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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 MARCH 31, 2004
COMMISSION FILE NUMBER 0-22085
LORAL ORION, INC.
500 HILLS DRIVE, BEDMINSTER, NJ 07921
TELEPHONE: (908) 470-2300
STATE OR OTHER JURISDICTION OF INCORPORATION:
DELAWARE
IRS IDENTIFICATION NUMBER:
52-1564318
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 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 April 30, 2004 was 100, all of which were owned,
directly or indirectly, by Loral Space & Communications Ltd.
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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 SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2004 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 49,670 $ 46,831
Accounts receivable, net 7,984 7,880
Prepaid expenses and other current assets 5,648 7,805
----------- -----------
Total current assets 63,302 62,516
Satellites and related equipment, net 542,446 574,337
Other assets, net 4,916 5,579
----------- -----------
Total assets $ 610,664 $ 642,432
=========== ===========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Liabilities not subject to compromise:
Current liabilities:
Accounts payable $ 1,664 $ 824
Customer advances 120,599 120,386
Due to Loral companies 9,347 17,510
----------- -----------
Total current liabilities 131,610 138,720
Customer advances 4,190 4,302
----------- -----------
Total liabilities not subject to compromise 135,800 143,022
Liabilities subject to compromise (Note 5) 996,571 997,042
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 (54,081) (52,784)
Retained deficit (1,071,792) (1,049,014)
----------- -----------
Total stockholder's deficit (521,707) (497,632)
----------- -----------
Total liabilities and stockholder's deficit $ 610,664 $ 642,432
=========== ===========
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
MARCH 31,
--------------------
2004 2003
-------- --------
Revenues from satellite services $ 20,590 $ 25,197
Operating expenses:
Cost of satellite services 37,234 23,670
Selling, general and administrative expenses 4,729 4,250
-------- --------
Operating loss before reorganization expenses due to bankruptcy (21,373) (2,723)
Reorganization expenses due to bankruptcy (1,878) --
-------- --------
Operating loss (23,251) (2,723)
Interest income -- 37
Interest expense (contractual interest was $2,564 for the three months
ended March 31, 2004, see Note 6) -- (2,920)
-------- --------
Loss before income taxes (23,251) (5,606)
Income tax benefit (provision) 473 (14)
-------- --------
Net loss $(22,778) $ (5,620)
======== ========
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)
THREE MONTHS ENDED
MARCH 31,
--------------------
2004 2003
-------- --------
Operating activities:
Net loss $(22,778) $ (5,620)
Non-cash items:
Depreciation and amortization 32,570 18,823
Provisions for (recoveries of) bad debts (150) 2,135
Non-cash interest expense, net -- 1,165
Changes in operating assets and liabilities:
Accounts receivable, net 46 (3,968)
Prepaid expenses and other current assets 2,157 1,935
Other assets 162 1,211
Accounts payable 840 (2,564)
Accrued interest and other current liabilities 52 (1,342)
Customer advances 45 966
Other long-term liabilities (469) (414)
Due from Loral companies, net (9,458) (4,396)
-------- --------
Net cash provided by operating activities 3,017 7,931
-------- --------
Investing activities:
Capital expenditures (178) (1,599)
-------- --------
Net cash used in investing activities (178) (1,599)
-------- --------
Financing activities:
Interest payments on 10% senior notes -- (30,634)
-------- --------
Net cash used in financing activities -- (30,634)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,839 (24,302)
Cash and cash equivalents at beginning of period 46,831 42,964
-------- --------
Cash and cash equivalents at end of period $ 49,670 $ 18,662
======== ========
Supplemental information:
Cash (paid) received for reorganization items:
Professional fees $ (1,353)
========
Retention costs $ (123)
========
Interest income $ 96
========
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 PRINCIPAL BUSINESS
Loral Orion, Inc. (the "Company" or "Loral Orion", which terms shall include
its subsidiaries unless otherwise indicated or the context requires), together
with its subsidiaries, operates in one business segment, satellite services. The
Company's satellite services business is managed by Loral Skynet, a division of
a subsidiary of Loral Space & Communications Ltd. ("Loral"), the Company's
parent. The Company's revenues and cash are generated from leasing satellite
capacity and platforms to customers for video and direct to home ("DTH")
broadcasting, high-speed data distribution, Internet access and
communications.
2. BANKRUPTCY FILINGS AND REORGANIZATION
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" and together with Loral, Loral Orion and certain other
Loral subsidiaries the "Debtors"), filed voluntary petitions for reorganization
under chapter 11 of title 11 ("Chapter 11") of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court") (Lead Case No. 03-41710 (RDD),
Case Nos. 03-41709 (RDD) through 03-41728 (RDD)) (the "Chapter 11 Cases"). 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 (see Note 3).
As a result of Loral Orion's and the Debtor Subsidiaries' voluntary
petitions for reorganization, all of Loral Orion's prepetition debt obligations
aggregating $920 million at March 31, 2004, have been accelerated (see Note 5
and Note 6). On July 15, 2003, Loral Orion suspended interest payments on all of
its senior unsecured notes, with an aggregate principal amount of $699 million.
A creditors' committee has been appointed in the Chapter 11 Cases to represent
all unsecured creditors of Loral, including all holders of Loral Orion's senior
unsecured notes, and, in accordance with the provisions of the Bankruptcy Code,
has the right to be heard on all matters that come before the Bankruptcy Court
(see Note 6).
During the duration of the Chapter 11 Cases, Loral Orion's business is
subject to risks and uncertainties of bankruptcy. For example, the Chapter 11
Cases could adversely affect Loral Orion's relationships with customers, which,
in turn could adversely affect the going concern value of the business and of
Loral Orion's assets, particularly if the Chapter 11 Cases are protracted. Also,
transactions outside the ordinary course of business are subject to the prior
approval of the Bankruptcy Court which may limit 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
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. Accordingly, absent further order of the Bankruptcy
Court, a party is generally prohibited from taking 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.
REORGANIZATION
Loral Orion intends to reorganize around its satellites. Loral Orion is in
the process now of completing its long-term business plan and does not believe
it will require any additional financing to fund operations.
As provided by the Bankruptcy Code, the Debtors had the exclusive right to
submit their plan or plans of reorganization for 120 days from the date of the
Chapter 11 filing. The Bankruptcy Court extended this exclusive period through
July 12, 2004. If the Debtors fail to file their plan or plans of reorganization
during this exclusive period, or if a plan is filed and such plan or plans is
not
5
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 the Debtors. 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 of reorganization notwithstanding rejection of the plan by an
impaired class of creditors or equity holders if certain requirements of the
Bankruptcy Code are met. Although the Debtors expect to file a plan or plans of
reorganization that provide for emergence from bankruptcy sometime in 2004,
Loral Orion cannot now describe the components or features of the plan,
including whether the plan will provide for creditors to be paid in whole or in
part or whether consideration they will receive will consist of cash, debt,
equity or some combination thereof. In addition, there can be no assurance that
the Debtors will be able to propose a plan, obtain court approval of any plan it
proposes, obtain acceptances from the number of creditors necessary to confirm a
plan, or actually confirm and consummate a plan.
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. However, the factors mentioned in Note 2 above, among other
things, raise substantial doubt about Loral Orion's ability to continue as a
going concern. The unaudited 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 developing a plan
of reorganization, confirmation of the plan by the Bankruptcy Court and the
Company maintaining good relations with its customers and suppliers. 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 were forced to liquidate (see REORGANIZATION in Note 2).
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 months ended March 31, 2004 are not necessarily indicative of the
results to be expected for the full year. The December 31, 2003 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 included
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 unaudited condensed consolidated
balance sheet. The caption "liabilities subject to compromise" reflects the
carrying value 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 statements of operations portray the results of
operations of the reporting entity during Chapter 11 proceedings. As a result,
any revenue, expenses, realized gains and losses, and provision for losses
resulting directly from the reorganization and restructuring of the organization
are reported separately as reorganization items, except those required to be
reported as discontinued operations and extraordinary items in conformity with
Statement of Financial Accounting Standards ("SFAS") No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets ("SFAS 144") and SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections ("SFAS 145"). 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.
INCOME TAXES
During 2004 and 2003, Loral Orion continued to maintain the 100% valuation
allowance established at December 31, 2002 and recorded a benefit of $0.5
million for its domestic loss under its tax sharing agreement with Loral Space &
Communications Corporation. The benefit for 2004 includes a nominal provision
for foreign income taxes.
RECLASSIFICATIONS
6
Certain reclassifications have been made to conform prior year amounts to
the current year's presentation.
4. OTHER ACQUIRED INTANGIBLE ASSETS
Other acquired intangible assets are included in other assets in the
Company's condensed consolidated balance sheets and were as follows (in
millions):
MARCH 31, 2004 DECEMBER 31, 2003
---------------------- ----------------------
GROSS ACCUMULATED GROSS ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
Customer relations $ 7.0 $(5.7) $ 7.0 $(5.5)
Trademarks 6.0 (4.9) 6.0 (4.7)
Regulatory 2.5 (1.8) 2.5 (1.7)
----- ----- ----- -----
$15.5 $(12.4) $15.5 $(11.9)
===== ===== ===== =====
As of March 31, 2004, the weighted average remaining amortization period for
customer relations and trademarks was approximately one year and for regulatory
fees was approximately eight and a half years.
Total amortization expense for other acquired intangible assets for the
three months ended March 31, 2004 and 2003 was approximately $0.5 million.
Annual amortization expense for other acquired intangible assets for the five
years ending December 31, 2008 is estimated to be as follows (in millions):
2004 $ 2.0
2005 1.2
2006 --
2007 --
2008 --
5. LIABILITIES SUBJECT TO COMPROMISE
As discussed in Note 2, the Company and its Debtor Subsidiaries have 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 carrying value 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. The
Bankruptcy Court established January 26, 2004 as the bar date in the Debtors'
Chapter 11 Cases, which is the date by which prepetition claims against Loral
Orion and its Debtor Subsidiaries were required to have been filed for claimants
to receive any distribution in the Chapter 11 Cases. Differences between
liability amounts estimated by the Company and claims filed by creditors are
being investigated and the Bankruptcy Court will make a final determination of
the allowable claim. The determination of how liabilities will ultimately be
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 through
the remainder of their Chapter 11 Cases. Should Loral Orion 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 unsecured claims. Liabilities
subject to compromise consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
-------- --------
Debt obligations (Note 6) $919,977 $919,977
Accounts payable 1,780 1,780
Customer advances 3,982 4,038
7
Accrued interest and other current liabilities 6,918 6,865
Other long term liabilities 4,091 4,559
Due to Loral companies 26,697 26,697
Note payable to Loral SpaceCom
Corporation ("LSC") 33,126 33,126
-------- --------
Total liabilities subject to compromise $996,571 $997,042
======== ========
6. DEBT
Debt consists of the following (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
-------- --------
10.00% senior notes due 2006:
Principal amount $612,704 $612,704
Accrued interest (deferred gain
on debt exchanges) 214,446 214,446
11.25% senior notes due 2007 (principal
amount $37 million) 39,402 39,402
12.50% senior discount notes due 2007 (principal
amount at maturity $49 million) 53,425 53,425
-------- --------
Total debt 919,977 919,977
Less, current maturities included in liabilities
subject to compromise (Note 5) 919,977 919,977
-------- --------
$ -- $ --
======== ========
Loral Orion currently has approximately $699 million in principal debt
obligations. As a result of the commencement of the Chapter 11 Cases, Loral
Orion suspended interest payments on all of its debt, which has significantly
reduced Loral Orion's cash interest payments.
As a result of Loral Orion's and the Debtor Subsidiaries' voluntary
petitions for reorganization, all $699 million principal amount of Loral Orion's
prepetition debt obligations, including its 10% senior notes obligations, have
been accelerated. On July 15, 2003, Loral Orion suspended interest payments on
its 10% Senior Notes due 2006, the 11.25% Senior Notes due 2007 and the 12.50%
Senior Notes due 2007. A creditors' committee has been appointed in the Chapter
11 Cases to represent all unsecured creditors of Loral, including all holders of
Loral Orion's senior unsecured notes, and, in accordance with the provisions of
the Bankruptcy Code, it has the right to be heard on all matters that come
before the Bankruptcy Court (see Note 2). For the three months ended March 31,
2004, Loral Orion did not recognize $2.6 million of interest expense and $15.3
million of a reduction to accrued interest on its 10% senior notes as a result
of the suspension of interest payments on its debt obligations.
7. REORGANIZATION EXPENSES DUE TO BANKRUPTCY
Reorganization expenses due to bankruptcy for the three months ended March
31, 2004 include professional fees associated with bankruptcy services and
employee retention costs, both allocated to the Company from Loral (see Note 8),
and interest income and were as follows (in thousands):
Professional fees $ 1,764
Employee retention costs 210
Interest income (96)
-------
Total reorganization expenses due to bankruptcy $ 1,878
=======
8. RELATED PARTY TRANSACTIONS
Due (to) from Loral companies consist of the following (in thousands):
MARCH 31, DECEMBER 31,
2004 2003
-------- --------
Loral Space and Communications Corporation $ 44,181 $ 43,654
Loral Skynet Network Services, Inc. 10,424 9,128
LSC (27,877) (29,299)
Loral Skynet (2,293) (2,178)
Space Systems/Loral ("SS/L") (6,398) (12,728)
-------- --------
$ 18,037 $ 8,577
======== ========
8
As a result of the uncertainty regarding collectibility, due to Loral Space
& Communications Corporation and Loral Skynet Network Services, Inc. filing
voluntary petitions for reorganization, the Company's receivables due from Loral
Space & Communications Corporation and Loral Skynet Network Services, Inc.
(aggregating $54.1 million as of March 31, 2004) have been reflected as debit
balances in stockholder's deficit. Liabilities due to related parties of $26.7
million have been included in liabilities subject to compromise as of March 31,
2004 (see Note 5).
Loral Orion and Loral Skynet have entered into agreements (the "Loral Skynet
Agreements") effective January 1, 1999, 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 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 $15.0 million per year. The costs charged to
Loral Orion amounted to $6.0 million and $2.1 million for the three months ended
March 31, 2004 and 2003, respectively.
Approximately 70 employees of Loral Skynet are union members and are
subject to a collective bargaining agreement that expires in late May 2004.
Loral Skynet and the union are in discussions concerning the terms upon which
the agreement will be extended. There is no assurance that an agreement will be
reached or, if not reached, whether the union will strike.
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 March 31, 2004, the
balance of the note was $33.1 million, including accrued interest which is
included in liabilities subject to compromise (see Note 5).
9. COMMITMENTS AND CONTINGENCIES
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 for Telstar 11 due to the high cost of such insurance and the
relative age of the satellite. As of March 31, 2004, the net book value of
Telstar 11 was $19 million and its end of life, as determined in the fourth
quarter of 2003, was accelerated to June 2004, from its previously expected end
of life of March 2005.
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 developed its services at 12.5 degrees W.L. Eutelsat 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 in the Company's debt agreements, typically obtained in-orbit
insurance for its satellites, the Company cannot assure 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. The Company's Telstar 10/Apstar IIR
and Telstar 12 satellites have the same solar array configuration as one other
1300-class satellite manufactured by SS/L that has experienced an event with a
large loss of solar power. SS/L believes that this failure is an isolated event
and does not reflect a systemic problem in either the satellite design or
manufacturing process. Accordingly, the Company does not believe that this
anomaly will affect Telstar 10/Apstar IIR or Telstar 12. 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 future renewals of
insurance for these two satellites. An uninsured loss of a satellite would have
a material adverse effect on the Company's consolidated financial position and
its results of operations.
On September 20, 2002, and as further amended in March 2003, Loral Orion
agreed with APT Satellite Company Limited
9
("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 was to initially
acquire 23% of the satellite in return for paying 25% of the project cost, and
was to pay to APT over time an additional 25% of the project cost to acquire an
additional 23% interest in the satellite. 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.
Due to the related party relationship and the nature of the repurchase
obligation of Loral SpaceCom, the agreements effectively result in a three party
jointly owned asset with the initial ownership of the satellite being
approximately 77% by APT, 14% by Loral Orion and 9% by Loral SpaceCom. At March
31, 2004, the project cost of the satellite was estimated at $230 million.
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. Under this arrangement, Loral
Orion retains title to the entire satellite (less the transponders to be
transferred to Loral SpaceCom as described above), 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, ultimately to 54% of the satellite's transponder
capacity.
In November 2003, Loral Orion and APT agreed to further revise their
existing arrangement. Under this revised arrangement, Loral Orion agreed, among
other things, to 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 paid by APT, decreasing APT's initial leased transponder
capacity from 77% to 69%. In addition, Loral Orion will provide to APT, free of
charge, certain unused 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 equivalent Ku-band transponder capacity on Telstar
10/Apstar IIR. These arrangements were approved by the Bankruptcy Court in
November 2003, and, as a result Loral Orion recorded an increase to self
constructed assets and customer advances of $119 million, representing future
obligations to APT. These arrangements will result in a jointly owned asset with
approximately 91.3% recorded by Loral Orion and 8.7% recorded by Loral SpaceCom.
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 generally subject to the automatic stay as
a result of the commencement of the Chapter 11 Cases.
10. FINANCIAL INFORMATION FOR THE ISSUER'S PARENT, GUARANTORS AND OTHER
SUBSIDIARIES
Loral Orion's (the "Issuer 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 Issuer 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
Issuer Company, Issuer's Parent, the Guarantor Subsidiaries and the Other
Subsidiaries as of March 31, 2004 and December 31, 2003 and for the three months
ended March 31, 2004 and 2003. The condensed consolidating financial information
has been presented to show the nature of assets held, results of operations and
cash flows of the Issuer Company, Issuer's Parent, Guarantor Subsidiaries and
Other Subsidiaries. The supplemental condensed consolidating financial
information reflects the investments of the Issuer Company in the Guarantor
Subsidiary and the Other Subsidiaries using the equity method of accounting. The
Company's significant transactions with its subsidiaries other than the
investment account and related equity in net loss of unconsolidated subsidiaries
are the intercompany payables and receivables between its subsidiaries. As a
result of filing Chapter 11, the accrual of interest on all related party notes
in the following condensed consolidating financial statements was suspended.
10
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2004
(IN THOUSANDS)
(UNAUDITED)
ISSUER ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------ ------------ ------------ ------------ ------------
Current assets:
Cash and cash equivalents ................... $ 49,670 $ 4,125 $ -- $-- $ (4,125) $ 49,670
Accounts receivable, net .................... 6,644 -- 1,340 -- -- 7,984
Prepaid expenses and other current assets ... 2,256 504 4,356 -- (1,468) 5,648
----------- ----------- ----------- ---- ----------- -----------
Total current assets ...................... 58,570 4,629 5,696 -- (5,593) 63,302
Property, plant and equipment, net ............. 364,011 -- 178,435 -- -- 542,446
Due to (from) unconsolidated subsidiaries ...... -- (3,908) 10,709 -- (6,801) --
Investments in unconsolidated subsidiaries ..... 311,464 (454,003) (271,698) -- 414,237 --
Investments in and advances to affiliates ...... -- 20 -- -- (20) --
Other assets, net .............................. 4,410 4,253 506 -- (4,253) 4,916
----------- ----------- ----------- ---- ----------- -----------
Total assets .............................. $ 738,455 $ (449,009) $ (76,352) $-- $ 397,570 $ 610,664
=========== =========== =========== ==== =========== ===========
Liabilities not subject to compromise:
Current liabilities:
Accounts payable ............................ $ 1,414 $ -- $ 250 $-- $ -- $ 1,664
Customer advances ........................... 120,585 -- 14 -- -- 120,599
Accrued interest, preferred dividends and
other current liabilities ................... -- 1,356 -- -- (1,356) --
Due to (from) unconsolidated subsidiaries ... 24,051 -- (14,704) -- -- 9,347
----------- ----------- ----------- ---- ----------- -----------
Total current liabilities ................. 146,050 1,356 (14,440) -- (1,356) 131,610
Long-term liabilities ....................... 4,190 52,233 14,985 -- (67,218) 4,190
----------- ----------- ----------- ---- ----------- -----------
Total liabilities not subject to compromise 150,240 53,589 545 -- (68,574) 135,800
Liabilities subject to compromise .............. 1,113,234 434,451 (116,663) -- (434,451) 996,571
Stockholder's (deficit) equity:
Common stock ................................ -- 4,413 -- -- (4,413) --
Paid-in capital ............................. 604,166 3,392,829 -- -- (3,392,829) 604,166
Treasury stock, at cost ..................... -- (3,360) -- -- 3,360 --
Unearned compensation ....................... -- (148) -- -- 148 --
Due from Loral companies .................... (54,081) -- -- -- -- (54,081)
Retained deficit ............................ (1,075,104) (4,251,172) 39,766 -- 4,214,718 (1,071,792)
Accumulated other comprehensive income ...... -- (79,611) -- -- 79,611 --
----------- ----------- ----------- ---- ----------- -----------
Total stockholder's (deficit) equity ...... (525,019) (937,049) 39,766 -- 900,595 (521,707)
----------- ----------- ----------- ---- ----------- -----------
Total liabilities and stockholder's
(deficit) equity ....................... $ 738,455 $ (449,009) $ (76,352) $-- $ 397,570 $ 610,664
=========== =========== =========== ==== =========== ===========
11
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(IN THOUSANDS)
(UNAUDITED)
ISSUER ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------- ------ ------------ ------------ ------------ ------------
Revenues from satellite services ................. $ 18,915 $ -- $ 7,426 $ -- $ (5,751) $ 20,590
Cost of satellite services ....................... 35,904 -- 7,081 -- (5,751) 37,234
Selling, general and administrative expenses ..... 4,344 2,234 385 -- (2,234) 4,729
-------- -------- -------- -------- -------- --------
Operating loss before reorganization expenses .... (21,333) (2,234) (40) -- 2,234 (21,373)
Reorganization expenses .......................... (1,878) (956) -- -- 956 (1,878)
-------- -------- -------- -------- -------- --------
Operating loss ................................... (23,211) (3,190) (40) -- 3,190 (23,251)
Income tax benefit (expense) ..................... (707) -- 14 -- 1,166 473
-------- -------- -------- -------- -------- --------
Loss before equity in net losses of unconsolidated
subsidiaries and affiliates and cumulative
effect of change in accounting principle ...... (23,918) (3,190) (26) -- 4,356 (22,778)
Equity in net income (losses) of
unconsolidated subsidiaries ................... (26) (76,446) -- -- 76,472 --
-------- -------- -------- -------- -------- --------
Loss before cumulative effect of change in
accounting principle .......................... (23,944) (79,636) (26) -- 80,828 (22,778)
-------- -------- -------- -------- -------- --------
Net loss ......................................... $(23,944) $(79,636) $ (26) $ -- $ 80,828 (22,778)
======== ======== ======== ======== ======== ========
12
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(IN THOUSANDS)
(UNAUDITED)
ISSUER ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- --------- ------------ ------------ ------------ ------------
Operating activities:
Net (loss) income ............................ $(23,944) $(79,636) $ (26) $ -- $ 80,828 $ (22,778)
Non-cash items:
Equity in net losses of unconsolidated
subsidiaries ............................. -- 76,446 -- -- (76,446) --
Depreciation and amortization .............. 27,317 -- 5,253 -- -- 32,570
Provisions for bad debts ................... (104) -- (46) -- -- (150)
Changes in operating assets and liabilities:
Accounts receivable, net ..................... 372 -- (326) -- -- 46
Due to (from) Loral companies, net ........... (1,616) 814 (6,650) -- (2,006) (9,458)
Prepaid expenses and other current assets .... 670 1,857 1,487 -- (1,857) 2,157
Other assets ................................. 119 -- 43 -- -- 162
Accounts payable ............................. 590 -- 250 -- -- 840
Accrued expenses and other current
liabilities ................................ 52 164 -- -- (164) 52
Customer advances ............................ 30 -- 15 -- -- 45
Other long-term liabilities .................. (469) -- -- -- -- (469)
-------- -------- -------- -------- -------- ---------
Net cash provided by (used in)
operating activities ......................... 3,017 (355) -- -- 355 3,017
-------- -------- -------- -------- -------- ---------
Investing activities:
Capital expenditures ......................... (178) -- -- -- -- (178)
-------- -------- -------- -------- -------- ---------
Net cash (used in) provided by in
investing activities ......................... (178) -- -- -- -- (178)
-------- -------- -------- -------- -------- ---------
Financing activities:
Net cash (used in) provided by financing -------- -------- -------- -------- -------- ---------
activities ................................... -- -- -- -- -- --
-------- -------- -------- -------- -------- ---------
(Decrease) increase in cash and cash equivalents 2,839 (355) -- -- 355 2,839
Cash and cash equivalents--beginning of period . 46,831 4,481 -- -- (4,481) 46,831
-------- -------- -------- -------- -------- --------
Cash and cash equivalents--end of period ....... $ 49,670 $ 4,126 $ -- $ -- $ (4,126) $ 49,670
======== ======== ======== ======== ======== ========
13
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
(IN THOUSANDS)
ISSUER ISSUER'S GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 46,831 $ 4,481 $ -- $-- $ (4,481) $ 46,831
Accounts receivable, net 6,912 -- 968 -- -- 7,880
Prepaid expenses and other current assets 2,925 2,341 5,859 -- (3,320) 7,805
----------- ----------- ----------- --- ----------- -----------
Total current assets 56,668 6,822 6,827 -- (7,801) 62,516
Satellites and related equipment, net 390,649 -- 183,688 -- -- 574,337
Investments in unconsolidated subsidiaries 311,487 (375,795) (271,698) -- 336,006 --
Investments in and advances to affiliates -- 20 -- -- (20) --
Other assets, net 5,030 4,253 549 -- (4,253) 5,579
----------- ----------- ----------- --- ----------- -----------
Total assets $ 763,834 $ (364,700) $ (80,634) $-- $ 323,932 $ 642,432
=========== =========== =========== === =========== ===========
Liabilities not subject to compromise:
Current liabilities:
Accounts payable $ 824 $-- $-- $-- $ -- $ 824
Customer advances 120,386 -- -- -- -- 120,386
Due to (from) unconsolidated subsidiaries 24,395 3,055 (17,598) 7,658 17,510
Accrued interest, preferred dividends and
other current liabilities -- 1,191 -- -- (1,191) --
----------- ----------- ----------- --- ----------- -----------
Total current liabilities 145,605 4,246 (17,598) -- 6,467 138,720
Long-term liabilities -- 52,233 13,835 -- (66,068) --
Customer advances 4,302 -- -- -- -- 4,302
----------- ----------- ----------- --- ----------- -----------
Total liabilities not subject to compromise 149,907 56,479 (3,763) -- (59,601) 143,022
Liabilities subject to compromise 1,113,705 434,491 (116,663) -- (434,491) 997,042
Stockholder's (deficit) equity:
Common stock -- 4,413 -- -- (4,413) --
Paid-in capital 604,166 3,392,829 -- -- (3,392,829) 604,166
Treasury stock, at cost -- (3,360) -- -- 3,360 --
Unearned compensation -- (168) -- -- 168 --
Due from Loral companies (52,784) -- -- -- -- (52,784)
Retained deficit (1,051,160) (4,171,536) 39,792 -- 4,133,890 (1,049,014)
Accumulated other comprehensive income -- (77,848) -- -- 77,848 --
----------- ----------- ----------- --- ----------- -----------
Total stockholder's (deficit) equity (499,778) (855,670) 39,792 -- 818,024 (497,632)
----------- ----------- ----------- --- ----------- -----------
Total liabilities and stockholder's
(deficit) equity $ 763,834 $ (364,700) $ (80,634) $ -- $ 323,932 $ 642,432
=========== =========== =========== === =========== ===========
14
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS)
(UNAUDITED)
ISSUER ISSUERS GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------
Revenues from satellite services $ 23,075 $ -- $10,937 $ -- $(8,815) $ 25,197
Costs of satellite services 24,602 -- 7,883 -- (8,815) 23,670
Selling, general and administrative expenses 3,976 1,422 274 -- (1,422) 4,250
-------- -------- -------- ------- -------- --------
Operating (loss) income (5,503) (1,422) 2,780 -- 1,422 (2,723)
Interest and investment income 37 5,547 -- -- (5,547) 37
Interest expense (2,920) (10,917) -- -- 10,917 (2,920)
Gain on investment -- 1,107 -- -- (1,107) --
-------- -------- -------- ------- -------- --------
(Loss) income before income taxes and
equity in net losses of unconsolidated
subsidiaries and affiliates (8,386) (5,685) 2,780 -- 5,685 (5,606)
Income tax benefit (provision) (192) (1,663) (972) -- 2,813 (14)
-------- -------- -------- ------- -------- --------
(Loss) income before equity in net losses of
unconsolidated subsidiaries and affiliates (8,578) (7,348) 1,808 -- 8,498 (5,620)
Equity in net income (losses) of
unconsolidated subsidiaries 1,808 (35,520) -- -- 33,712 --
Equity in net income (losses) of affiliates -- (5,306) -- -- 5,306 --
-------- -------- -------- ------- -------- --------
Net (loss) income $ (6,770) $(48,174) $ 1,808 $ -- $ 47,516 $ (5,620)
======== ======== ======== ======= ======== ========
15
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS)
(UNAUDITED)
ISSUER ISSUERS GUARANTOR OTHER
COMPANY PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------------------
Operating activities:
Net (loss) income $ (6,770) $(48,174) $ 1,808 $ -- $ 47,516 $ (5,620)
Non-cash items:
Equity in net losses of affiliates -- 5,306 -- -- (5,306) --
Equity in net losses of unconsolidated
subsidiaries (1,808) 35,520 -- -- (33,712) --
Deferred taxes -- 1,663 1,150 -- (2,813) --
Depreciation and amortization 13,569 14 5,254 -- (14) 18,823
Provisions for bad debts 2,146 -- (11) -- -- 2,135
Non-cash interest expense, net 1,165 -- -- -- -- 1,165
Changes in operating assets and liabilities:
Accounts receivable, net (3,996) -- 28 -- -- (3,968)
Due to unconsolidated subsidiaries and
Loral companies, net 5,713 710 (10,109) -- (710) (4,396)
Other assets 757 874 2,389 -- (874) 3,146
Accounts payable (2,332) -- (232) -- -- (2,564)
Accrued expenses and other current
liabilities (1,342) (9,389) -- -- 9,389 (1,342)
Customer advances 1,243 -- (277) -- -- 966
Other long-term liabilities (414) -- -- -- (414)
-------- -------- -------- ---------- -------- --------
Net cash provided by (used in) operating
activities 7,931 (13,476) -- -- 13,476 7,931
-------- -------- -------- ---------- -------- --------
Investing activities:
Capital expenditures (1,599) -- -- -- -- (1,599)
Investments in and advances to
unconsolidated subsidiaries -- 195 -- -- (195) --
-------- -------- -------- ---------- -------- --------
Net cash (used in) provided by in
investing activities (1,599) 195 -- -- (195) (1,599)
-------- -------- -------- ---------- -------- --------
Financing activities:
Interest payments on 10% senior notes (30,634) -- -- -- -- (30,634)
Note receivable from unconsolidated -- 17,284 -- -- (17,284) --
affiliate -- 2,157 -- -- (2,157) --
Proceeds from stock issuances -- -- -- -- -- --
Net cash (used in) provided by financing
activities (30,634) 19,441 -- -- (19,441) (30,634)
-------- -------- -------- ---------- -------- --------
(Decrease) increase in cash and cash (24,302) 6,160 -- -- (6,160) (24,302)
equivalents
Cash and cash equivalents--beginning of
period 42,964 1,514 -- -- (1,514) 42,964
-------- -------- -------- ---------- -------- --------
Cash and cash equivalents--end of period $ 18,662 $ 7,674 $ -- $ -- $ (7,674) $ 18,662
======== ======== ======== ========== ======== ========
16
LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR IN POSSESSION
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 1 AND OUR LATEST
ANNUAL REPORT ON FORM 10-K.
WE USE THE TERMS "LORAL ORION," "THE COMPANY," "WE," "OUR," AND "US" IN THIS
REPORT TO REFER TO LORAL ORION AND ITS SUBSIDIARIES.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED IN THE FOLLOWING DISCUSSION
AND ANALYSIS, THE MATTERS DISCUSSED 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, WE OR OUR REPRESENTATIVES HAVE MADE
AND MAY CONTINUE TO MAKE FORWARD-LOOKING STATEMENTS, ORALLY OR IN WRITING, IN
OTHER CONTEXTS. THESE FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF
WORDS SUCH AS "BELIEVES," "EXPECTS," "PLANS," "MAY," "WILL," "WOULD," "COULD,"
"SHOULD," "ANTICIPATES," "ESTIMATES," "PROJECT," "INTEND," OR "OUTLOOK" OR OTHER
VARIATIONS OF THESE WORDS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES THAT ARE DIFFICULT TO PREDICT OR
QUANTIFY. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY AS A RESULT OF A WIDE
VARIETY OF FACTORS AND CONDITIONS, MANY OF WHICH ARE BEYOND OUR CONTROL. THESE
INCLUDE THE DEVELOPMENT OF A PLAN OF REORGANIZATION, CONFIRMATION OF THE PLAN BY
THE BANKRUPTCY COURT AND THE ABILITY TO MAINTAIN GOOD RELATIONS WITH OUR
CUSTOMERS AND SUPPLIERS. FOR A DETAILED DISCUSSION OF THESE AND OTHER FACTORS
AND CONDITIONS, PLEASE REFER TO THE COMMITMENTS AND CONTINGENCIES SECTION BELOW
AND TO OTHER PERIODIC REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
("SEC") BY LORAL ORION. IN ADDITION, WE CAUTION YOU THAT WE OPERATE IN AN
INDUSTRY SECTOR WHERE SECURITIES VALUES MAY BE VOLATILE AND MAY BE INFLUENCED BY
ECONOMIC AND OTHER FACTORS BEYOND OUR CONTROL. WE UNDERTAKE NO OBLIGATION TO
UPDATE ANY FORWARD-LOOKING STATEMENTS.
OVERVIEW
BUSINESS -- SATELLITE SERVICES
Our business is managed by Loral Skynet, a division of a subsidiary of our
parent Loral Space & Communications Ltd. ("Loral"), which leases satellite
capacity on our satellites and platforms to our customers for video and
direct-to-home ("DTH") broadcasting, high-speed data distribution, Internet
access, communications and networking services. The satellite services business
is capital intensive and highly competitive. We compete with other satellite
operators and with ground-based service providers. The build-out of a satellite
fleet requires substantial investment. Once these investments are made, however,
the costs to maintain and operate the satellites are relatively low. The upfront
investments are earned back through the leasing of transponders to customers
over the life of the satellite. Beyond construction, one of the major cost
factors is in-orbit insurance, an essential component given the harsh and
unpredictable environment in which the satellites operate. Annual receipts from
this business are fairly predictable because they are based on an established
base of long-term customer contracts. In 2003, satellite services sales were
$93.6 million. Worldwide Satellite Services industry sales in 2002 were
approximately $7 billion, according to available industry estimates.
The satellite services market has been characterized in recent years by
over-capacity, pricing pressure and increased competition from fiber. The
downturn in the telecommunications sector led many existing customers, hampered
by a lack of access to the capital markets and a slow-down in demand, to
postpone expansion plans. Similarly, several start-up companies that leased our
satellite capacity for the delivery of new applications failed to meet their
business objectives. Our growth will depend on our ability to differentiate
ourselves from the competition through customized product offerings, superior
customer service and successful marketing of available capacity on our
satellites, which is well positioned to serve regions of the world where we
expect demand to grow.
BANKRUPTCY PROCEEDINGS
We operate in extremely competitive markets characterized in recent years by
over-capacity and pricing pressures brought on by the global economic downturn.
Our existing and potential customers, having limited access to the capital
markets, postponed or
17
reduced the scope of their planned satellite-based applications and services.
This resulted in an excess of transponder capacity. In the face of these
pressures, we further increased our emphasis on cash conservation, reducing
operating expenses and closely monitoring capital expenditures. The sustained
and unprecedented decline in demand for our satellite services, however,
exacerbated our already strained financial condition.
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" and together with Loral, Loral Orion and certain other
Loral subsidiaries the "Debtors"), filed voluntary petitions for reorganization
under chapter 11 of title 11 ("Chapter 11") of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court") (Lead Case No. 03-41710 (RDD),
Case Nos. 03-41709 (RDD) through 03-41728 (RDD)) (the "Chapter 11 Cases"). 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 our Chapter 11 filing, all of our prepetition debt
obligations aggregating $920 million at March 31, 2004 ($699 million principal
amount), were accelerated. On July 15, 2003, we suspended interest payments on
all of our senior unsecured notes, with a principal amount of $699 million.
For the duration of the bankruptcy proceedings, our business is subject to
risks and uncertainties of bankruptcy.
FUTURE OUTLOOK
We intend to reorganize around our satellites, which cover regions with high
growth potential, such as South East Asia, the Middle East and South America,
where the ground infrastructure is inadequate to support increased demand. We
consider these operations to be a viable foundation for the further expansion
of our company. We anticipate using excess cash flows from operations to
populate our available slots with satellites to meet market demand. We are in
the process now of completing our long-term business plan. We believe that we
will not require any additional financing to fund operations. At this time,
however, it is impossible to predict accurately the effect of the Chapter 11
reorganization on us, when we may emerge from Chapter 11 and what our capital
structure will be. The rights and claims of various creditors and security
holders will be determined by our plan of reorganization. No assurance can be
given as to what values, if any, will be ascribed in the bankruptcy proceedings
to each of these constituencies. Accordingly, we urge that appropriate caution
be exercised with respect to existing and future investments in any of such
securities and claims.
Critical success factors for us include Loral Skynet maintaining its
reputation of reliability, quality and superior customer service. During
reorganization, in particular, these factors are vital to securing new customers
and retaining current ones. In addition, we must continue to contain costs and
maximize the efficiency of our operations. Loral Skynet is focused on increasing
the capacity utilization of our satellites.
See Note 2 to the condensed consolidated financial statements for a complete
description of our bankruptcy filings.
CONSOLIDATED OPERATING RESULTS
See Critical Accounting Matters in our latest Annual Report on Form 10-K
filed with the SEC.
The accompanying unaudited condensed consolidated financial statements have
been prepared assuming the Company, in its current structure, will continue as a
going concern. However, the factors mentioned above, among other things, raise
substantial doubt about our 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, developing a plan of reorganization, confirmation of the plan by
the Bankruptcy Court and maintaining good relations with our customers. If a
plan of reorganization is not confirmed and implemented, we may be forced to
liquidate under applicable provisions of the Bankruptcy Code. There can be no
assurance of the level of recovery that our creditors would receive in the event
of a 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 we
were forced to liquidate.
The common definition of EBITDA is "Earnings Before Interest, Taxes,
Depreciation and Amortization." In evaluating financial performance, we use
revenues and operating income (loss) from continuing operations before
depreciation and amortization and reorganization expenses due to bankruptcy
("Adjusted EBITDA") as a measure of a segment's profit or loss. Adjusted EBITDA
is equivalent to the common definition of EBITDA before reorganization expenses
due to bankruptcy, gain on debt exchanges, loss from discontinued operations and
cumulative effect of change in accounting principle, net of tax. Interest
expense has been excluded from
18
Adjusted EBITDA to maintain comparability with the performance of competitors
using similar measures with different capital structures. During the period we
are in Chapter 11, we only recognize interest expense on the actual interest
payments we make and we do not expect to make any interest payments during this
period on our debt obligations. Reorganization expenses are only incurred during
the period we are in Chapter 11. These expenses have been excluded from Adjusted
EBITDA to maintain comparability with our results during periods we are not in
Chapter 11 and with the results of competitors using similar measures. 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 our
liquidity or as an alternative to net income as an indicator of our operating
performance.
We believe the use of Adjusted EBITDA along with GAAP financial measures
enhances the understanding of our 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 recorded and the
differences in assets' lives. Adjusted EBITDA as used here may not be comparable
to similarly titled measures reported by competitors. We also use Adjusted
EBITDA to evaluate operating performance, to allocate resources and capital, and
to evaluate future growth opportunities. See the table below for reconciliations
of Adjusted EBITDA to net loss.
The following discussion of revenues and Adjusted EBITDA reflects the
results of our operating businesses for the three months ended March 31, 2004
and 2003. The balance of the discussion relates to our consolidated results,
unless otherwise noted. Our business has been adversely affected by the global
economic downturn, which has caused a delay in demand for new telecommunications
applications and services.
REVENUES (IN MILLIONS):
THREE MONTHS ENDED MARCH 31,
---------------------------
2004 2003
--------- ---------
Satellite services $ 20.6 $ 25.2
========= =========
RECONCILIATION OF ADJUSTED EBITDA TO NET LOSS (IN MILLIONS):
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
------- -------
Adjusted EBITDA $ 11.3 $ 16.1
Depreciation and amortization 32.6 18.8
Reorganization expenses due to bankruptcy 1.9 --
------- -------
Operating loss (23.2) (2.7)
Interest expense -- (2.9)
Income tax provision (0.1) --
------- -------
Net loss $ (23.3) $ (5.6)
======= =======
THREE MONTHS ENDED MARCH 31, 2004 COMPARED WITH 2003
REVENUES FROM SATELLITE SERVICES
THREE MONTHS ENDED MARCH 31,
---------------------------
2004 2003 % INCREASE
(IN MILLIONS) (DECREASE)
--------- --------- -----------
Revenues from satellite services $ 20.6 $ 25.2 (18)%
Revenues from satellite services decreased $4.6 million in 2004 as compared
to 2003, primarily due to decreases in transponder utilization of $3.7 million
and prices of $0.9 million.
COST OF SATELLITE SERVICES
19
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003 % INCREASE
(IN MILLIONS) (DECREASE)
--------- -------- -----------
Cost of satellite services $ 37.2 $23.7 57%
% of revenues from satellite services 181% 94%
The increase of $13.5 million in 2004 as compared to 2003 was due to higher
depreciation of $13.7 million, primarily for our Telstar 11 satellite which, we
determined in the fourth quarter of 2003, would go out of service in June 2004
(earlier than its previously expected end of life of March 2005) and increased
costs of $1.3 million allocated from Loral Skynet due to an amendment to the
agreement to reflect a price increase. This was offset by a net decrease in
insurance costs of $1.4 million, primarily resulting from the non-renewal of
insurance for Telstar 11 in the fourth quarter of 2003 and from a lower premium
on renewal of Telstar 10/Apstar IIR due to changes to coverage requirements. The
increase in cost of satellite services as a percentage of revenues in the first
quarter of 2004 as compared to the first quarter of 2003, was primarily due to
higher depreciation for Telstar 11 and reduced revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003 % INCREASE
(IN MILLIONS) (DECREASE)
-------- -------- -----------
Selling, general and
administrative expenses $ 4.7 $ 4.3 11%
% of revenues from satellite services 23% 17%
The increase of $0.4 million in 2004 as compared to 2003 was primarily due
to higher expenses of $2.6 million allocated from Loral Skynet due to an
amendment to the agreement to reflect a price increase, offset by lower bad debt
expense of $2.3 million.
REORGANIZATION EXPENSES DUE TO BANKRUPTCY
Reorganization expenses due to bankruptcy in the first quarter of 2004 were
$1.9 million, which includes the allocation from Loral of professional fees of
$1.8 million associated with bankruptcy services and employee retention costs of
$0.2 million, offset by interest and investment income earned of $0.1 million
(which represents the interest earned during the first quarter of 2004
subsequent to filing bankruptcy).
INTEREST EXPENSE
THREE MONTHS ENDED MARCH 31,
---------------------------
2004 2003 % INCREASE
(IN MILLIONS) (DECREASE)
--------- --------- -----------
Interest cost before capitalized
interest $0.2 $3.2 (94)%
Capitalized interest (0.2) (0.3) (33)%
---- ----
Interest expense $ -- 2.9 (100)%
==== ====
Interest expense decreased $2.9 million in 2004 as compared to 2003,
primarily due to the fact that subsequent to our voluntary petitions for
reorganization on July 15, 2003, we stopped recognizing and paying interest on
all of our debt obligations.
INCOME TAX BENEFIT (PROVISION)
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 2004 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 deferred tax assets under the
criteria of SFAS No. 109, Accounting for Income Taxes. During 2004, the Company
continued to maintain a 100% valuation allowance and recorded a benefit of $0.5
million under the tax sharing agreement for its tax losses. For the first
quarters of 2004 and 2003 the company recorded a nominal provision for foreign
income taxes.
20
SATELLITE SERVICES PERFORMANCE
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003 % INCREASE
(IN MILLIONS) (DECREASE)
---------- --------- ------------
Satellite services revenues $20.6 $25.2 (18)%
Cost of satellite services 37.2 23.7 57%
Selling, general and administrative
expenses 4.7 4.2 11%
----- ----
Operating loss (21.3) (2.7) 685%
Add: depreciation and amortization 32.6 18.8 73%
----- ----
Adjusted EBITDA $11.3 $16.1 (30)%
===== ====
See REVENUES FROM SATELLITE SERVICES, COST OF SATELLITE SERVICES and
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES, for an explanation of the changes
in these items for the periods presented. The net increase in depreciation and
amortization expense of $13.8 million in 2004 as compared to 2003, was primarily
due to higher depreciation on our Telstar 11 satellite which we determined in
the fourth quarter of 2003, would go out of service in June 2004 (earlier than
its previously expected end of life of March 2005).
As of March 31, 2004, we had three satellites in-orbit and one under
construction (see Note 9 to the condensed consolidated financial statements). At
March 31, 2004, and December 31, 2003 our backlog totaled $418 million and $432
million, respectively which included intercompany backlog of $35 million and $37
million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND AVAILABLE CREDIT
As of March 31, 2004, we had $50 million of cash. Cash flow from Satellite
Services is fairly predictable because it is based on an existing base of
long-term customer contracts.
CONTRACTUAL OBLIGATIONS
Contractual obligations as previously disclosed in our latest Annual Report
on 10-K have not materially changed.
NET CASH PROVIDED BY OPERATING ACTIVITIES
Net cash provided by operating activities in 2004 was $3 million. This was
primarily due to net income as adjusted for non-cash items of $10 million
(primarily depreciation and amortization). This was offset by an increase in net
amounts due from Loral companies of $9 million, primarily resulting from
payments we made to SS/L for the construction of our Telstar 18/Apstar V
satellite and related equipment.
Net cash provided by operating activities in 2003 was $8 million. This was
primarily due to net income as adjusted for non-cash items of $17 million
(primarily depreciation and amortization), offset by a $4 million increase in
accounts receivable primarily due to the timing of collections from customers
and a decrease in net amounts due to Loral companies of $4 million.
NET CASH USED IN INVESTING ACTIVITIES
Net cash used in investing activities was zero and $2 million in 2004 and
2003, respectively, primarily for capital expenditures for the construction of
our Telstar 18/ApstarV satellite and related equipment.
NET CASH USED IN FINANCING ACTIVITIES
Net cash used in financing activities was zero and $31 million in 2004 and
2003, respectively. The decrease in 2004, resulted from the suspension of
interest payments on all of our senior notes on July 15, 2003.
RELATED PARTY TRANSACTIONS
See Note 8 to the condensed consolidated financial statements for details of
our related party transactions.
21
COMMITMENTS AND CONTINGENCIES
RISK FACTORS
Our business and operations are subject to a significant number of risks.
The most significant of these risks are summarized in, and the reader's
attention is directed to, the section of the Company's Annual Report on Form
10-K for the year ended December 31, 2003 entitled "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Commitments and
Contingencies--Risk Factors." In addition, the reader is referred to Note 9
(Commitments and Contingencies) of the condensed consolidated financial
statements of this Quarterly Report on Form 10-Q for further discussion of these
risks.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
(a) DISCLOSURE CONTROLS AND PROCEDURES. Our chief executive officer and our
chief financial officer, after evaluating the effectiveness of our "disclosure
controls and procedures" (as defined in the Securities and Exchange Act of 1934
Rules 13a-15(e) and 15-d-15(e)) as of March 31, 2004, have concluded that our
disclosure controls and procedures were effective and designed to ensure that
material information relating to Loral Orion and its consolidated subsidiaries
required to be in our filings under the Securities and Exchange Act of 1934,
would be made known to them by others within those entities in a timely manner.
(b) INTERNAL CONTROLS OVER FINANCIAL REPORTING. There were no changes in our
internal controls over financial reporting (as defined in the Securities and
Exchange Act of 1934 Rules 13a-15(f) and 15-d-15(f)) during the most recent
fiscal quarter that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
22
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 the commencement of the Chapter 11 Cases, the pursuit of
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, a
party is generally prohibited from taking 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.
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 debt
obligations have been accelerated and are immediately due and payable (see Note
6 to the condensed consolidated financial statements). On July 15, 2003, Loral
Orion suspended interest payments on all of its senior unsecured notes, with an
aggregate principal amount of $699 million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 12 - Deficiency of Earnings to Cover Fixed Charges
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
23
(b) Reports on Form 8-K
DATE OF REPORT DESCRIPTION
- ----------------------- ---------------------------------------------------------------------
January 7, 2004 Item 9 - Regulation FD Disclosure Monthly Operating Report for the Period of October 25, 2003 through
November 21, 2003 as filed with the U.S. Bankruptcy Court for the
Southern District of New York
February 6, 2004 Item 9 - Regulation FD Disclosure Monthly Operating Report for the Period of November 22, 2003
through December 31, 2003 as filed with the U.S. Bankruptcy Court
for the Southern District of New York
March 9, 2004 Item 9 - Regulation FD Disclosure Monthly Operating Report for the Period of January 1, 2004 through
January 23, 2004 as filed with the U.S. Bankruptcy Court for the
Southern District of New York
March 19, 2004 Item 9 - Regulation FD Disclosure Amended Monthly Operating Report for the Period of November 23,
2003 through December 31, 2003 as filed with the U.S. Bankruptcy
Court for the Southern District of New York
March 24, 2004 Item 9 - Regulation FD Disclosure Amended Monthly Operating Reports for the Periods of November 23,
2003 through December 31, 2003 and January 1, 2004 through January
23, 2004 as filed with the U.S. Bankruptcy Court for the Southern
District of New York
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ RICHARD J. TOWNSEND
-----------------------
Richard J. Townsend
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Dated: May 10, 2004
25