3,731 Due to Loral companies..................................................... 37,310 46,723 Accrued interest and other current liabilities............................. 4,750 4,700 ----------- ----------- Total current liabilities.............................................. 975,126 122,268 Customer advances............................................................. 8,982 8,765 Long-term debt................................................................ -- 894,829 Note payable to Loral SpaceCom................................................ 33,126 31,540 Commitments and contingencies (Notes 2 and 6) Stockholder's deficit: Common stock, $.01 par value............................................... -- -- Paid-in capital............................................................ 604,166 604,166 Due from Loral companies................................................... (52,483) -- Retained deficit........................................................... (1,011,144) (1,003,182) ----------- ----------- Total stockholder's deficit............................................ (459,461) (399,016) ----------- ----------- Total liabilities and stockholder's deficit............................ $ 557,773 $ 658,386 =========== ===========
See notes to condensed consolidated financial statements 2 LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- --------------------- 2003 2002 2003 2002 ------- ---------- -------- --------- Revenues from satellite services............................. $24,712 $ 27,579 $ 49,909 $ 57,200 Operating expenses: Cost of satellite services................................ 23,507 22,529 47,177 45,295 Selling, general and administrative expenses.............. 681 3,235 4,931 6,343 ------- ---------- -------- --------- Operating income (loss)...................................... 524 1,815 (2,199) 5,562 Interest expense............................................. (2,760) (3,492) (5,648) (6,750) Interest income.............................................. -- 81 5 301 ------- ---------- -------- --------- Loss before income taxes and cumulative effect of change in accounting principle................... (2,236) (1,596) (7,842) (887) Income tax (provision) benefit............................... (106) (938) (120) 1,369 ------- ---------- -------- --------- (Loss) income before cumulative effect of change in accounting principle............................. (2,342) (2,534) (7,962) 482 Cumulative effect of change in accounting principle (Note 7)......................................... -- -- -- (562,201) ------- ---------- -------- --------- Net loss..................................................... $(2,342) $ (2,534) $ (7,962) $(561,719) ======= ========== ======== =========
See notes to condensed consolidated financial statements 3 LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------ 2003 2002 ---------- ---------- Operating activities: Net loss.................................................. $ (7,962) $ (561,719) Non-cash items: Depreciation and amortization......................... 37,647 37,647 Interest.............................................. 740 (529) Provisions for bad debts.............................. 838 864 Cumulative effect of change in accounting principle -- 562,201 Changes in operating assets and liabilities: Accounts receivable................................... (4,512) 1,128 Prepaid expenses and other current assets............. 4,071 2,324 Other assets.......................................... 2,443 1,698 Accounts payable...................................... (978) (2,064) Accrued interest and other current liabilities........ 50 2,811 Customer advances..................................... 1,002 (3,260) Due from Loral companies, net......................... (9,319) (4,782) ---------- ---------- Net cash provided by operating activities.................... 24,020 36,319 ---------- ---------- Investing activities: Capital expenditures...................................... (3,752) -- ---------- ---------- Net cash used in investing activities........................ (3,752) -- ---------- ---------- Financing activities: Interest payments on 10% senior notes..................... (30,634) -- Payment of satellite incentive obligation................. (935) (918) ---------- ---------- Net cash used in financing activities........................ (31,569) (918) ---------- ---------- Net (decrease) increase in cash and cash equivalents......... (11,301) 35,401 Cash and cash equivalents at beginning of period............. 42,964 19,399 ---------- ---------- Cash and cash equivalents at end of period................... $ 31,663 $ 54,800 ========== ==========
See notes to condensed consolidated financial statements 4 LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR-IN-POSSESSION (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS The principal business of Loral Orion, Inc. (the "Company" or "Loral Orion"), is providing fixed satellite services, including video distribution and other satellite transmission services by leasing transponder capacity on its satellites to its customers for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television ("DTH"). Loral Skynet, a division of Loral SpaceCom Corporation ("Loral SpaceCom" or "LSC"), which is a subsidiary of Loral Space & Communications Corporation, which is in turn a subsidiary of Loral Space & Communications Ltd. ("Loral"), manages the Company's business. The Company operates in one business segment, Fixed Satellite Services ("FSS"). 2. RECENT EVENTS--BANKRUPTCY FILINGS On July 15, 2003, Loral, Loral Orion and certain of its subsidiaries, including Loral Asia Pacific Satellite (HK) Limited ("Loral Asia Pacific"), (the "Debtor Subsidiaries"), filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") (Lead Case No. 03-41716 (RDD), Case Nos. 03-41717 (RDD) through 03-41723 (RDD)) (the "Chapter 11 Cases"). Loral Orion and its Debtor Subsidiaries continue to manage their properties and operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the provisions of the Bankruptcy Code. As a result of Loral Orion's and the Debtor Subsidiaries' voluntary petitions for reorganization, Loral Orion's prepetition debt obligations, including its 10% senior notes obligations, have been accelerated and are immediately due and payable and Loral Orion's other prepetition debt obligations are subject to acceleration (see Note 4). A creditors' committee has been appointed in the Chapter 11 Cases to represent all unsecured creditors, including all holders of Loral Orion's senior unsecured notes, and, in accordance with the provisions of the Bankruptcy Code, will have the right to be heard on all matters that come before the Bankruptcy Court. At this point, it is not possible to predict with certainty when a plan of reorganization will be confirmed by the Bankruptcy Court in the Chapter 11 Cases or how any such plan will treat the claims of prepetition creditors. During the pendency of the Chapter 11 Cases, Loral Orion's business will be subject to risks and uncertainties relating to the Chapter 11 Cases. For example, the Chapter 11 Cases could adversely affect relationships with Loral Orion's customers and suppliers, which could adversely affect the going concern value of the business and of its assets, particularly if the Chapter 11 Cases are protracted. Also, transactions outside the ordinary course of business will be subject to the prior approval of the Bankruptcy Court which may limit Loral Orion's ability to respond to certain market events or take advantage of certain market opportunities, and, as a result, Loral Orion's operations could be materially adversely affected. As a result of the commencement of the Chapter 11 Cases, the pursuit of all pending claims and litigation against Loral Orion and its Debtor Subsidiaries arising prior to or relating to events which occurred prior to the commencement of the Chapter 11 Cases is generally subject to an automatic stay under Section 362 of the Bankruptcy Code, and, absent further order of the Bankruptcy Court, no party may take any action to recover any prepetition claims, enforce any lien against or obtain possession of any property from Loral Orion or its Debtor Subsidiaries. In addition, pursuant to Section 365 of the Bankruptcy Code, Loral Orion and its Debtor Subsidiaries may reject or assume prepetition executory contracts and unexpired leases, and parties affected by rejections of these contracts or leases may file claims with the Bankruptcy Court which will be addressed in the context of the Chapter 11 Cases. 3. BASIS OF PRESENTATION The condensed consolidated financial statements have been prepared assuming the Company in its current structure will continue as a going concern. The factors mentioned in Note 2 above, however, among other things, raise substantial doubt about Loral Orion's ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The ability of the Company to continue as a going concern is dependent on a number of factors including, but not limited to, the Company's development of a plan of reorganization, confirmation of the plan by the Bankruptcy Court, customer retention and the Company's ability to continue to provide high quality services. If a plan of reorganization is not confirmed and implemented, the Company may be forced to liquidate under applicable provisions of the Bankruptcy Code. There can be no assurance of the level of recovery that the Company's creditors would receive in such liquidation. The condensed 5 consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities if the Company is forced to liquidate. The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules of the Securities and Exchange Commission ("SEC") and, in the opinion of the Company, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of operations, financial position, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules. The Company believes that the disclosures made are adequate to keep the information presented from being misleading. The results of operations for the three and six months ended June 30, 2003, are not necessarily indicative of the results to be expected for the full year. The December 31, 2002 balance sheet has been derived from the audited consolidated financial statements at that date. It is suggested that these financial statements be read in conjunction with the Company's latest Annual Report on Form 10-K. Income Taxes The Company continued to maintain a 100% valuation allowance against its deferred tax assets under the criteria of SFAS No. 109, Accounting for Income Taxes, and recorded no benefit in 2003 under the tax sharing agreement with Loral Space and Communications Corporation for its loss. For the three and six months ended June 30, 2002, the Company recorded a provision of $0.9 million and a benefit of $1.4 million, respectively, under the tax sharing agreement. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. 4. DEBT Debt consists of the following (in thousands):
JUNE 30, DECEMBER 31, 2003 2002 --------- ------------ 10.00% senior notes due 2006: Principal amount.............................................. $ 612,704 $ 612,704 Accrued interest (deferred gain on debt exchanges)............ 214,446 245,080 11.25% senior notes due 2007 (principal amount $37 million)...... 39,430 39,762 12.50% senior discount notes due 2007 (principal amount at maturity and accreted principal amount $49 million) 53,469 53,982 Satellite incentive obligations.................................. 7,092 8,028 ---------- ---------- Total debt.................................................... 927,141 959,556 Less, current portion............................................ 927,141 64,727 ---------- ---------- Long-term debt................................................ $ --- $ 894,829 ========== ==========
As a result of Loral Orion's and the Debtor Subsidiaries' voluntary petitions for reorganization, Loral Orion's prepetition debt obligations, including its 10% senior notes obligations, have been accelerated and are immediately due and payable and Loral Orion's other prepetition debt obligations are subject to acceleration and have been reclassified to current liabilities. A creditors' committee has been appointed in the Chapter 11 Cases to represent all unsecured creditors, including all holders of Loral Orion's senior unsecured notes, and, in accordance with the provisions of the Bankruptcy Code, will have the right to be heard on all matters that come before the Bankruptcy Court. At this point, it is not possible to predict with certainty when a plan of reorganization will be confirmed by the Bankruptcy Court in the Chapter 11 Cases or how any such plan will treat the claims of prepetition creditors. 5. RELATED PARTY TRANSACTIONS Due (to) from Loral companies consist of the following (in thousands):
JUNE 30, DECEMBER 31, 2003 2002 -------- -------- Loral Space & Communications Corporation $43,700 $ 43,772 Loral Cyberstar, Inc...................... 8,783 8,805 Loral SpaceCom Corporation ("LSC")........ (24,443) (23,977) Loral Skynet.............................. (6,314) (7,854) Space Systems/Loral ("SS/L").............. (6,553) (14,892) ------- -------- $15,173 $ 5,854 ======= ========
6 As a result of the uncertainty regarding collectibility, due to Loral Space & Communications Corporation and Loral CyberStar, L.P. filing voluntary petitions for reorganization, the Company's receivables due from Loral Space & Communications Corporation and Loral CyberStar, L.P., (aggregating $52.5 million) have been reflected as debit balances in stockholder's deficit. Note Payable to LSC The Company has a note payable outstanding with LSC in the principal amount of $29.7 million due 2006, having an interest rate of 10% per annum payable in kind, subordinated to Loral Orion's new 10% senior notes. As of June 30, 2003, the balance of the note was $33.1 million, including accrued interest. 6. COMMITMENTS AND CONTINGENCIES On September 20, 2002, Loral Orion entered into an agreement with APT Satellite Company Limited ("APT") for the 50/50 joint acquisition of the Apstar V satellite, a satellite under construction by SS/L for APT. Loral Orion's aggregate purchase price for its 50% interest in the satellite will be 50% of the project cost of constructing, launching and insuring the satellite. At launch, Loral Orion will obtain title to 25% of the satellite, in return for payment by Loral Orion of half of its purchase price, a portion of which is funded by existing launch vehicle deposits. At June 30, 2003, the total purchase price for Loral Orion's 50% interest in the satellite was estimated at $113 million. Subject to certain acceleration rights on the part of Loral Orion, the remainder of the estimated purchase price will be paid by and title will transfer to Loral Orion as follows: $7 million for 2.5 additional transponders on the second anniversary of the satellite's in-service date; 13 million for three additional transponders on the third anniversary; and $18 million for four additional transponders on each of the fourth and fifth anniversary. In March 2003, as a result of finalizing launch arrangements for the satellite, Loral Orion agreed to take two fewer transponders (resulting in a reduction in the satellite percentage ownership allocation between APT and Loral Orion from 50/50 to 54/46), without changing the 50/50 cost allocation in the satellite as described above. Loral SpaceCom has agreed to purchase from Loral Orion 4.75 transponders on the satellite, together with a lease of an additional transponder for an approximate two-year period from the satellite's in-service date, at a price equal to 12.5% of the project cost of the satellite. More recently and in response to concerns regarding the timely receipt of necessary export licenses to transfer title of the satellite from SS/L to APT, Loral Orion and APT have been engaged in discussions to revise their existing arrangement to provide for transfer at launch of a prepaid leasehold interest, instead of title, to APT. Under this arrangement, Loral Orion would hold title to the satellite, with APT leasing on a prepaid basis 77% of the transponders on the satellite commencing at launch. APT's leasehold interest in the satellite would be reduced over time (ultimately to 54%) as Loral Orion makes additional payments towards its share of the satellite project cost. This new arrangement may be subject to Bankruptcy Court approval. In November 1995, a component on Telstar 11 malfunctioned, resulting in a 2-hour service interruption. The malfunctioning component supported nine transponders serving the European portion of Telstar 11's footprint. Full service was restored using a back-up component. If that back-up component fails, Telstar 11 would lose a significant amount of usable capacity. In such event, while the Company would be entitled to insurance proceeds of approximately $195 million as of June 30, 2003, and could lease replacement capacity and function as a reseller with respect to such capacity, the loss of capacity would have a material adverse effect on the Company. Telstar 12, originally intended to operate at 12 degrees W.L., was launched aboard an Ariane launch vehicle in October 1999 into the orbital slot located at 15 degrees W.L., and commenced operations in January 2000. Under an agreement reached with Eutelsat, Loral Orion agreed to operate Telstar 12 at 15 degrees W.L. while Eutelsat continues to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority rights at such location on Loral Orion's behalf. As part of this coordination effort, Loral Orion agreed to provide to Eutelsat four 54 MHz transponders on Telstar 12 for the life of the satellite and has retained risk of loss with respect to those transponders. Eutelsat also has the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. As part of the international coordination process, Loral Orion continues to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees W.L. If these discussions are not successful, Telstar 12's useable capacity may be reduced. While the Company has in the past, consistent with industry practice and the requirements of the Company's indenture, typically obtained in-orbit insurance for its satellites, the Company cannot guarantee that, upon a policy's expiration, the Company will be able to renew the insurance on acceptable terms, especially on satellites that have, or that are part of a family of satellites that have, experienced problems in the past. Two satellites owned by Loral Orion have the same solar array configuration as two other 1300-class satellites manufactured by SS/L that have experienced solar array failures. SS/L believes that these failures are isolated events and do not reflect a systemic problem in either the satellite design or manufacturing process. Accordingly, the Company does not believe that these anomalies will affect these satellites. The insurance coverage for Telstar 10/Apstar IIR, however, provides for coverage of losses due to solar array failures only in the event of a capacity loss of 75% or more. The Company believes that the insurers will require either 7 exclusions of, or limitations on, coverage due to solar array failures in connection with the renewal of insurance for the Company's other satellite in 2004. An uninsured loss of a satellite would have a material adverse effect on the Company's consolidated financial position and results of operations. The Company is subject to various other legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Although the outcome of these claims cannot be predicted with certainty, the Company does not believe that any of these other existing legal matters will have a material adverse effect on its consolidated financial position or results of operations. These claims against the Company are subject to the automatic stay as a result of the commencement of the Chapter 11 Cases. See Part II, Item 1, Legal Proceedings. 7. ACCOUNTING FOR GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. SFAS 142 also changed the evaluation criteria for testing goodwill for impairment from an undiscounted cash flow approach, which was previously utilized under the guidance in Accounting Principles Board Opinion No. 17, Intangible Assets, to a test based on fair value. Fair value is determined by the amount at which an asset or liability could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Quoted market prices in active markets are the best evidence of fair value and must be used as the basis for the measurement, if available. If quoted market prices are not available, the estimate of fair value must be based on the best information available, including prices for similar assets and liabilities and the results of using other valuation techniques, such as public company trading multiples and future discounted cash flows. GOODWILL In accordance with SFAS 142, the Company's previously recognized cost in excess of net assets acquired ("goodwill") of $562 million (at December 31, 2001) from the acquisition of the Company by Loral in 1998 was reviewed under the new transitional guidance as of January 1, 2002. The Company hired professionals in the valuation consulting business to determine the fair value of the Company. Since there were no quoted market prices in active markets for the Company, the measurement of fair value was based on the best information available in the circumstances, including reasonable and supportable assumptions and projections, to determine that the most appropriate method of fair value was public company trading multiples. Based on the fair values concluded on by those professionals, management determined that the Company's goodwill under the new guidance in SFAS 142 was fully impaired. Accordingly, as of January 1, 2002, the Company recorded a non-cash charge for the cumulative effect of the change in accounting principle of $562 million. The charge is the result of a change in the evaluation criteria for goodwill from an undiscounted cash flow approach which was previously utilized under the guidance in Accounting Principles Board Opinion No. 17 to the fair value approach which is stipulated in SFAS 142. Other Acquired Intangible Assets The Company evaluated the useful lives of its other acquired intangible assets in connection with the adoption of SFAS 142 and determined that no changes to the useful lives were necessary. Other acquired intangible assets are included in other assets in the Company's condensed consolidated balance sheets and were as follows at June 30, 2003 and December 31, 2002 (in millions):
JUNE 30, 2003 DECEMBER 31, 2002 -------------------------- ---------------------- GROSS ACCUMULATED GROSS ACCUMULATED AMOUNT AMORTIZATION AMOUNT AMORTIZATION ------- ------------ ------- ------------ Customer relations $ 7.0 $ (5.0) $ 7.0 $ (4.5) Trademarks.......... 6.0 (4.3) 6.0 (3.9) Regulatory.......... 2.5 (1.6) 2.5 (1.4) ------- -------- ------- ------ Total............ $ 15.5 $ (10.9) $ 15.5 $ (9.8) ======= ======== ======= ======
As of June 30, 2003, the weighted average remaining amortization period for customer relations and trademarks was two years and for regulatory fees was seven years. Total amortization expense for other acquired intangible assets was $0.5 million for both the three months ended June 30, 2003 and 2002 and $1.1 million for both the six months ended June 30, 2003 and 2002. Annual amortization expense for other acquired intangible assets for the five years ending December 31, 2007 is estimated to be as follows (in millions): 2003.................... $ 2.0 2004.................... 2.0 2005.................... 1.2 2006.................... -- 2007.................... --
8 8. NEW ACCOUNTING PRONOUNCEMENTS SFAS 143 In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. The Company has determined that there was no effect on its consolidated results of operations or its financial position upon the adoption of SFAS 143 on January 1, 2003. FIN 45 In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others ("FIN 45"). FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation were applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements were effective for financial statements of interim or annual reports ending after December 15, 2002. The Company adopted the disclosure provisions of FIN 45 during the fourth quarter of 2002. The Company adopted the recognition provisions of FIN 45 on January 1, 2003 and has determined that there was no effect on its consolidated results of operations or its financial position. FIN 46 In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 ("FIN 46"). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company is currently evaluating the provisions of FIN 46. SFAS 149 In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivates) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company believes that there will be no effect on its consolidated results of operation or financial position upon the adoption of SFAS 149 on July 1, 2003. SFAS 150 In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. SFAS 150 is effective for the Company beginning on July 1, 2003. The Company believes that there will be no effect on its consolidated results of operation or financial position upon the adoption of SFAS 150 on July 1, 2003. 9 9. FINANCIAL INFORMATION FOR PARENT, ISSUER'S PARENT, GUARANTOR SUBSIDIARIES AND OTHER SUBSIDIARIES Loral Orion's (the "Parent Company") 10% Senior Notes due 2006 are fully and unconditionally guaranteed, on a joint and several basis, by the Parent Company and several of its wholly-owned subsidiaries (the "Guarantor Subsidiaries") and Loral ("Issuer's Parent"). The Company's remaining original senior notes and senior discount notes are fully and unconditionally guaranteed on a joint and several basis by the Parent Company, the Guarantor Subsidiaries and substantially all of the other wholly-owned subsidiaries (the "Other Subsidiaries"). The Parent Company, the Guarantor Subsidiaries and certain other non-guarantor subsidiaries of Loral Orion filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code on July 15, 2003. Presented below is condensed consolidating financial information for the Parent Company, Issuer's Parent, the Guarantor Subsidiaries and the Other Subsidiaries as of June 30, 2003 and December 31, 2002 and for the three and six months ended June 30, 2003 and 2002. The condensed consolidating financial information has been presented to show the nature of assets held, results of operations and cash flows of the Parent Company, Issuer's Parent, Guarantor Subsidiaries and Other Subsidiaries. The supplemental condensed consolidating financial information reflects the investments of the Parent Company in the Guarantor Subsidiaries and the Other Subsidiaries using the equity method of accounting. The Company's significant transactions with its subsidiaries, other than the investment account and related equity in net loss of unconsolidated subsidiaries, are intercompany payables and receivables between its subsidiaries. 10 CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 2003 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ----------- ------------ ------------ ------------ ------------ Current assets: Cash and cash equivalents $ 31,663 $ 4,351 $ - $ - $ (4,351) $ 31,663 Accounts receivable, net 11,259 - 30 - - 11,289 Prepaid expenses and other current assets 5,182 6,221 3,872 - (7,145) 8,130 ----------- ----------- ---------- ------------ ----------- ----------- Total current assets 48,104 10,572 3,902 - (11,496) 51,082 Property, plant and equipment, net 297,622 - 194,194 - - 491,816 Notes (payable to) receivable from unconsolidated subsidiary (33,126) 140,216 - - (140,216) (33,126) Due to (from) unconsolidated subsidiaries (155,776) 36,754 130,195 - (48,493) (37,310) Investments in unconsolidated subsidiaries - (137,082) - - 137,082 - Investments in and advances to affiliates 313,234 8,223 (271,698) - (49,759) - Other assets, net 14,241 2,676 647 - (2,689) 14,875 ----------- ----------- ---------- ------------ ----------- ----------- Total assets $ 484,309 $ 61,359 $ 57,240 $ - $ (115,571) $ 487,337 =========== =========== ========== ============ =========== =========== Current liabilities: Current portion of long-term debt $ 927,141 $ 350,000 $ - $ - $ (350,000) $ 927,141 Accounts payable 447 1,445 962 - (1,445) 1,409 Customer advances 4,223 - 293 - - 4,516 Accrued interest, preferred dividends and other current liabilities 4,750 27,559 - - (27,559) 4,750 Income taxes payable - 8,123 - - (8,123) - ----------- ----------- ---------- ------------ ----------- ----------- Total current liabilities 936,561 387,127 1,255 - (387,127) 937,816 Long-term liabilities 7,979 51,972 15,964 - (66,933) 8,982 Stockholder's (deficit) equity: 6% Series C convertible redeemable preferred stock - 184,753 - - (184,753) - 6% Series D convertible redeemable preferred stock - 35,624 - - (35,624) - Common stock, par value $.01 - 4,409 - - (4,409) - Paid-in capital 604,166 3,392,821 - - (3,392,821) 604,166 Treasury stock, at cost - (3,360) - - 3,360 - Unearned compensation - (208) - - 208 - Due from Loral companies (52,483) - - - - (52,483) Retained deficit (1,011,914) (3,932,790) 40,021 - 3,893,539 (1,011,144) Accumulated other comprehensive income - (58,989) - - 58,989 - ----------- ----------- ---------- ------------ ----------- ----------- Total stockholder's (deficit) equity (460,231) (377,740) 40,021 - 338,489 (459,461) ----------- ----------- ---------- ------------ ----------- ----------- Total liabilities and stockholder's (deficit) equity $ 484,309 $ 61,359 $ 57,240 $ - $ (115,571) $ 487,337 =========== =========== ========== ============ =========== ===========
11 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- --------- ------------ ------------ ------------ ------------ Revenues from satellite services $ 22,949 $ - $ 9,732 $ - $ (7,969) $ 24,712 Costs of satellite services 23,594 - 7,882 - (7,969) 23,507 Selling, general and administrative expenses 385 2,762 296 - (2,762) 681 Management fee expense - 109 - - (109) - -------- --------- --------- ----------- ----------- -------- Operating (loss) income (1,030) (2,871) 1,554 - 2,871 524 Interest and investment income - 5,781 - - (5,781) - Interest expense (2,760) (9,859) - - 9,859 (2,760) -------- --------- --------- ----------- ----------- -------- (Loss) income before income taxes and equity in net losses of unconsolidated subsidiaries and affiliates (3,790) (6,949) 1,554 - 6,949 (2,236) Income tax (provision) benefit (698) (1,732) (543) - 2,867 (106) -------- --------- --------- ----------- ----------- -------- (Loss) income before equity in net losses of unconsolidated subsidiaries and affiliates (4,488) (8,681) 1,011 - 9,816 (2,342) Equity in net income (losses) of unconsolidated subsidiaries 1,011 (79,621) - - 78,610 - Equity in net (losses) income of affiliates - (7,487) - - 7,487 - -------- --------- --------- ----------- ----------- -------- Net (loss) income $ (3,477) $ (95,789) $ 1,011 $ - $ 95,913 $ (2,342) ======== ========= ========= =========== =========== ========
12 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ---------- ------------ ------------ ------------ ------------ Revenues from satellite services $ 46,024 $ - $20,669 $ - $ (16,784) $ 49,909 Costs of satellite services 48,196 - 15,765 - (16,784) 47,177 Selling, general and administrative expenses 4,361 4,184 570 - (4,184) 4,931 Management fee expense - 109 - - (109) - -------- --------- ------- ------- ---------- -------- Operating income (loss) (6,533) (4,293) 4,334 - 4,293 (2,199) Interest and investment income 5 11,328 - - (11,328) 5 Interest expense (5,648) (19,669) - - 19,669 (5,648) -------- --------- ------- ------- ---------- -------- (Loss) income before income taxes and equity in net losses of unconsolidated subsidiaries and affiliates (12,176) (12,634) 4,334 - 12,634 (7,842) Income tax (provision) benefit (890) (3,395) (1,515) - 5,680 (120) -------- --------- ------- ------- ---------- -------- (Loss) income before equity in net losses of unconsolidated subsidiaries and affiliates (13,066) (16,029) 2,819 - 18,314 (7,962) Equity in net income (losses) of unconsolidated subsidiaries 2,819 (115,141) - - 112,322 - Equity in net (losses) income of affiliates - (12,793) - - 12,793 - -------- --------- ------- ------- ---------- -------- Net (loss) income $(10,247) $(143,963) $ 2,819 $ - $ 143,429 $ (7,962) ======== ========= ======= ======= ========== ========
13 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2003 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- --------- ------------ ------------ ------------ ------------ Operating activities: Net (loss) income $(10,247) $(143,963) $ 2,819 $ - $ 143,429 $ (7,962) Non-cash items: Equity in net losses of affiliates 12,793 (12,793) - Equity in net losses of unconsolidated subsidiaries (2,819) 115,141 (112,322) - Deferred taxes - 3,395 2,285 - (5,680) - Depreciation and amortization 27,140 28 10,507 - (28) 37,647 Provisions for bad debt 802 - 36 - - 838 Interest 740 - - - - 740 Accounts receivable, net (4,584) - 72 - - (4,512) Prepaid expenses and other current assets (1,565) - 5,636 - - 4,071 Due to (from) Loral companies, net 11,586 (306) (20,905) - 306 (9,319) Other assets 2,381 (4,883) 62 - 4,883 2,443 Accounts payable (746) - (232) - - (978) Accrued expenses and other current liabilities 50 (960) - - 960 50 Customer advances 1,282 - (280) - - 1,002 -------- --------- -------- -------- --------- -------- Net cash provided by (used in) operating activities 24,020 (18,755) - - 18,755 24,020 -------- --------- -------- -------- --------- -------- Investing activities: Capital expenditures (3,752) - - - - (3,752) Investments in and advances to unconsolidated subsidiaries - 491 - - (491) - -------- --------- -------- -------- --------- -------- Net cash (used in) provided by in investing activities (3,752) 491 - - (491) (3,752) -------- --------- -------- -------- --------- -------- Financing activities: Interest payments on 10% senior notes (30,634) - - - - (30,634) Repayments of other long-term obligations (935) - - - - (935) Note receivable from unconsolidated affiliate - 17,284 - - (17,284) - Proceeds from stock issuances - 3,817 - - (3,817) - -------- --------- -------- -------- --------- -------- Net cash (used in) provided by financing activities (31,569) 21,101 - - (21,101) (31,569) -------- --------- -------- -------- --------- -------- (Decrease) increase in cash and cash equivalents (11,301) 2,837 - - (2,837) (11,301) Cash and cash equivalents--beginning of period 42,964 1,514 - - (1,514) 42,964 -------- --------- -------- -------- --------- -------- Cash and cash equivalents--end of period $ 31,663 $ 4,351 $ - $ - $ (4,351) $ 31,663 ======== ========= ======== ======== ========= ========
14 CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2002 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ----------- ----------- ------------ ------------ ------------ ------------ Current assets: Cash and cash equivalents.......... $ 42,964 $ 1,514 $ -- $ -- $ (1,514) $ 42,964 Accounts receivable, net........... 7,477 -- 138 -- -- 7,615 Prepaid expenses and other current assets................... 5,540 823 8,584 -- (1,734) 13,213 ----------- ----------- ---------- ---- ----------- ----------- Total current assets............. 55,981 2,337 8,722 -- (3,248) 63,792 Property, plant and equipment, net. 319,998 -- 204,701 -- -- 524,699 Notes (payable to) receivable from unconsolidated subsidiary.......... (31,540) 157,500 -- -- (157,500) (31,540) Due to (from) unconsolidated subsidiaries and Loral companies... (97,652) 36,448 107,917 -- (40,859) 5,854 Investments in unconsolidated subsidiaries....................... 304,590 (20,185) (271,698) -- (12,707) -- Investments in and advances to affiliates......................... -- 21,507 -- -- (21,507) -- Other assets, net................... 16,622 3,191 696 -- (3,191) 17,318 ----------- ----------- ---------- ---- ----------- ----------- Total assets..................... $ 567,999 $ 200,798 $ 50,338 $ -- $ (239,012) $ 580,123 =========== ============ ========== ==== =========== =========== Current liabilities: Current portion of long-term debt................... $ 64,727 $ -- $ -- $ -- $ -- $ 64,727 Accounts payable................... 1,194 2,404 1,193 -- (2,404) 2,387 Customer advances.................. 1,208 -- 521 -- 2,002 3,731 Accrued interest and preferred dividends......................... 4,700 20,840 -- -- (20,840) 4,700 Other current liabilities.......... 1,968 -- 35 (2,003) -- Income taxes payable............... -- 8,123 -- -- (8,123) -- ----------- ----------- ---------- ---- ----------- ----------- Total current liabilities........ 73,797 31,367 1,749 -- (31,368) 75,545 Long-term liabilities............... 7,743 48,577 11,387 -- (58,942) 8,765 Long-term debt...................... 894,829 350,000 -- -- (350,000) 894,829 6% Series C convertible redeemable preferred stock.................... -- 104,582 -- -- (104,582) -- 6% Series D convertible redeemable preferred stock.................... -- 20,499 -- -- (20,499) -- Stockholder's (deficit) equity: 6% Series C convertible redeemable preferred stock....... -- 80,171 -- -- (80,171) -- 6% Series D convertible redeemable preferred stock....... -- 15,125 -- -- (15,125) -- Common stock, par value $.01....... -- 4,293 -- -- (4,293) -- Paid-in capital.................... 604,166 3,389,035 -- -- (3,389,035) 604,166 Treasury stock, at cost............ -- (3,360) -- -- 3,360 -- Unearned compensation.............. -- (151) -- -- 151 -- Retained deficit................... (1,012,536) (3,782,107) 37,202 -- 3,754,259 (1,003,182) Accumulated other comprehensive income............................ -- (57,233) -- -- 57,233 -- ----------- ----------- ---------- ---- ----------- ----------- Total stockholder's (deficit) equity.......................... (408,370) (354,227) 37,202 -- 326,379 (399,016) ----------- ----------- ---------- ---- ----------- ----------- Total liabilities and stockholder's (deficit) equity.. $ 567,999 $ 200,798 $ 50,338 $ -- $ (239,012) $ 580,123 =========== =========== ========== ==== =========== ===========
15 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- ------------ ------------ ------------ ------------ Revenues from satellite services.. $ 24,971 $ -- $ 11,281 $-- $ (8,673) $ 27,579 Costs of satellite services....... 24,104 -- 7,098 -- (8,673) 22,529 Selling, general and administrative expenses........ 2,925 2,438 310 -- (2,438) 3,235 Management fee expense............ -- (264) -- -- 264 -- -------- -------- -------- --- -------- -------- Operating (loss) income........... (2,058) (2,174) 3,873 -- 2,174 1,815 Interest and investment income.... 81 5,387 -- -- (5,387) 81 Interest expense.................. (3,492) (9,805) -- -- 9,805 (3,492) -------- -------- -------- --- -------- -------- (Loss) income before income taxes and equity in net loss of unconsolidated subsidiaries and affiliates..................... (5,469) (6,592) 3,873 -- 6,592 (1,596) Income tax (provision) benefit.... (1,815) (1,605) (1,371) -- 3,853 (938) -------- -------- -------- --- -------- -------- (Loss) income before equity in net loss of unconsolidated subsidiaries and affiliates.... (7,284) (8,197) 2,502 -- 10,445 (2,534) Equity in net income (loss) of unconsolidated subsidiaries, net of taxes....................... 2,502 6,287 -- -- (8,789) -- Equity in net loss of affiliates, net of taxes................... -- (20,659) -- -- 20,659 -- -------- -------- -------- --- -------- -------- Net (loss) income................. $ (4,782) $(22,569) $ 2,502 $-- $ 22,315 $ (2,534) ======== ======== ======== === ======== ========
16 CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- -------- ------------ ------------ ------------ ------------ Revenues from satellite services.. $ 51,807 $ -- $ 24,173 $-- $ (18,780) $ 57,200 Costs of satellite services....... 49,879 14,196 -- (18,780) 45,295 Selling, general and administrative expenses........ 5,629 2,457 714 -- (2,457) 6,343 Management fee expense............ -- 27 -- -- (27) -- --------- ---------- -------- --- --------- --------- Operating (loss) income........... (3,701) (2,484) 9,263 -- 2,484 5,562 Interest and investment income.... 301 10,617 -- -- (10,617) 301 Interest expense.................. (6,750) (19,652) -- -- 19,652 (6,750) --------- ---------- -------- --- --------- --------- (Loss) income before income taxes, equity in net loss of unconsolidated subsidiaries and affiliates and cumulative effect of change in accounting principle....................... (10,150) (11,519) 9,263 -- 11,519 (887) Income tax benefit (provision).... 2,349 (3,154) (3,228) -- 5,402 1,369 --------- ---------- -------- --- --------- --------- (Loss) income before equity in net loss of unconsolidated subsidiaries and affiliates and cumulative effect of change in accounting principle......... (7,801) (14,673) 6,035 -- 16,921 482 Equity in net income (loss) of unconsolidated subsidiaries, net of taxes.................. 6,035 (868,000) -- -- 861,965 -- Equity in net loss of affiliates, net of taxes................. -- (36,256) -- -- 36,256 -- --------- ---------- -------- --- --------- --------- (Loss) income before cumulative effect of change in accounting principle.................... (1,766) (918,929) 6,035 -- 915,142 482 Cumulative effect of change in accounting principle......... (562,201) -- -- -- -- (562,201) --------- ---------- -------- --- --------- --------- Net (loss) income............... $(563,967) $ (918,929) $ 6,035 $-- $ 915,142 $(561,719) ========= ========== ======== === ========= =========
17 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002 (IN THOUSANDS)
PARENT ISSUER'S GUARANTOR OTHER COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ---------- ------------ ------------ ------------ ------------ Operating activities: Net (loss) income................ $(563,967) $ (918,929) $ 6,035 $-- $ 915,142 $(561,719) Non-cash items: Cumulative effect of change in accounting principle...... 562,201 -- -- -- -- 562,201 Equity in net loss of affiliates, net of taxes..... -- 36,256 -- -- (36,256) -- Equity in net loss of unconsolidated subsidiaries, net of taxes................. (6,035) 868,000 -- -- (861,965) -- Deferred taxes................. -- 3,135 2,248 -- (5,383) -- Depreciation and amortization.. 27,141 -- 10,506 -- 37,647 Non-cash interest income....... (529) -- -- -- -- (529) Provisions for bad debts....... 674 -- 190 -- -- 864 Changes in operating assets and liabilities: Accounts receivable, net....... 1,507 -- (379) -- -- 1,128 Prepaid expenses and other current assets............... 788 (1,719) 1,536 -- 1,719 2,324 Due to (from) Loral companies, net............... 15,766 -- (20,151) -- (397) (4,782) Due to (from) unconsolidated subsidiaries................. (397) (6,129) -- -- 6,526 -- Other assets................... 1,587 (379) 111 -- 379 1,698 Accounts payable............... (2,065) (317) -- -- 318 (2,064) Accrued expenses and other current liabilities.......... 2,811 (1,897) -- -- 1,897 2,811 Customer advances.............. (1,192) -- (40) -- (1) (1,233) Income taxes payable........... -- 19 -- -- (19) -- Deferred revenue............... (1,971) -- (56) -- -- (2,027) Other.......................... -- 165 -- -- (165) -- --------- ---------- -------- --- --------- --------- Net cash provided by (used in) operating activities............. 36,319 (21,795) -- -- 21,795 36,319 --------- ---------- -------- --- --------- --------- Investing activities: Investments in and advances to affiliates................ -- (2,162) -- -- 2,162 -- Investments in and advances to unconsolidated subsidiaries................. -- (857) -- -- 857 -- --------- ---------- -------- --- --------- --------- Net cash used in investing activities........................ -- (3,019) -- -- 3,019 -- --------- ---------- -------- --- --------- --------- Financing activities: Repayments of long-term obligations.................. (918) -- -- -- -- (918) Preferred dividends............ -- (20,878) -- -- 20,878 -- Proceeds from stock issuances.................... -- 7,154 -- -- (7,154) -- --------- ---------- -------- --- --------- --------- Net cash used in financing activities..................... (918) (13,724) -- -- 13,724 (918) --------- ---------- -------- --- --------- --------- Increase (decrease) in cash and cash equivalents............. 35,401 (38,538) -- -- 38,538 35,401 Cash and cash equivalents -- beginning of period.............. 19,399 46,068 -- -- (46,068) 19,399 --------- ---------- -------- --- --------- --------- Cash and cash equivalents -- end of period.................... $ 54,800 $ 7,530 $ -- $-- $ (7,530) $ 54,800 ========= ========== ======== === ========= =========
18 ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS Except for the historical information contained herein, the matters discussed in the following Management's Narrative Analysis of Results of Operations of Loral Orion, Inc. ("Loral Orion" or the "Company") are not historical facts, but are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. In addition, the Company or its representatives have made and may continue to make forward-looking statements, orally or in writing, in other contexts, such as in reports filed with the SEC, press releases or statements made with the approval of an authorized executive officer of the Company. These forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "plans," "may," "will," "would," "could," "should," "anticipates," "estimates," "project," "intend," or "outlook" or the negative of these words or other variations of these words or other comparable words, or by discussion of strategy that involves risks and uncertainties. These forward-looking statements are only predictions, and actual events or results may differ materially as a result of a wide variety of factors and conditions, many of which are beyond the Company's control. These include the Company developing a plan of reorganization, confirmation of the plan by the Bankruptcy Court, customer retention and the Company's ability to continue to provide high quality services. For a detailed discussion of additional factors and conditions, please also refer to the section of the Company's latest Annual Report on Form 10-K titled "Certain Factors that May Affect Future Results" beginning on page 4 and to the other periodic reports filed with the SEC by Loral Orion. In addition, we caution you that the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the Company's control. The Company undertakes no obligation to update any forward-looking statements. GENERAL The principal business of Loral Orion is leasing transponder capacity on its satellites to its customers for various applications, including broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television ("DTH"). Loral Skynet, a division of Loral SpaceCom Corporation ("Loral SpaceCom" or "LSC"), which is a subsidiary of Loral Space & Communications Corporation, which is in turn a subsidiary of Loral Space and Communications Ltd. ("Loral"), manages the Company's business. The Company operates in one segment, Fixed Satellite Services ("FSS"). No restrictions exist on the ability of any of the subsidiaries of Loral Orion ("Subsidiary Guarantors") other than inconsequential subsidiaries, to pay dividends or make other distributions to the Company, except to the extent provided by law generally (e.g., adequate capital to pay dividends under state corporate laws). RECENT EVENTS--BANKRUPTCY FILINGS On July 15, 2003, Loral, Loral Orion and certain of its subsidiaries, including Loral Asia Pacific Satellite (HK) Limited ("Loral Asia Pacific"), (the "Debtor Subsidiaries"), filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") (Lead Case No. 03-41716 (RDD), Case Nos. 03-41717 (RDD) through 03-41723 (RDD)) (the "Chapter 11 Cases"). Loral Orion and its Debtor Subsidiaries continue to manage their properties and operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the provisions of the Bankruptcy Code. As a result of Loral Orion's and the Debtor Subsidiaries' voluntary petitions for reorganization, Loral Orion's prepetition debt obligations, including its 10% senior notes obligations, have been accelerated and are immediately due and payable and Loral Orion's other prepetition debt obligations are subject to acceleration (see Note 4 to the condensed consolidated financial statements). As of July 15, 2003, Loral Orion failed to make interest payments of $30.6 million on its 10% Senior Notes due 2006, $2.1 million on its 11.25% Senior Notes due 2007 and $3.1 million on its 12.50% Senior Notes due 2007. A creditors' committee has been appointed in the Chapter 11 Cases to represent all unsecured creditors, including all holders of Loral Orion's senior unsecured notes, and, in accordance with the provisions of the Bankruptcy Code, will have the right to be heard on all matters that come before the Bankruptcy Court. At this point, it is not possible to predict with certainty when a plan of reorganization will be confirmed by the Bankruptcy Court in the Chapter 11 Cases or how any such plan will treat the claims of prepetition creditors. During the pendency of the Chapter 11 Cases, Loral Orion's business will be subject to risks and uncertainties relating to the Chapter 11 Cases. For example, the Chapter 11 Cases could adversely affect relationships with Loral Orion's customers and suppliers, which could adversely affect the going concern value of the business and of its assets, particularly if the Chapter 11 Cases are protracted. Also, transactions outside the ordinary course of business will be subject to the prior approval of the Bankruptcy Court which may limit Loral Orion's ability to respond to certain market events or take advantage of certain market opportunities, and, as a result, Loral Orion's operations could be materially adversely affected. 19 As a result of the commencement of the Chapter 11 Cases, the pursuit of all pending claims and litigation against Loral Orion and its Debtor Subsidiaries arising prior to or relating to events which occurred prior to the commencement of the Chapter 11 Cases is generally subject to an automatic stay under Section 362 of the Bankruptcy Code, and, absent further order of the Bankruptcy Court, no party may take any action to recover any prepetition claims, enforce any lien against or obtain possession of any property from Loral Orion or its Debtor Subsidiaries. In addition, pursuant to Section 365 of the Bankruptcy Code, Loral Orion and its Debtor Subsidiaries may reject or assume prepetition executory contracts and unexpired leases, and parties affected by rejections of these contracts or leases may file claims with the Bankruptcy Court which will be addressed in the context of the Chapter 11 Cases. The condensed consolidated financial statements have been prepared assuming the Company in its current structure will continue as a going concern. The factors mentioned above, however, among other things, raise substantial doubt about Loral Orion's ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The ability of the Company to continue as a going concern is dependent on a number of factors including, but not limited to, the Company's development of a plan of reorganization, confirmation of the plan by the Bankruptcy Court, customer retention and the Company's ability to continue to provide high quality services. If a plan of reorganization is not confirmed and implemented, the Company may be forced to liquidate under applicable provisions of the Bankruptcy Code. There can be no assurance of the level of recovery that the Company's creditors would receive in such liquidation. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities if the Company is forced to liquidate. CRITICAL ACCOUNTING MATTERS See the Company's latest Annual Report on Form 10-K filed with the SEC and Accounting Pronouncements below. RESULTS OF OPERATIONS In evaluating financial performance, management uses revenues and operating income (loss) before depreciation and amortization ("EBITDA") as a measure of segment profit or loss. The following discusses the results of Loral Orion for the three and six months ended June 30, 2003 and 2002. EBITDA (1) (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------- 2003 2002 2003 2002 -------- ------- ------ ------ Revenues............................. $ 24.7 $ 27.6 $ 49.9 $ 57.2 ======== ======= ====== ====== EBITDA............................... $ 19.3 $ 20.6 $ 35.4 $ 43.2 Depreciation and amortization........ (18.8) (18.8) (37.6) (37.6) -------- ------- ------ ------ Operating income (loss).............. $ 0.5 $ 1.8 $ (2.2) $ 5.6 ======== ======= ====== ======
(1) EBITDA is provided because it is a measure commonly used in the communications industry to analyze companies on the basis of operating performance, leverage and liquidity and is presented to enhance the understanding of the Company's operating results. However, EBITDA should not be construed as an alternative to net income as an indicator of a company's operating performance, or cash flow from operations as a measure of a company's liquidity. EBITDA may be calculated differently and, therefore, may not be comparable to similarly titled measures reported by other companies. THREE MONTHS ENDED JUNE 30, 2003 COMPARED WITH JUNE 30, 2002 Revenues were $24.7 million and $27.6 million in 2003 and 2002, respectively. Revenues decreased due to reduced prices and volume resulting from the global economic downturn, which has caused a delay in demand for new telecommunications applications and services. EBIDTA was $19.3 million and $20.6 million in 2003 and 2002, respectively. This decrease was primarily due to lower revenues, higher insurance costs resulting from the renewal of a policy for one of the Company's satellites, offset by lower bad debt expense. Depreciation and amortization was $18.8 million in both 2003 and 2002. As a result of the above, the Company had operating income of $0.5 million in 2003 as compared to operating income of $1.8 million in 2002. Interest expense was $2.8 million, net of capitalized interest of $0.5 million in 2003 as compared to $3.5 million in 2002. As a result of the Company's voluntary petitions for reorganization, interest expense will decrease subsequent to July 14, 2003, since the Company does not expect to pay interest on its debt obligations. Interest income was zero and $0.1 million in 2003 and 2002, respectively. 20 The Company is included in the consolidated U.S. federal income tax return of Loral Space & Communications Corporation. Pursuant to a tax sharing agreement for 2003 with Loral Space & Communications Corporation, the Company is entitled to reimbursement for the use of its current period tax losses to the extent such losses are utilized by the consolidated group in the current period; otherwise the Company is required to pay its separate Company income tax liability to Loral Space & Communications Corporation. The provision for income taxes from continuing operations for the three months ended June 30, 2003 and 2002 was $0.1 million and $0.9 million on a pre-tax loss of $2.2 million and $1.6 million, respectively. In 2003, the Company continued to maintain a full valuation allowance against its deferred tax asset and recorded no benefit under the tax sharing agreement for its loss. In 2002, the Company recorded a provision of $0.9 million under the tax sharing agreement. SIX MONTHS ENDED JUNE 30, 2003 COMPARED WITH JUNE 30, 2002 Revenues were $49.9 million and $57.2 million in 2003 and 2002, respectively. Revenues decreased due to reduced prices and volume resulting from the global economic downturn, which has caused a delay in demand for new telecommunications applications and services. EBIDTA was $35.4 million and $43.2 million in 2003 and 2002, respectively. This decrease was primarily due to lower revenues and renewing the insurance on one of the Company's satellites, offset by lower marketing expenses. Depreciation and amortization was $37.6 million in both 2003 and 2002. As a result of the above, the Company had an operating loss of $2.2 million in 2003, as compared to operating income of $5.6 million in 2002. Interest expense was $5.6 million, net of capitalized interest of $0.8 million in 2003 as compared to $6.8 million in 2002. As a result of the Company's voluntary petitions for reorganization, interest expense will decrease subsequent to July 14, 2003, since the Company does not expect to pay interest on its debt obligations. Interest income was $5,000 and $301,000 in 2003 and 2002, respectively. The decrease in 2003 as compared to 2002 was primarily due to a reduction in the balances held for investment. The Company is included in the consolidated U.S. federal income tax return of Loral Space & Communications Corporation. Pursuant to a tax sharing agreement for 2003 with Loral Space & Communications Corporation, the Company is entitled to reimbursement for the use of its current period tax losses to the extent such losses are utilized by the consolidated group in the current period; otherwise the Company is required to pay its separate Company income tax liability to Loral Space & Communications Corporation. The (provision) benefit for income taxes from continuing operations for the six months ended June 30, 2003 and 2002 was $(0.1) million and $1.4 million on a pre-tax loss of $7.8 million and $0.9 million, respectively. In 2003, the Company continued to maintain a full valuation allowance against its deferred tax asset and recorded no benefit under the tax sharing agreement for its loss. In 2002, the Company recorded a benefit of $1.4 million under the tax sharing agreement. On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which resulted in the Company recording a charge for the cumulative effect of change in accounting principle of $562 million (see Accounting Pronouncements). Operational Matters At June 30, 2003, the Company had contracted backlog of approximately $373 million (which includes $39 million to Loral companies), as compared to $453 million at December 31, 2002 (which included $42 million to Loral companies). On September 20, 2002, Loral Orion entered into an agreement with APT Satellite Company Limited ("APT") for the 50/50 joint acquisition of the Apstar V satellite, a satellite under construction by SS/L for APT. Loral Orion's aggregate purchase price for its 50% interest in the satellite will be 50% of the project cost of constructing, launching and insuring the satellite. At launch, Loral Orion will obtain title to 25% of the satellite, in return for payment by Loral Orion of half of its purchase price, a portion of which is funded by existing launch vehicle deposits. At June 30, 2003, the total purchase price for Loral Orion's 50% interest in the satellite was estimated at $113 million. Subject to certain acceleration rights on the part of Loral Orion, the remainder of the estimated purchase price will be paid by and title will transfer to Loral Orion as follows: $7 million for 2.5 additional transponders on the second anniversary of the satellite's in-service date; 13 million for three additional transponders on the third anniversary; and $18 million for four additional transponders on each of the fourth and fifth anniversary. In March 2003, as a result of finalizing launch arrangements for the satellite, Loral Orion agreed to take two fewer transponders (resulting in a reduction in the satellite percentage ownership allocation between APT and Loral Orion from 50/50 to 54/46), without changing the 50/50 cost allocation in the satellite as described above. Loral SpaceCom has agreed to purchase from Loral Orion 4.75 transponders on the satellite, together with a lease of an additional transponder for an approximate two-year period from the satellite's in-service date, at a price equal to 12.5% of the project cost of the satellite. More recently and in response to concerns regarding the timely receipt of necessary export licenses to transfer title of the satellite from SS/L to APT, Loral Orion and APT have been engaged in discussions to revise their existing arrangement to provide for transfer at launch of a prepaid leasehold interest, instead of title, to APT. Under this arrangement, Loral Orion would hold title to the satellite, with APT leasing on a prepaid basis 77% of the transponders on the satellite commencing at launch. APT's leasehold interest in the satellite would be reduced over time (ultimately to 54%) as Loral Orion makes additional payments towards its share of the satellite project cost. This new arrangement may be subject to Bankruptcy Court approval. 21 In November 1995, a component on Telstar 11 malfunctioned, resulting in a 2-hour service interruption. The malfunctioning component supported nine transponders serving the European portion of Telstar 11's footprint. Full service was restored using a back-up component. If that back-up component fails, Telstar 11 would lose a significant amount of usable capacity. In such event, while the Company would be entitled to insurance proceeds of approximately $195 million as of June 30, 2003 and could lease replacement capacity and function as a reseller with respect to such capacity, the loss of capacity would have a material adverse effect on the Company. Telstar 12, originally intended to operate at 12 degrees W.L., was launched aboard an Ariane launch vehicle in October 1999 into the orbital slot located at 15 degrees W.L., and commenced operations in January 2000. Under an agreement reached with Eutelsat, Loral Orion agreed to operate Telstar 12 at 15 degrees W.L. while Eutelsat continues to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority rights at such location on Loral Orion's behalf. As part of this coordination effort, Loral Orion agreed to provide to Eutelsat four 54 MHz transponders on Telstar 12 for the life of the satellite and has retained risk of loss with respect to those transponders. Eutelsat also has the right to acquire, at cost, four transponders on the next replacement satellite for Telstar 12. As part of the international coordination process, Loral Orion continues to conduct discussions with various administrations regarding Telstar 12's operations at 15 degrees W.L. If these discussions are not successful, Telstar 12's useable capacity may be reduced. While the Company has in the past, consistent with industry practice and the requirements of our indenture, typically obtained in-orbit insurance for its satellites, the Company cannot guarantee that, upon a policy's expiration, the Company will be able to renew the insurance on acceptable terms, especially on satellites that have, or that are part of a family of satellites that have, experienced problems in the past. Two satellites owned by Loral Orion have the same solar array configuration as two other 1300-class satellites manufactured by SS/L that have experienced solar array failures. SS/L believes that these failures are isolated events and do not reflect a systemic problem in either the satellite design or manufacturing process. Accordingly, the Company does not believe that these anomalies will affect these satellites. The insurance coverage for Telstar 10/Apstar IIR, however, provides for coverage of losses due to solar array failures only in the event of a capacity loss of 75% or more. The Company believes that the insurers will require either exclusions of, or limitations on, coverage due to solar array failures in connection with the renewal of insurance for the Company's other satellite in 2004. An uninsured loss of a satellite would have a material adverse effect on the Company's consolidated financial position and results of operations. The Company is subject to various other legal proceedings and claims, either asserted or unasserted, that arise in the ordinary course of business. Although the outcome of these claims cannot be predicted with certainty, the Company does not believe that any of these other existing legal matters will have a material adverse effect on its consolidated financial position or results of operations These claims against the Company are subject to the automatic stay as a result of the commencement of the Chapter 11 Cases. See Part II, Item 1, Legal Proceedings. The Company, like others in the satellite industry, are faced with significantly higher premiums on launch and in-orbit insurance, increasing thresholds in determining total losses for satellites in orbit and significantly shorter coverage periods than those that have been available in the past, which was due in part to the events of September 11, 2001. This development in the insurance industry has increased the Company's cost of doing business. The Company intends to pass on some of the increased cost to its customers. There can be no assurance, however, that the Company will be able to do so. Insurance market conditions have historically been cyclical in nature. While the Company anticipates that these conditions will improve in the future, there can be no assurance that they will. 22 Accounting Pronouncements SFAS 142 On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets ("SFAS 142"), which addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. SFAS 142 also changed the evaluation criteria for testing goodwill for impairment from an undiscounted cash flow approach, which was previously utilized under the guidance in Accounting Principles Board Opinion No. 17, Intangible Assets, to a test based on fair value. Fair value is determined by the amount at which an asset or liability could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Quoted market prices in active markets are the best evidence of fair value and must be used as the basis for the measurement, if available. If quoted market prices are not available, the estimate of fair value must be based on the best information available, including prices for similar assets and liabilities and the results of using other valuation techniques, such as public company trading multiples and future discounted cash flows. In accordance with SFAS 142, the Company's previously recognized cost in excess of net assets acquired ("goodwill") of $562 million (at December 31, 2001) from the acquisition of the Company by Loral in 1998 was reviewed under the new transitional guidance as of January 1, 2002. The Company hired professionals in the valuation consulting business to determine the fair value of the Company. Since there were no quoted market prices in active markets for the Company, the measurement of fair value was based on the best information available in the circumstances, including reasonable and supportable assumptions and projections, to determine that the most appropriate method of fair value was public company trading multiples. Based on the fair values concluded on by those professionals, management determined that the Company's goodwill under the new guidance in SFAS 142 was fully impaired. Accordingly, as of January 1, 2002, the Company recorded a non-cash charge for the cumulative effect of the change in accounting principle of $562 million. The charge is the result of a change in the evaluation criteria for goodwill from an undiscounted cash flow approach which was previously utilized under the guidance in Accounting Principles Board Opinion No. 17 to the fair value approach which is stipulated in SFAS 142. SFAS 143 In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and the normal operation of a long-lived asset, except for certain obligations of lessees. The Company has determined that there was no effect on its consolidated results of operations or its financial position upon the adoption of SFAS 143 on January 1, 2003. FIN 45 In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others ("FIN 45"). FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation were applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements were effective for financial statements of interim or annual reports ending after December 15, 2002. The Company adopted the disclosure provisions of FIN 45 during the fourth quarter of 2002. The Company adopted the recognition provisions of FIN 45 on January 1, 2003 and has determined that there was no effect on its consolidated results of operations or its financial position. FIN 46 In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 ("FIN 46"). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company is currently evaluating the provisions of FIN 46. SFAS 149 23 In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities ("SFAS 149"). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivates) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company believes that there will be no effect on its consolidated results of operation or financial position upon the adoption of SFAS 149 on July 1, 2003. SFAS 150 In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. SFAS 150 is effective for the Company beginning on July 1, 2003. The Company believes that there will be no effect on its consolidated results of operation or financial position upon the adoption of SFAS 150 on July 1, 2003. ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES (a) Disclosure controls and procedures. Loral Orion's chief executive officer and its chief financial officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities and Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) as of June 30, 2003, have concluded that as of June 30, 2003, the Company's disclosure controls and procedures were effective and designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities. (b) Internal control over Financial reporting. There were no significant changes in the Company's internal control over financial reporting during the quarterly period ended June 30, 2003, that have materially effected, are reasonably likely to materially effect, the Company's control over financial reporting. 24 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On July 15, 2003, Loral, Loral Orion and certain of its subsidiaries, including Loral Asia Pacific Satellite (HK) Limited ("Loral Asia Pacific"), (the "Debtor Subsidiaries"), filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") (Lead Case No. 03-41716 (RDD), Case Nos. 03-41717 (RDD) through 03-41723 (RDD)) (the "Chapter 11 Cases"). Loral Orion and its Debtor Subsidiaries continue to manage their properties and operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the provisions of the Bankruptcy Code. As a result of Loral Orion's and the Debtor Subsidiaries' voluntary petitions for reorganization, Loral Orion's prepetition debt obligations, including its 10% senior notes obligations, have been accelerated and are immediately due and payable and Loral Orion's other prepetition debt obligations are subject to acceleration (see Note 4 to the condensed consolidated financial statements). A creditors' committee has been appointed in the Chapter 11 Cases to represent all unsecured creditors, including all holders of Loral Orion's senior unsecured notes, and, in accordance with the provisions of the Bankruptcy Code, will have the right to be heard on all matters that come before the Bankruptcy Court. At this point, it is not possible to predict with certainty when a plan of reorganization will be confirmed by the Bankruptcy Court in the Chapter 11 Cases or how any such plan will treat the claims of prepetition creditors. See Note 6 to the condensed consolidated financial statements. ITEM 3. DEFAULTS UPON SENIOR SECURITIES (a) On July 15, 2003, Loral, Loral Orion, and certain of its subsidiaries, including Loral Asia Pacific, (the "Debtor Subsidiaries") filed voluntary petitions for reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") (Lead Case No. 03-41716 (RDD), Case Nos. 03-41717 (RDD) through 03-41723 (RDD)). As a result of Loral Orion's voluntary petitions for reorganization, Loral Orion's 10% senior notes obligations have been accelerated and are immediately due and payable and Loral Orion's other debt obligations are subject to acceleration (see Note 4 to the condensed consolidated financial statements). As of July 15, 2003, Loral Orion failed to make interest payments of $30.6 million on its 10% Senior Notes due 2006, $2.1 million on its 11.25% Senior Notes due 2007 and $3.1 million on its 12.50% Senior Notes due 2007. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 31.1 --Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 --Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 --Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2 --Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K NONE 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LORAL ORION, INC. Registrant Date: August 14, 2003 /s/ RICHARD J. TOWNSEND ------------------------------------ Richard J. Townsend Executive Vice President and Chief Financial Officer (Principal Financial Officer and Registrant's Authorized Officer) 26 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- Exhibit 31.1 -- Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 -- Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 -- Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2 -- Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002