SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 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]

     As of July 31, 2004, there were 100 shares of Loral Orion, Inc. common stock outstanding, all of which were owned, directly or indirectly, by Loral Space & Communications Ltd.

Table of Contents

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

See notes to condensed consolidated financial statements

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LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR IN POSSESSION
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to condensed consolidated financial statements

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LORAL ORION, INC. AND SUBSIDIARIES, A DEBTOR IN POSSESSION
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to condensed consolidated financial statements

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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 Principle Business

     Loral Orion, Inc. (“Loral Orion,” the “Company,” “we,” “our,” and “us”, terms that include our subsidiaries unless otherwise indicated or the context requires), together with its subsidiaries, operates in one business segment, satellite services. Our satellite services business is managed by Loral Skynet, a division of a subsidiary of our parent Loral Space & Communications Ltd. (“Loral”). Our 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”). We and our Debtor Subsidiaries continue to manage our properties and operate our business 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 our voluntary petitions for reorganization, all of our debt obligations were accelerated (see Notes 5 and 6). On July 15, 2003, we also suspended interest payments on all of our debt obligations. A creditors’ committee was appointed in the Chapter 11 Cases to represent all unsecured creditors of Loral, including our debt holders, 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).

     For the duration of the Chapter 11 Cases, our business is subject to the risks and uncertainties of bankruptcy. For example, the Chapter 11 Cases could adversely affect our relationships with customers which in turn could adversely affect the going concern value of our business and of our 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 our ability to respond to certain market events or take advantage of certain market opportunities, and, as a result, our operations could be materially adversely affected.

     Because we are in Chapter 11, the pursuit of all claims and litigation pending against us that arose prior to, or relate to events that occurred prior to our bankruptcy filings 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 of our property. In addition, pursuant to Section 365 of the Bankruptcy Code, we may reject or assume prepetition executory contracts and unexpired leases. Parties affected by our rejections of contracts or leases may file claims with the Bankruptcy Court.

     Reorganization

     We intend to reorganize around our fleet of international satellites. We are in the process now of completing our long-term business plan and do not believe we will require any additional financing to fund operations.

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     On July 22, 2004, Loral announced that it had reached an agreement with the creditors’ committee in the Debtors' Chapter 11 Cases on the principal terms of a plan of reorganization. Under the proposed plan, reorganized Loral will continue under current management substantially debt-free, with our business, satellite services, managed by Loral Skynet, intact. The proposed plan will provide that all pre-petition institutional debt will be exchanged for substantially all of the equity of the reorganized company, and that certain other pre-petition general unsecured creditors will be offered a payment plan that may include an option to elect either a discounted cash payment or a payout over time.

     The Bankruptcy Court has extended the period during which the Debtors have the exclusive right to file a plan of reorganization through August 27, 2004, subject to any further extension, as to which we can give no assurance. The Debtors are currently working with the creditors’ committee to document the proposed consensual plan of reorganization. If the Debtors fail to file their plan of reorganization during this exclusive period, or if a plan is filed and is not accepted by the required number of creditors within the required period, any party in interest may subsequently file its own plan of reorganization for the Debtors.

     Implementation of the proposed plan and the treatment of claims and equity interests as provided therein, are subject to confirmation of the plan in accordance with the provisions of the Bankruptcy Code. Although we expect to file the plan of reorganization within a time frame to permit for our emergence from Chapter 11 some time in 2004, the timing and terms of resolution of the Chapter 11 cases cannot be predicted with certainty. There can be no assurance that we will be able to obtain court approval of the plan we propose or obtain acceptances from the number of creditors necessary to confirm this plan.

3.

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements (the “financial statements”) have been prepared assuming Loral Orion, 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 our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a going concern is dependent on a number of factors including, but not limited to, our submission of a plan of reorganization, the Bankruptcy Court’s confirmation of a plan 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. We cannot give any assurance of the level of recovery our creditors would receive in a liquidation. The 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 (see Reorganization in Note 2).

     The financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) and, in our opinion, 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 U. S. have been condensed or omitted pursuant to SEC rules. We believe 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, 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 financial statements be read in conjunction with the audited consolidated financial statements included in our latest Annual Report on Form 10-K.

     The 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 us to distinguish prepetition liabilities subject to compromise from postpetition liabilities in our condensed consolidated balance sheet. The caption “liabilities subject to compromise” reflects the carrying value of prepetition claims that will be restructured in our Chapter 11 Cases. In addition, our 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

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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”). We did not prepare condensed combined financial statements for Loral Orion and its Debtor Subsidiaries, since the subsidiaries that did not file voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code were immaterial to our condensed consolidated financial position and our results of operations.

     Income Taxes

     During 2004 and 2003, we continued to maintain the 100% valuation allowance established at December 31, 2002 and, for the three and six months ended June 30, 2004, we recorded benefits of $1.4 million and $1.9 million, respectively, for our domestic loss under our tax sharing agreement with Loral Space & Communications Corporation. The net tax benefit for 2004 includes a nominal provision for foreign income taxes. For the three and six months ended June 30, 2003, we recorded no benefit under the tax sharing agreement and recorded provisions for foreign income taxes of $0.1 million.

     Reclassifications

     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 our condensed consolidated balance sheets and were as follows (in millions):

     As of June 30, 2004, the weighted average remaining amortization period for customer relations and trademarks was approximately one year and for regulatory fees was approximately nine years.

     Total amortization expense for other acquired intangible assets for both the three months ended June 30, 2004 and 2003 was $0.5 million and for both the six months ended June 30, 2004 and 2003 was $1.0 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):

5.

Liabilities Subject to Compromise

     As discussed in Note 2, we and our 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.

     On the condensed consolidated balance sheets, the caption “liabilities subject to compromise” reflects our carrying value of prepetition claims that will be restructured in our Chapter 11 Cases. Pursuant to court order, we have 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, we have rejected certain of our prepetition contracts and are calculating our estimated liability to the unsecured creditors affected by these rejections. The

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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 us and our Debtor Subsidiaries were to have been filed for claimants to receive any distribution in the Chapter 11 Cases. Differences between liability amounts estimated by us and claims filed by our creditors are being investigated and the Bankruptcy Court will make a final determination of the allowable claims. The determination of how liabilities ultimately will be treated cannot be made until the Bankruptcy Court approves a Chapter 11 plan of reorganization. We will continue to evaluate the amount and classification of our prepetition liabilities through the remainder of our Chapter 11 Cases. Should we identify additional liabilities subject to compromise, we will recognize them accordingly. As a result, “liabilities subject to compromise” may change. Claims classified as “liabilities subject to compromise” represent unsecured claims. Liabilities subject to compromise at June 30, 2004 and December 31, 2003 consisted of the following (in thousands):

6.

Debt

     As of June 30, 2004, the principal amounts of our prepetition debt obligations were $699 million. As a result of our voluntary petitions for reorganization, all of our prepetition debt obligations, including our 10% senior notes obligations, were accelerated. On July 15, 2003, we also suspended interest payments on all of our debt obligations, which has eliminated our cash interest payments. A creditors’committee was appointed in the Chapter 11 Cases to represent all unsecured creditors of Loral, including our debt holders, and, in accordance with the provisions of the Bankruptcy Code, the committee has the right to be heard on all matters that come before the Bankruptcy Court (see Note 2).

     For the three and six months ended June 30, 2004, we did not recognize $2.6 million and $5.1 million, respectively, of interest expense on our 11.25% and 12.50% senior notes and $15.3 million and $30.6 million, respectively, of a reduction to accrued interest on our 10% senior notes as a result of the suspension of interest payments on our debt obligations.

7.

Reorganization Expenses

     Reorganization expenses due to bankruptcy include professional fees associated with bankruptcy services and employee retention costs, both allocated to us from Loral, and interest income and were as follows (in thousands):

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8.

Related Party Transactions

     Due (to) from Loral companies consist of the following (in thousands):

     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, our receivables due from Loral Space & Communications Corporation and Loral Skynet Network Services, Inc. (aggregating $55.4 million and $52.8 million as of June 30, 2004 and December 31, 2003, respectively) 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 June 30, 2004 and December 31, 2003 (see Note 5).

     We are 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, we are entitled to reimbursement for the use of our current period tax losses to the extent such losses are utilized by the consolidated group in the current period. Otherwise, we are required to pay our separate company income tax liability to Loral Space & Communications Corporation.

     We and Loral Skynet have entered into agreements (the “Loral Skynet Agreements”) effective January 1, 1999, whereby Loral Skynet provides to us (i) marketing and sales of satellite capacity services on our satellite network and related billing and administration of customer contracts for those services (the “Sales Services”) and (ii) telemetry, tracking and control services for our satellite fleet (the “Technical Services”, and together with the Sales Services, the “Services”). We are 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 us by approximately $15.0 million per year. Also, as a result of Loral Skynet’s sale of its North American satellites in March 2004, the costs allocated to us and to other Loral companies by Loral Skynet are expected to increase by approximately $16 million per year (such increase results from Loral Skynet having a lower base of business to absorb costs). Loral Skynet allocated costs to us of $10.0 million and $2.0 million for the three months ended June 30, 2004 and 2003 and $16.0 million and $4.1 million for the six months ended June 30, 2004 and 2003, respectively.

     Loral allocates corporate management expenses to its individual subsidiaries and divisions, including us. The allocation of these expenses to us is computed in a manner consistent with Loral’s other subsidiaries and divisions, using a fixed formula based on three factors: employee payroll, revenues and assets. As a result of Loral Skynet’s sale of its North American satellites in March 2004, we will incur a more significant portion of expense allocated by Loral. Loral also charges subsidiaries for specific expenses incurred by the Loral corporate office that are specifically identifiable to the subsidiaries (e.g. outside legal fees). These expenses were and continue to be reflected in the subsidiaries’ income statements. The allocation to us for the three months ended June 30, 2004 and 2003 was $1.9 million and $0.7 million, respectively. The allocation to us for the six months ended June 30, 2004 and 2003 was $2.9 million and $1.6 million, respectively.

     Note Payable to LSC

     We have 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 our 10% senior notes. As of June 30, 2004, the balance of the note was $33.1 million, including accrued interest which is included in liabilities subject to

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compromise (see Note 5).

9.

Commitments and Contingencies

     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, we 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 our behalf. As part of this coordination effort, we agreed to provide to Eutelsat four 54 MHz transponders on Telstar 12 for the life of the satellite and have 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, we continue 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 we have in the past, consistent with industry practice and the requirements in our debt agreements, typically obtained in-orbit insurance for our satellites, we cannot assure that, upon a policy’s expiration, we 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. Our 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, we do 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. We believe that the insurers will require either exclusions of, or limitations on, coverage due to solar array failures in connection with future insurance renewals for these two satellites. An uninsured loss of a satellite would have a material adverse effect on our condensed consolidated financial position and our results of operations.

     On September 20, 2002, and as further amended in March 2003, we agreed with APT Satellite Company Limited (“APT”) to jointly acquire the Apstar V satellite, a satellite then under construction by SS/L for APT pursuant to which we and APT agreed to share, on a 50/50 basis, the project cost of constructing, launching and insuring the satellite. Under this agreement, we were initially to acquire 23% of the satellite in return for paying 25% of the project cost, and were to pay APT over time an additional 25% of the project cost to acquire an additional 23% interest in the satellite. LSC has agreed to purchase from us 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 LSC, 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 us and 9% by LSC. At June 30, 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, we amended our various agreements with APT converting our arrangement from joint ownership to a lease, but leaving unchanged the cost allocation between the parties relating to the project cost of the satellite. Under this arrangement, we retain title to the entire satellite (less the transponders to be transferred to LSC as described above), now known as Telstar 18, and will initially lease to APT transponders representing 77% of the transponder capacity. The number of transponders leased to APT would be reduced over time upon repayment by us of the second 25% of the satellite’s project cost, ultimately to 54% of the satellite’s transponder capacity.

     In November 2003, we agreed with APT to further revise our existing arrangement. Under this revised arrangement, we 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, we agreed to provide to APT, free of charge, certain unused capacity on Telstar 10/Apstar IIR, during an interim period, and provide to 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 we have recorded increases to self constructed assets and customer advances, which as of June 30, 2004 amounted to $124 million.

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representing future obligations to APT. These arrangements will result in a jointly-owned asset with approximately 91.3% owned by us and 8.7% owned by LSC.

     In June 2004, we and LSC entered into certain arrangements with respect to the transponders on Telstar 18 owned by us and LSC regarding the allocation of any insurance proceeds received due to the partial loss or total loss, prior to and after launch and the allocation of any warranty payback that may be made by SS/L in the event of a total loss, constructive total loss or partial loss.

     We are 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, we do not believe that any of these other existing legal matters will have a material adverse effect on our condensed consolidated financial position or our results of operations. These claims against us are generally subject to the automatic stay as a result of the commencement of the Chapter 11 Cases.

10.

Financial Information for the Issuers Parent, 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 our wholly owned subsidiaries (the “Guarantor Subsidiaries”) and Loral (“Issuer’s Parent”). Our 11.25% senior notes and 12.50% senior discount notes are fully and unconditionally guaranteed, on a joint and several basis, by our Guarantor Subsidiaries and substantially all of our other wholly owned subsidiaries (the “Other Subsidiaries”). The Issuer Company, Issuer’s Parent, the Guarantor Subsidiaries and certain of our other non-guarantor subsidiaries 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 June 30, 2004 and December 31, 2003 and for the three and six months ended June 30, 2004 and 2003. The unaudited 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. Our significant transactions with our subsidiaries, other than the investment account and related equity in net (loss) income of unconsolidated subsidiaries, are intercompany payables and receivables between our 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.

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CONDENSED CONSOLIDATING BALANCE SHEET

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

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CONDENSED CONSOLIDATING BALANCE SHEET

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS