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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 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.




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TABLE OF CONTENTS  PART 1. FINANCIAL INFORMATIONItem 1. Financial StatementsCONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSCONDENSED CONSOLIDATING BALANCE SHEETCONDENSED CONSOLIDATING STATEMENT OF OPERATIONSCONDENSED CONSOLIDATING STATEMENT OF OPERATIONSCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSCONDENSED CONSOLIDATING BALANCE SHEETCONDENSED CONSOLIDATING STATEMENT OF OPERATIONSCONDENSED CONSOLIDATING STATEMENT OF OPERATIONSCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWSItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 4. Disclosure Controls and ProceduresPART IIItem 1. Legal ProceedingsItem 3. Defaults Upon Senior SecuritiesItem 6. Exhibits and Reports on Form 8-KSIGNATURESCOMPUTATION OF DEFICIENCY OF EARNINGSCERTIFICATIONCERTIFICATIONCERTIFICATIONCERTIFICATION    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 (In thousands, except par value)
(Unaudited)
 JUNE 30,
    
    DECEMBER 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    47,621
    
    
    $
    46,831Accounts receivable, net
    
    
    6,064
    
    
    
    7,880Prepaid expenses and other current assets
    
    
    7,824
    
    
    
    7,805Total current assets
    
    
    61,509
    
    
    
    62,516Satellites and related equipment, net
    
    
    524,989
    
    
    
    574,337Other assets, net
    
    
    4,107
    
    
    
    5,579Total assets
    
    $
    590,605
    
    
    $
    642,432LIABILITIES AND STOCKHOLDERS DEFICITLiabilities not subject to compromise:Current liabilities:Accounts payable
    
    $
    2,257
    
    
    $
    824Customer advances
    
    
    125,371
    
    
    
    120,386Due to Loral companies
    
    
    8,443
    
    
    
    17,510Total current liabilities
    
    
    136,071
    
    
    
    138,720Customer advances
    
    
    3,693
    
    
    
    4,302Total liabilities not subject to compromise
    
    
    139,764
    
    
    
    143,022Liabilities subject to compromise (Note 5)
    
    
    995,620
    
    
    
    997,042Commitments and contingencies (Notes 2, 5, 6 and 9)Stockholders deficit:Common stock, $.01 par value
    
    
    
    
    
    
    Paid-in capital
    
    
    604,166
    
    
    
    604,166Due from Loral companies (Note 8)
    
    
    (55,392
    )
    
    
    (52,784
    )Retained deficit
    
    
    (1,093,553
    )
    
    
    (1,049,014
    )Total stockholders deficit
    
    
    (544,779
    )
    
    
    (497,632
    )Total liabilities and stockholders deficit
    
    $
    590,605
    
    
    $
    642,432
 See notes to condensed consolidated financial statements 1




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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 (In thousands)
(Unaudited)
 THREE MONTHS ENDED
    
    SIX MONTHS ENDEDJUNE 30,
    
    JUNE 30,2004
    
    2003
    
    2004
    
    2003Revenues from satellite services
    
    $
    23,120
    
    
    $
    24,712
    
    
    $
    43,710
    
    
    $
    49,909Operating expenses:Cost of satellite services
    
    
    34,299
    
    
    
    23,507
    
    
    
    71,533
    
    
    
    47,177Selling, general and administrative expenses
    
    
    9,769
    
    
    
    681
    
    
    
    14,498
    
    
    
    4,931Operating (loss) income before
reorganization expenses due to bankruptcy
    
    
    (20,948
    )
    
    
    524
    
    
    
    (42,321
    )
    
    
    (2,199
    )Reorganization expenses due to bankruptcy
    
    
    (1,973
    )
    
    
    
    
    
    
    (3,851
    )
    
    
    Operating (loss) income
    
    
    (22,921
    )
    
    
    524
    
    
    
    (46,172
    )
    
    
    (2,199
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5Interest expense (contractual interest was
$2,564 and $5,127 for the three and six
months ended June 30, 2004, respectively,
see Note 6)
    
    
    (220
    )
    
    
    (2,760
    )
    
    
    (220
    )
    
    
    (5,648
    )Loss before income taxes
    
    
    (23,141
    )
    
    
    (2,236
    )
    
    
    (46,392
    )
    
    
    (7,842
    )Income tax benefit (provision)
    
    
    1,380
    
    
    
    (106
    )
    
    
    1,853
    
    
    
    (120
    )Net loss
    
    $
    (21,761
    )
    
    $
    (2,342
    )
    
    $
    (44,539
    )
    
    $
    (7,962
    )
 See notes to condensed consolidated financial statements 2




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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 (In thousands)
(Unaudited)
 SIX MONTHS ENDED JUNE 30,2004
    
    2003Operating activities:Net loss
    
    $
    (44,539
    )
    
    $
    (7,962
    )Non-cash items:Depreciation and amortization
    
    
    61,331
    
    
    
    37,647Provisions for bad debts
    
    
    708
    
    
    
    838Adjustment to revenue straightlining assessment
    
    
    105
    
    
    
    Non-cash interest expense, net
    
    
    
    
    
    
    740Changes in operating assets and liabilities:Accounts receivable, net
    
    
    1,108
    
    
    
    (4,512
    )Prepaid expenses and other current assets
    
    
    (80
    )
    
    
    4,071Other assets
    
    
    424
    
    
    
    2,443Accounts payable
    
    
    1,433
    
    
    
    (978
    )Accrued interest and other current liabilities
    
    
    107
    
    
    
    (42
    )Customer advances
    
    
    3,798
    
    
    
    1,002Other long-term liabilities
    
    
    (951
    )
    
    
    (843
    )Due to Loral companies, net
    
    
    (11,673
    )
    
    
    (9,319
    )Net cash provided by operating activities
    
    
    11,771
    
    
    
    23,085Investing activities:Capital expenditures
    
    
    (10,981
    )
    
    
    (3,752
    )Net cash used in investing activities
    
    
    (10,981
    )
    
    
    (3,752
    )Financing activities:Interest payments on 10% senior notes
    
    
    
    
    
    
    (30,634
    )Net cash used in financing activities
    
    
    
    
    
    
    (30,634
    )Increase (decrease) in cash and cash equivalents
    
    
    790
    
    
    
    (11,301
    )Cash and cash equivalents  beginning of period
    
    
    46,831
    
    
    
    42,964Cash and cash equivalents  end of period
    
    $
    47,621
    
    
    $
    31,663Supplemental information:Cash (paid) received for reorganization items:Professional fees
    
    $
    (3,052
    )Retention costs
    
    $
    (122
    )Interest income
    
    $
    203
 See notes to condensed consolidated financial statements 3




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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. 4




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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 Reorganizationin 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 5




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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): June 30, 2004
    
    December 31, 2003Gross
    
    Accumulated
    
    Gross
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationCustomer relations
    
    $
    7.0
    
    
    $
    (6.0
    )
    
    $
    7.0
    
    
    $
    (5.5
    )Trademarks
    
    
    6.0
    
    
    
    (5.1
    )
    
    
    6.0
    
    
    
    (4.7
    )Regulatory
    
    
    2.4
    
    
    
    (1.7
    )
    
    
    2.5
    
    
    
    (1.7
    )$
    15.4
    
    
    $
    (12.8
    )
    
    $
    15.5
    
    
    $
    (11.9
    )
 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): 2004
    
    $
    2.02005
    
    
    1.22006
    
    
    2007
    
    
    2008
    
    
    
  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 6




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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): June 30,
    
    December 31,2004
    
    2003Debt obligations (Note 6)
    
    $
    919,977
    
    
    $
    919,977Accounts payable
    
    
    1,780
    
    
    
    1,780Customer advances
    
    
    3,460
    
    
    
    4,038Accrued interest and other current liabilities
    
    
    6,971
    
    
    
    6,865Other long-term liabilities
    
    
    3,609
    
    
    
    4,559Due to Loral companies
    
    
    26,697
    
    
    
    26,697Note payable to Loral SpaceCom Corporation (LSC)
    
    
    33,126
    
    
    
    33,126Total liabilities subject to compromise
    
    $
    995,620
    
    
    $
    997,042
  6.
    
    Debt June 30,
    
    December 31,2004
    
    2003(In thousands)10.00% senior notes due 2006:Principal amount
    
    $
    612,704
    
    
    $
    612,704Accrued interest (deferred gain on debt exchanges)
    
    
    214,446
    
    
    
    214,44611.25% senior notes due 2007 (principal amount $37 million)
    
    
    39,402
    
    
    
    39,40212.50% senior discount notes due 2007 (principal amount $49 million)
    
    
    53,425
    
    
    
    53,425Total debt
    
    
    919,977
    
    
    
    919,977Less, current maturities included in liabilities subject to compromise (Note 5)
    
    
    919,977
    
    
    
    919,977$
    
    
    
    $
    
 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): 7




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Three Months Ended
    
    Six Months EndedJune 30, 2004
    
    June 30, 2004Professional fees
    
    $
    1,870
    
    
    $
    3,634Employee retention costs
    
    
    210
    
    
    
    420Interest income
    
    
    (107
    )
    
    
    (203
    )Total reorganization expenses due to bankruptcy
    
    $
    1,973
    
    
    $
    3,851
  8.
    
    Related Party Transactions Due (to) from Loral companies consist of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Loral Space and Communications Corporation
    
    $
    45,578
    
    
    $
    43,654Loral Skynet Network Services, Inc.
    
    
    9,815
    
    
    
    9,128LSC
    
    
    (28,135
    )
    
    
    (29,299
    )Loral Skynet
    
    
    (3,763
    )
    
    
    (2,178
    )Space Systems/Loral (SS/L)
    
    
    (3,243
    )
    
    
    (12,728
    )$
    20,252
    
    
    $
    8,577
 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 8




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##### Table of Contents



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. 9




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##### Table of Contents



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. 10




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CONDENSED CONSOLIDATING BALANCE SHEET JUNE 30, 2004
(In thousands)
(Unaudited)
 Issuer
    
    Issuers
    
    Guarantor
    
    OtherCompany
    
    Parent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCurrent assets:Cash and cash equivalents
    
    $
    47,621
    
    
    $
    3,919
    
    
    $
    
    
    
    $
    
    
    
    $
    (3,919
    )
    
    $
    47,621Accounts receivable, net
    
    
    5,792
    
    
    
    
    
    
    
    272
    
    
    
    
    
    
    
    
    
    
    
    6,064Prepaid expenses and other current assets
    
    
    5,918
    
    
    
    5,082
    
    
    
    1,913
    
    
    
    
    
    
    
    (5,089
    )
    
    
    7,824Total current assets
    
    
    59,331
    
    
    
    9,001
    
    
    
    2,185
    
    
    
    
    
    
    
    (9,008
    )
    
    
    61,509Satellites and related equipment, net
    
    
    351,808
    
    
    
    
    
    
    
    173,181
    
    
    
    
    
    
    
    
    
    
    
    524,989Investments in unconsolidated subsidiaries
    
    
    307,972
    
    
    
    (465,219
    )
    
    
    (271,698
    )
    
    
    
    
    
    
    428,945
    
    
    
    Investments in and advances to affiliates
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    Other assets, net
    
    
    3,644
    
    
    
    4,253
    
    
    
    463
    
    
    
    
    
    
    
    (4,253
    )
    
    
    4,107Total assets
    
    $
    722,755
    
    
    $
    (451,945
    )
    
    $
    (95,869
    )
    
    $
    
    
    
    $
    415,664
    
    
    $
    590,605Liabilities not subject to compromise:Current liabilities:Accounts payable
    
    $
    2,007
    
    
    $
    1,514
    
    
    $
    250
    
    
    $
    
    
    
    $
    (1,514
    )
    
    $
    2,257Customer advances
    
    
    125,454
    
    
    
    
    
    
    
    (83
    )
    
    
    
    
    
    
    
    
    
    
    125,371Due to (from) unconsolidated subsidiaries
    
    
    27,581
    
    
    
    11,164
    
    
    
    (31,331
    )
    
    
    
    
    
    
    1,029
    
    
    
    8,443Total current liabilities
    
    
    155,042
    
    
    
    12,678
    
    
    
    (31,164
    )
    
    
    
    
    
    
    (485
    )
    
    
    136,071Long-term liabilities
    
    
    3,693
    
    
    
    52,233
    
    
    
    14,459
    
    
    
    
    
    
    
    (66,692
    )
    
    
    3,693Total liabilities not subject to compromise
    
    
    158,735
    
    
    
    64,911
    
    
    
    (16,705
    )
    
    
    
    
    
    
    (67,177
    )
    
    
    139,764Liabilities subject to compromise
    
    
    1,112,282
    
    
    
    434,452
    
    
    
    (116,662
    )
    
    
    
    
    
    
    (434,452
    )
    
    
    995,620Stockholders (deficit) equity:Common stock
    
    
    
    
    
    
    4,413
    
    
    
    
    
    
    
    
    
    
    
    (4,413
    )
    
    
    Paid-in capital
    
    
    604,166
    
    
    
    3,392,829
    
    
    
    
    
    
    
    
    
    
    
    (3,392,829
    )
    
    
    604,166Treasury stock, at cost
    
    
    
    
    
    
    (3,360
    )
    
    
    
    
    
    
    
    
    
    
    3,360
    
    
    
    Unearned compensation
    
    
    
    
    
    
    (127
    )
    
    
    
    
    
    
    
    
    
    
    127
    
    
    
    Due from Loral companies
    
    
    (53,996
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,396
    )
    
    
    (55,392
    )Retained deficit
    
    
    (1,098,432
    )
    
    
    (4,273,841
    )
    
    
    37,498
    
    
    
    
    
    
    
    4,241,222
    
    
    
    (1,093,553
    )Accumulated other comprehensive income
    
    
    
    
    
    
    (71,222
    )
    
    
    
    
    
    
    
    
    
    
    71,222
    
    
    
    Total stockholders (deficit) equity
    
    
    (548,262
    )
    
    
    (951,308
    )
    
    
    37,498
    
    
    
    
    
    
    
    917,293
    
    
    
    (544,779
    )Total liabilities and stockholders (deficit) equity
    
    $
    722,755
    
    
    $
    (451,945
    )
    
    $
    (95,869
    )
    
    $
    
    
    
    $
    415,664
    
    
    $
    590,605
 11




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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2004
(In thousands)
(Unaudited)
 Issuer
    
    Issuers
    
    Guarantor
    
    OtherCompany
    
    Parent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues from satellite services
    
    $
    21,507
    
    
    $
    
    
    
    $
    9,635
    
    
    $
    
    
    
    $
    (8,022
    )
    
    $
    23,120Cost of satellite services
    
    
    32,625
    
    
    
    
    
    
    
    9,696
    
    
    
    
    
    
    
    (8,022
    )
    
    
    34,299Selling, general and administrative expenses
    
    
    6,340
    
    
    
    2,045
    
    
    
    3,429
    
    
    
    
    
    
    
    (2,045
    )
    
    
    9,769Operating loss before reorganization expenses
    
    
    (17,458
    )
    
    
    (2,045
    )
    
    
    (3,490
    )
    
    
    
    
    
    
    2,045
    
    
    
    (20,948
    )Reorganization expenses
    
    
    (1,973
    )
    
    
    (1,021
    )
    
    
    
    
    
    
    
    
    
    
    1,021
    
    
    
    (1,973
    )Operating loss
    
    
    (19,431
    )
    
    
    (3,066
    )
    
    
    (3,490
    )
    
    
    
    
    
    
    3,066
    
    
    
    (22,921
    )Interest expense
    
    
    (220
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (220
    )Loss before income taxes and equity in net losses of
unconsolidated subsidiaries
    
    
    (19,651
    )
    
    
    (3,066
    )
    
    
    (3,490
    )
    
    
    
    
    
    
    3,066
    
    
    
    (23,141
    )Income tax benefit (expense)
    
    
    (1,409
    )
    
    
    
    
    
    
    1,222
    
    
    
    
    
    
    
    1,567
    
    
    
    1,380Loss before equity in net losses of unconsolidated
subsidiaries
    
    
    (21,060
    )
    
    
    (3,066
    )
    
    
    (2,268
    )
    
    
    
    
    
    
    4,633
    
    
    
    (21,761
    )Equity in net income (losses) of unconsolidated subsidiaries
    
    
    (2,268
    )
    
    
    (19,603
    )
    
    
    
    
    
    
    
    
    
    
    21,871
    
    
    
    Net loss
    
    $
    (23,328
    )
    
    
    (22,669
    )
    
    $
    (2,268
    )
    
    
    
    
    
    $
    26,504
    
    
    $
    (21,761
    )
 12




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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2004
(In thousands)
(Unaudited)
 Issuer
    
    Issuers
    
    Guarantor
    
    OtherCompany
    
    Parent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues from satellite services
    
    $
    40,422
    
    
    $
    
    
    
    $
    17,061
    
    
    $
    
    
    
    $
    (13,773
    )
    
    $
    43,710Cost of satellite services
    
    
    68,529
    
    
    
    
    
    
    
    16,777
    
    
    
    
    
    
    
    (13,773
    )
    
    
    71,533Selling, general and administrative expenses
    
    
    10,684
    
    
    
    4,279
    
    
    
    3,814
    
    
    
    
    
    
    
    (4,279
    )
    
    
    14,498Operating loss before reorganization expenses
    
    
    (38,791
    )
    
    
    (4,279
    )
    
    
    (3,530
    )
    
    
    
    
    
    
    4,279
    
    
    
    (42,321
    )Reorganization expenses
    
    
    (3,851
    )
    
    
    (1,977
    )
    
    
    
    
    
    
    
    
    
    
    1,977
    
    
    
    (3,851
    )Operating loss
    
    
    (42,642
    )
    
    
    (6,256
    )
    
    
    (3,530
    )
    
    
    
    
    
    
    6,256
    
    
    
    (46,172
    )Interest expense
    
    
    (220
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (220
    )Loss before income taxes and equity in net losses of
unconsolidated subsidiaries
    
    
    (42,862
    )
    
    
    (6,256
    )
    
    
    (3,530
    )
    
    
    
    
    
    
    6,256
    
    
    
    (46,392
    )Income tax benefit (expense)
    
    
    (2,116
    )
    
    
    
    
    
    
    1,236
    
    
    
    
    
    
    
    2,733
    
    
    
    1,853Loss before equity in net losses of unconsolidated
subsidiaries
    
    
    (44,978
    )
    
    
    (6,256
    )
    
    
    (2,294
    )
    
    
    
    
    
    
    8,989
    
    
    
    (44,539
    )Equity in net income (losses) of unconsolidated subsidiaries
    
    
    (2,294
    )
    
    
    (96,049
    )
    
    
    
    
    
    
    
    
    
    
    98,343
    
    
    
    Net loss
    
    $
    (47,272
    )
    
    
    (102,305
    )
    
    $
    (2,294
    )
    
    
    
    
    
    $
    107,332
    
    
    $
    (44,539
    )
 13




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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2004
(In thousands)
(Unaudited)
 Issuer
    
    Issuers
    
    Guarantor
    
    OtherCompany
    
    Parent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedOperating activities:Net (loss) income
    
    $
    (47,272
    )
    
    $
    (102,305
    )
    
    $
    (2,294
    )
    
    $
    
    
    
    $
    107,332
    
    
    $
    (44,539
    )Non-cash items:Equity in net losses of unconsolidated subsidiaries
    
    
    2,294
    
    
    
    96,049
    
    
    
    
    
    
    
    
    
    
    
    (98,343
    )
    
    
    Deferred taxes
    
    
    
    
    
    
    
    
    
    
    1,597
    
    
    
    
    
    
    
    (1,597
    )
    
    
    Depreciation and amortization
    
    
    50,825
    
    
    
    
    
    
    
    10,506
    
    
    
    
    
    
    
    
    
    
    
    61,331Adjustment to revenue straightling assessment
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Provisions for bad debts
    
    
    965
    
    
    
    
    
    
    
    (257
    )
    
    
    
    
    
    
    
    
    
    
    708Changes in operating assets and liabilities:Accounts receivable, net
    
    
    155
    
    
    
    
    
    
    
    953
    
    
    
    
    
    
    
    
    
    
    
    1,108Due to (from) Loral companies, net
    
    
    3,192
    
    
    
    8,070
    
    
    
    (13,729
    )
    
    
    
    
    
    
    (9,206
    )
    
    
    (11,673
    )Prepaid expenses and other current assets
    
    
    (3,053
    )
    
    
    (2,701
    )
    
    
    2,973
    
    
    
    
    
    
    
    2,701
    
    
    
    (80
    )Other assets
    
    
    339
    
    
    
    
    
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    424Accounts payable
    
    
    1,183
    
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    1,433Accrued expenses and other current liabilities
    
    
    107
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    (325
    )
    
    
    107Customer advances
    
    
    3,882
    
    
    
    
    
    
    
    (84
    )
    
    
    
    
    
    
    
    
    
    
    3,798Other long-term liabilities
    
    
    (951
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (951
    )Net cash provided by (used in) operating activities
    
    
    11,771
    
    
    
    (562
    )
    
    
    
    
    
    
    
    
    
    
    562
    
    
    
    11,771Investing activities:Capital expenditures
    
    
    (10,981
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,981
    )Investments in and advances to unconsolidated subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (10,981
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,981
    )Financing activities:Net cash (used in) provided by financing activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Increase (decrease) in cash and cash equivalents
    
    
    790
    
    
    
    (562
    )
    
    
    
    
    
    
    
    
    
    
    562
    
    
    
    790Cash and cash equivalentsbeginning of period
    
    
    46,831
    
    
    
    4,481
    
    
    
    
    
    
    
    
    
    
    
    (4,481
    )
    
    
    46,831Cash and cash equivalentsend of period
    
    $
    47,621
    
    
    $
    3,919
    
    
    $
    
    
    
    $
    
    
    
    $
    (3,919
    )
    
    $
    47,621
 14




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##### Table of Contents



CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2003
(In thousands)
 ISSUER
    
    ISSUERS
    
    GUARANTOR
    
    OTHERCOMPANY
    
    PARENT
    
    SUBSIDIARIES
    
    SUBSIDIARIES
    
    ELIMINATIONS
    
    CONSOLIDATEDCurrent assets:Cash and cash equivalents
    
    $
    46,831
    
    
    $
    4,481
    
    
    $
    
    
    
    $
    
    
    
    $
    (4,481
    )
    
    $
    46,831Accounts receivable, net
    
    
    6,912
    
    
    
    
    
    
    
    968
    
    
    
    
    
    
    
    
    
    
    
    7,880Prepaid expenses and other current assets
    
    
    2,925
    
    
    
    2,341
    
    
    
    5,859
    
    
    
    
    
    
    
    (3,320
    )
    
    
    7,805Total current assets
    
    
    56,668
    
    
    
    6,822
    
    
    
    6,827
    
    
    
    
    
    
    
    (7,801
    )
    
    
    62,516Satellites and related equipment, net
    
    
    390,649
    
    
    
    
    
    
    
    183,688
    
    
    
    
    
    
    
    
    
    
    
    574,337Investments 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
    )
    
    
    5,579Total assets
    
    $
    763,834
    
    
    $
    (364,700
    )
    
    $
    (80,634
    )
    
    $
    
    
    
    $
    323,932
    
    
    $
    642,432Liabilities not subject to compromise:Current liabilities:Accounts payable
    
    $
    824
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    824Customer advances
    
    
    120,386
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,386Due to (from) Loral companies
    
    
    24,395
    
    
    
    3,055
    
    
    
    (17,598
    )
    
    
    
    
    
    
    7,658
    
    
    
    17,510Accrued interest, preferred dividends and other
current liabilities
    
    
    
    
    
    
    1,191
    
    
    
    
    
    
    
    
    
    
    
    (1,191
    )
    
    
    Total current liabilities
    
    
    145,605
    
    
    
    4,246
    
    
    
    (17,598
    )
    
    
    
    
    
    
    6,467
    
    
    
    138,720Long-term liabilities
    
    
    
    
    
    
    52,233
    
    
    
    13,835
    
    
    
    
    
    
    
    (66,068
    )
    
    
    Customer advances
    
    
    4,302
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,302Total liabilities not subject to compromise
    
    
    149,907
    
    
    
    56,479
    
    
    
    (3,763
    )
    
    
    
    
    
    
    (59,601
    )
    
    
    143,022Liabilities subject to compromise
    
    
    1,113,705
    
    
    
    434,491
    
    
    
    (116,663
    )
    
    
    
    
    
    
    (434,491
    )
    
    
    997,042Stockholders (deficit) equity:Common stock
    
    
    
    
    
    
    4,413
    
    
    
    
    
    
    
    
    
    
    
    (4,413
    )
    
    
    Paid-in capital
    
    
    604,166
    
    
    
    3,392,829
    
    
    
    
    
    
    
    
    
    
    
    (3,392,829
    )
    
    
    604,166Treasury stock, at cost
    
    
    
    
    
    
    (3,360
    )
    
    
    
    
    
    
    
    
    
    
    3,360
    
    
    
    Unearned compensation
    
    
    
    
    
    
    (168
    )
    
    
    
    
    
    
    
    
    
    
    168
    
    
    
    Due from Loral companies
    
    
    (52,784
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52,784
    )Retained (deficit) earnings
    
    
    (1,051,160
    )
    
    
    (4,171,536
    )
    
    
    39,792
    
    
    
    
    
    
    
    4,133,890
    
    
    
    (1,049,014
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (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
 15




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2003
(In thousands)
(Unaudited)
 ISSUER
    
    ISSUERS
    
    GUARANTOR
    
    OTHERCOMPANY
    
    PARENT
    
    SUBSIDIARIES
    
    SUBSIDIARIES
    
    ELIMINATIONS
    
    CONSOLIDATEDRevenues from satellite services
    
    $
    22,949
    
    
    $
    
    
    
    $
    9,732
    
    
    $
    
    
    
    $
    (7,969
    )
    
    $
    24,712Costs of satellite services
    
    
    23,594
    
    
    
    
    
    
    
    7,882
    
    
    
    
    
    
    
    (7,969
    )
    
    
    23,507Selling, general and administrative
expenses
    
    
    385
    
    
    
    2,762
    
    
    
    296
    
    
    
    
    
    
    
    (2,762
    )
    
    
    681Management fee expense
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    (109
    )
    
    
    Operating income (loss)
    
    
    (1,030
    )
    
    
    (2,871
    )
    
    
    1,554
    
    
    
    
    
    
    
    2,871
    
    
    
    524Interest and investment income
    
    
    
    
    
    
    5,781
    
    
    
    
    
    
    
    
    
    
    
    (5,781
    )
    
    
    Interest expense
    
    
    (2,760
    )
    
    
    (9,859
    )
    
    
    
    
    
    
    
    
    
    
    9,859
    
    
    
    (2,760
    )(Loss) income before income taxes and
equity in net losses of unconsolidated
subsidiaries and affiliates
    
    
    (3,790
    )
    
    
    (6,949
    )
    
    
    1,554
    
    
    
    
    
    
    
    6,949
    
    
    
    (2,236
    )Income tax (provision) benefit
    
    
    (698
    )
    
    
    (1,732
    )
    
    
    (543
    )
    
    
    
    
    
    
    2,867
    
    
    
    (106
    )(Loss) income before equity in net losses
of unconsolidated subsidiaries and affiliates
    
    
    (4,488
    )
    
    
    (8,681
    )
    
    
    1,011
    
    
    
    
    
    
    
    9,816
    
    
    
    (2,342
    )Equity in net income (losses) of unconsolidated
subsidiaries
    
    
    1,011
    
    
    
    (79,621
    )
    
    
    
    
    
    
    
    
    
    
    78,610
    
    
    
    Equity in net (losses) income of affiliates
    
    
    
    
    
    
    (7,487
    )
    
    
    
    
    
    
    
    
    
    
    7,487
    
    
    
    Net (loss) income
    
    $
    (3,477
    )
    
    $
    (95,789
    )
    
    $
    1,011
    
    
    $
    
    
    
    $
    95,913
    
    
    $
    (2,342
    )
 16




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2003
(In thousands)
(Unaudited)
 ISSUER
    
    ISSUERS
    
    GUARANTOR
    
    OTHERCOMPANY
    
    PARENT
    
    SUBSIDIARIES
    
    SUBSIDIARIES
    
    ELIMINATIONS
    
    CONSOLIDATEDRevenues from satellite services
    
    $
    46,024
    
    
    $
    
    
    
    $
    20,669
    
    
    $
    
    
    
    $
    (16,784
    )
    
    $
    49,909Costs of satellite services
    
    
    48,196
    
    
    
    
    
    
    
    15,765
    
    
    
    
    
    
    
    (16,784
    )
    
    
    47,177Selling, general and administrative expenses
    
    
    4,361
    
    
    
    4,184
    
    
    
    570
    
    
    
    
    
    
    
    (4,184
    )
    
    
    4,931Management fee expense
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    (109
    )
    
    
    Operating (loss) Income
    
    
    (6,533
    )
    
    
    (4,293
    )
    
    
    4,334
    
    
    
    
    
    
    
    4,293
    
    
    
    (2,199
    )Interest and investment income
    
    
    5
    
    
    
    11,328
    
    
    
    
    
    
    
    
    
    
    
    (11,328
    )
    
    
    5Interest expense
    
    
    (5,648
    )
    
    
    (19,669
    )
    
    
    
    
    
    
    
    
    
    
    19,669
    
    
    
    (5,648
    )(Loss) income before income taxes and equity
in net losses of unconsolidated subsidiaries
and affiliates
    
    
    (12,176
    )
    
    
    (12,634
    )
    
    
    4,334
    
    
    
    
    
    
    
    12,634
    
    
    
    (7,842
    )Income tax (provision) benefit
    
    
    (890
    )
    
    
    (3,395
    )
    
    
    (1,515
    )
    
    
    
    
    
    
    5,680
    
    
    
    (120
    )(Loss) income before equity in net losses of
unconsolidated subsidiaries and affiliates
    
    
    (13,066
    )
    
    
    (16,029
    )
    
    
    2,819
    
    
    
    
    
    
    
    18,314
    
    
    
    (7,962
    )Equity in net income (losses) of
unconsolidated subsidiaries
    
    
    2,819
    
    
    
    (115,141
    )
    
    
    
    
    
    
    
    
    
    
    112,322
    
    
    
    Equity in net (losses) income of affiliates
    
    
    
    
    
    
    (12,793
    )
    
    
    
    
    
    
    
    
    
    
    12,793
    
    
    
    Net (loss) income
    
    $
    (10,247
    )
    
    $
    (143,963
    )
    
    $
    2,819
    
    
    $
    
    
    
    $
    143,429
    
    
    $
    (7,962
    )
 17




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##### Table of Contents



CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2003
(In thousands)
(Unaudited)
 ISSUER
    
    ISSUERS
    
    GUARANTOR
    
    OTHERCOMPANY
    
    PARENT
    
    SUBSIDIARIES
    
    SUBSIDIARIES
    
    ELIMINATIONS
    
    CONSOLIDATEDOperating activities:Net (loss) income
    
    $
    (10,247
    )
    
    $
    (143,963
    )
    
    $
    2,819
    
    
    $
    
    
    
    $
    143,429
    
    
    $
    (7,962
    )Non-cash items:Equity in net losses of affiliates
    
    
    
    
    
    
    12,793
    
    
    
    
    
    
    
    
    
    
    
    (12,793
    )
    
    
    Equity in net (income) losses of unconsolidated
subsidiaries
    
    
    (2,819
    )
    
    
    115,141
    
    
    
    
    
    
    
    
    
    
    
    (112,322
    )
    
    
    Deferred taxes
    
    
    
    
    
    
    3,395
    
    
    
    2,285
    
    
    
    
    
    
    
    (5,680
    )
    
    
    Depreciation and amortization
    
    
    27,140
    
    
    
    28
    
    
    
    10,507
    
    
    
    
    
    
    
    (28
    )
    
    
    37,647Provisions for bad debts
    
    
    802
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    838Non-cash interest expense, net
    
    
    740
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    740Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (4,584
    )
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    (4,512
    )Prepaid expenses and other current assets
    
    
    (1,565
    )
    
    
    
    
    
    
    5,636
    
    
    
    
    
    
    
    
    
    
    
    4,071Other assets
    
    
    2,381
    
    
    
    (4,883
    )
    
    
    62
    
    
    
    
    
    
    
    4,883
    
    
    
    2,443Accounts payable
    
    
    (746
    )
    
    
    
    
    
    
    (232
    )
    
    
    
    
    
    
    
    
    
    
    (978
    )Accrued expenses and other current
liabilities
    
    
    (42
    )
    
    
    (960
    )
    
    
    
    
    
    
    
    
    
    
    960
    
    
    
    (42
    )Customer advances
    
    
    1,282
    
    
    
    
    
    
    
    (280
    )
    
    
    
    
    
    
    
    
    
    
    1,002Other long-term liabilities
    
    
    (843
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (843
    )Due to (from) Loral companies, net
    
    
    11,586
    
    
    
    (306
    )
    
    
    (20,905
    )
    
    
    
    
    
    
    306
    
    
    
    (9,319
    )Net cash provided by (used in) operating
activities
    
    
    23,085
    
    
    
    (18,755
    )
    
    
    
    
    
    
    
    
    
    
    18,755
    
    
    
    23,085Investing activities:Capital expenditures
    
    
    (3,752
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,752
    )Investments in and advances to unconsolidated
subsidiaries
    
    
    
    
    
    
    491
    
    
    
    
    
    
    
    
    
    
    
    (491
    )
    
    
    Net cash (used in) provided by in investing
activities
    
    
    (3,752
    )
    
    
    491
    
    
    
    
    
    
    
    
    
    
    
    (491
    )
    
    
    (3,752
    )Financing activities:Interest payments on 10% senior notes
    
    
    (30,634
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,634
    )Note receivable from unconsolidated affiliate
    
    
    
    
    
    
    17,284
    
    
    
    
    
    
    
    
    
    
    
    (17,284
    )
    
    
    Proceeds from stock issuances
    
    
    
    
    
    
    3,817
    
    
    
    
    
    
    
    
    
    
    
    (3,817
    )
    
    
    Net cash (used in) provided by financing
activities
    
    
    (30,634
    )
    
    
    21,101
    
    
    
    
    
    
    
    
    
    
    
    (21,101
    )
    
    
    (30,634
    )(Decrease) increase in cash and cash equivalents
    
    
    (11,301
    )
    
    
    2,837
    
    
    
    
    
    
    
    
    
    
    
    (2,837
    )
    
    
    (11,301
    )Cash and cash equivalents  beginning of period
    
    
    42,964
    
    
    
    1,514
    
    
    
    
    
    
    
    
    
    
    
    (1,514
    )
    
    
    42,964Cash and cash equivalents  end of period
    
    $
    31,663
    
    
    $
    4,351
    
    
    $
    
    
    
    $
    
    
    
    $
    (4,351
    )
    
    $
    31,663
 18




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##### Table of Contents



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 unaudited condensed consolidated financial statements (financial
statements) included in Item 1 and our latest Annual Report onForm 10-K. We use the terms Loral Orion, the Company, we, our, and us in
this report to refer to Loral Orion, Inc. and its subsidiaries. Disclosure Regarding Forward-Looking Statements Except for the historical information contained in the following
discussion and analysis, the matters discussed below 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 a plan by the Bankruptcy Court and
our ability to maintain good relations with our customers. For a detailed
discussion of these and other factors and conditions, please refer to the
Commitments and Contingencies section below and to our other periodic reports
filed with the Securities and Exchange Commission (SEC). We operate in an
industry sector in which 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 and platforms to customers for video and direct-to-home (DTH)
broadcasting, high-speed data distribution, Internet access and communications.
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 fleet 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
derived from an established base of long-term customer contracts. The satellite services market has been characterized in recent years by
over-capacity, pricing pressure and competition from fiber. The downturn in the
telecommunications sector led many existing customers, hampered by a slow-down
in demand and lack of access to the capital markets, 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 are well
positioned to serve regions of the world where we expect demand to grow. Approximately
70 employees of Loral Skynet, which operates our satellite fleet, are union members and are
subject to a collective bargaining agreement that expired in late May 2004. In
mid-July 2004, after discussions between Loral Skynet and the union regarding
the terms of an extension to the agreement did not result in a new agreement,
61 satellite controllers and 19




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##### Table of Contents



technicians who are union members commenced a strike at two of Loral
Skynets satellite control centers. Loral Skynet immediately implemented its
strike contingency plan, and service to our customers has not been
affected. In early August 2004, Loral Skynet reached agreement with
the union on a new three-year agreement, and the striking union
members have returned to work. Bankruptcy Proceedings We operate in extremely competitive markets characterized in recent years
by over-capacity and pricing pressures brought on by the downturn in the
telecommunications sector. Our existing and potential customers, having limited
access to the capital markets, postponed or 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). 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.
As a result of our Chapter 11 filing, all of our prepetition debt obligations
were accelerated. On July 15, 2003, we also suspended interest payments on all
of our debt obligations. As of June 30, 2004, the principal amounts of our
prepetition debt obligations were $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 Southeast 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. 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. 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 financial statements for a description of our
Chapter 11 Cases and our reorganization plans. Consolidated Operating Results See Critical Accounting Matters in our latest Annual Report on Form 10-K
filed with the SEC. 20




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##### Table of Contents



The accompanying financial statements have been prepared assuming Loral
Orion, 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 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. The common definition of EBITDA is Earnings Before Interest, Taxes,
Depreciation and Amortization. In evaluating financial performance, we use
revenues and operating income (loss) 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 and
cumulative effect of change in accounting principle, net of tax. Interest
expense has been excluded from 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 U.S. 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. Adjusted EBITDA is 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 business for the three and six months ended June 30,
2004 and 2003. The balance of the discussion relates to our condensed
consolidated results, unless otherwise noted. Our business has been adversely
affected by the downturn in the telecommunications sector, which has caused a
delay in demand for new telecommunications applications and services. Revenues: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(In millions)Satellite services
    
    $
    23.1
    
    
    $
    24.7
    
    
    $
    43.7
    
    
    $
    49.9
 Reconciliation of Adjusted EBITDA to Net Loss: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(In millions)Adjusted EBITDA
    
    $
    7.8
    
    
    $
    19.3
    
    
    $
    19.0
    
    
    $
    35.4Depreciation and amortization
    
    
    28.7
    
    
    
    18.8
    
    
    
    61.3
    
    
    
    37.6Reorganization expenses due to bankruptcy
    
    
    2.0
    
    
    
    
    
    
    
    3.9
    
    
    
    Operating (loss) income
    
    
    (22.9
    )
    
    
    0.5
    
    
    
    (46.2
    )
    
    
    (2.2
    )Interest expense
    
    
    (0.2
    )
    
    
    (2.7
    )
    
    
    (0.2
    )
    
    
    (5.7
    )
 21




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(In millions)Income tax
benefit (provision)
    
    
    1.3
    
    
    
    (0.1
    )
    
    
    1.9
    
    
    
    (0.1
    )Net loss
    
    $
    (21.8
    )
    
    $
    (2.3
    )
    
    $
    (44.5
    )
    
    $
    (8.0
    )
 Three Months Ended June 30, 2004 Compared With 2003 Revenues from Satellite Services Three Months EndedJune 30,
    
    % Increase/2004
    
    2003
    
    (Decrease)(In millions)Revenues from satellite services
    
    $
    23.1
    
    
    $
    24.7
    
    
    
    (6
    %)
 Revenues from satellite services decreased $1.6 million in the three
months ended June 30, 2004, as compared to 2003 primarily due to decreases in
transponder utilization of $0.9 million and rates of $0.7 million. Cost of Satellite Services Three Months EndedJune 30,
    
    % Increase/2004
    
    2003
    
    (Decrease)(In millions)Cost of satellite services includes:Depreciation and amortization
    
    $
    28.7
    
    
    $
    18.8
    
    
    
    53
    %Other
    
    
    5.6
    
    
    
    4.7
    
    
    
    18
    %Cost of satellite services
    
    $
    34.3
    
    
    $
    23.5
    
    
    
    46
    %Cost of satellite services as a % of revenues
    
    
    148
    %
    
    
    95
    %
 The increase of $10.8 million in the three months ended June 30, 2004, as
compared to 2003 was primarily due to higher depreciation of $9.9 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 $2.2
million allocated from Loral Skynet due to an amendment to our agreement with
Loral Skynet in September 2003 to reflect a price increase and due to Loral
Skynet allocating substantially more of its costs to us and to other Loral
companies subsequent to the sale of Loral Skynets North American satellites in
March 2004 (see Note 8 to the financial statements). This was offset by a
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 2004 as compared to 2003, was primarily due to higher depreciation
for Telstar 11. Selling, General and Administrative Expenses Three Months EndedJune 30,
    
    % Increase/2004
    
    2003
    
    (Decrease)(In millions)Selling, general and administrative expenses
    
    $
    9.7
    
    
    $
    0.7
    
    
    
    N/A% of revenues from satellite services
    
    
    42
    %
    
    
    3
    %
 The increase of $9.0 million in the three months ended June 30, 2004, as
compared to 2003 was primarily due to increased expenses of $5.8 million
allocated from Loral Skynet due to an amendment to our agreement with Loral
Skynet in September 2003 to reflect a price increase and due to Loral Skynet
allocating substantially more of its costs to us and to other Loral companies
subsequent to the sale of Loral Skynets North American satellites in March
2004, higher bad debt expense of $2.1 million and increased expenses of $1.2
million of allocated corporate office expenses primarily due to the sale of
Loral Skynets North American satellites in March 2004. See Note 8 to the
financial statements. Reorganization Expenses Due to Bankruptcy 22




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##### Table of Contents



Reorganization expenses due to bankruptcy in 2004 were $2.0 million, which
includes the allocation from Loral of professional fees of $1.9 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 in 2004 subsequent to filing bankruptcy). Interest Expense Three Months EndedJune 30,
    
    % Increase/2004
    
    2003
    
    (Decrease)(In millions)Interest cost before capitalized interest
    
    $
    0.2
    
    
    $
    3.2
    
    
    
    (93
    )%Capitalized interest
    
    
    
    
    
    
    (0.5
    )
    
    
    (100
    )%Interest expense
    
    $
    0.2
    
    
    $
    2.7
    
    
    
    (92
    )%
 Interest expense decreased $2.5 million in the three months ended June 30,
2004, as compared to 2003. This was 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) During 2004 and 2003, we continued to maintain the 100% valuation
allowance established at December 31, 2002. For the three months ended June
30, 2004, we recorded a tax benefit of $1.4 million for our domestic loss under
our tax sharing agreement with Loral Space & Communications Corporation (see
Note 8 to the financial statements) and a nominal provision for foreign income
taxes. For the three months ended June 30, 2003, we recorded no benefit for
our domestic loss under the tax sharing agreement and a provision for foreign
income taxes of $0.1 million. Six Months Ended June 30, 2004 Compared With 2003 Revenues from Satellite Services Six Months EndedJune 30,
    
    % Increase/2004
    
    2003
    
    (Decrease)(In millions)Revenues from satellite services
    
    $
    43.7
    
    
    $
    49.9
    
    
    
    (12
    )%
 Revenues from satellite services decreased $6.2 million in the six months
ended June 30, 2004, as compared to 2003 primarily due to decreases in
transponder utilization of $2.9 million and rates of $3.3 million. Cost of Satellite Services Six Months EndedJune 30,
    
    % Increase/2004
    
    2003
    
    (Decrease)(In millions)Cost of satellite services includes:Depreciation and amortization
    
    $
    61.3
    
    
    $
    37.6
    
    
    
    63
    %Other
    
    
    10.2
    
    
    
    9.6
    
    
    
    7
    %Cost of satellite services
    
    $
    71.5
    
    
    $
    47.2
    
    
    
    52
    %Cost of satellite services as a % of revenues
    
    
    164
    %
    
    
    95
    %
 The increase of $24.3 million in the six months ended June 30, 2004, as
compared to 2003 was primarily due to higher depreciation of $23.7 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 $3.5
million allocated from Loral Skynet due to an amendment to our agreement with
Loral Skynet in September 2003 to reflect a price increase and due to Loral
Skynet allocating substantially more of its costs to us and to other Loral
companies subsequent to the sale of Loral Skynets North American satellites in
March 23




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##### Table of Contents



2004 (see Note 8 to the financial statements). This was offset by a
decrease in insurance costs of $2.9 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 2004 as compared to 2003 was primarily due to higher depreciation
for Telstar 11 and reduced revenues. Selling, General and Administrative Expenses Six Months EndedJune 30,
    
    % Increase/2004
    
    2003
    
    (Decrease)(In millions)Selling, general and administrative expenses
    
    $
    14.5
    
    
    $
    4.9
    
    
    
    194
    %% of revenues from satellite services
    
    
    33
    %
    
    
    10
    %
 The increase of $9.6 million in the six months ended June 30, 2004, as
compared to 2003 was primarily due to increased expenses of $8.4 million
allocated from Loral Skynet due to an amendment to our agreement with Loral
Skynet in September 2003 to reflect a price increase and due to Loral Skynet
allocating substantially more of its costs to us and to other Loral companies
subsequent to the sale of Loral Skynets North American satellites in March
2004 and increased expenses of $1.3 million of allocated corporate office
expenses primarily due to the sale of Loral Skynets North American satellites
in March 2004. See Note 8 to the financial statements. Reorganization Expenses due to Bankruptcy Reorganization expenses due to bankruptcy in the six months ended June 30,
2004 were $3.9 million, which includes the allocation from Loral of
professional fees of $3.6 million associated with bankruptcy services and
employee retention costs of $0.4 million, offset by interest and investment
income earned of $0.2 million (which represents the interest earned during 2004
subsequent to filing bankruptcy). Interest Expense Six Months EndedJune 30,
    
    % Increase/2004
    
    2003
    
    (Decrease)(In millions)Interest cost before capitalized interest
    
    $
    0.4
    
    
    $
    6.5
    
    
    
    (93
    )%Capitalized interest
    
    
    (0.2
    )
    
    
    (0.8
    )
    
    
    (75
    )%Interest expense
    
    $
    0.2
    
    
    $
    5.7
    
    
    
    (96
    )%
 Interest expense decreased $5.5 million in the six months ended June 30,
2004, as compared to 2003. This was 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) During 2004 and 2003, we continued to maintain the 100% valuation
allowance established at December 31, 2002. For the six months ended June 30,
2004, we recorded a tax benefit of $1.9 million for our domestic loss under our
tax sharing agreement with Loral Space & Communications Corporation (see Note 8
to the financial statements) and a nominal provision for foreign income taxes.
For the six months ended June 30, 2003, we recorded no benefit for our domestic
loss under the tax sharing agreement and a provision for foreign income taxes
of $0.1 million. Satellite Services Performance 24




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(In millions)
    
    (In millions)Satellite services revenues
    
    $
    23.1
    
    
    $
    24.7
    
    
    $
    43.7
    
    
    $
    49.9Cost of satellite services
    
    
    34.3
    
    
    
    23.5
    
    
    
    71.5
    
    
    
    47.2Selling, general and administrative expenses
    
    
    9.7
    
    
    
    0.7
    
    
    
    14.5
    
    
    
    4.9Operating loss
    
    
    (20.9
    )
    
    
    0.5
    
    
    
    (42.3
    )
    
    
    (2.2
    )Add: depreciation and amortization
    
    
    28.7
    
    
    
    18.8
    
    
    
    61.3
    
    
    
    37.6Adjusted EBITDA
    
    $
    7.8
    
    
    $
    19.3
    
    
    $
    19.0
    
    
    $
    35.4
 See Revenues from Satellite Services, Cost of Satellite Services and
Selling, General and Administrative Expenses, for explanations of the changes
in these items for the periods presented. The increase in depreciation and
amortization expense of $9.9 million and $23.7 million in the three and six
months ended June 30, 2004, respectively, as compared to 2003 was 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 June 30, 2004, we had three satellites in-orbit (including Telstar
18 which was launched in June 2004 and is expected to go into service in August
2004, see below). At June 30, 2004 and December 31, 2003, our backlog totaled $385 million
and $432 million, respectively which included intercompany backlog of $35
million and $37 million, respectively. Following
its launch on June 28, 2004, the Telstar 18 satellite
separated from its launch rockets upper stage prematurely and
was placed into a lower than expected transfer orbit. Telstar 18
has since been raised to its final orbital position and is in the
process of completing in-orbit testing. We believe, based on current
available data, that Telstar 18 has sufficient fuel remaining to
exceed its 13-year specified design life. Liquidity and Capital Resources Cash and Available Credit As of June 30, 2004, we had $48 million of available cash and had no
further available credit. Cash flow from our business is fairly predictable
because it is derived from 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 the six months ended June 30,
2004 was $12 million. This was primarily due to net income as adjusted for
non-cash items (primarily depreciation and amortization) of $18 million, offset
by an increase in net amounts due from Loral companies of $12 million,
primarily resulting from payments we made to SS/L for the construction of our
Telstar 18 satellite and related equipment. Net cash provided by operating activities in the six months ended June 30,
2003 was $23 million. This was primarily due to net income as adjusted for
non-cash items of $31 million (primarily depreciation and amortization) and a
$4 million decrease in prepaid expenses and other current assets primarily due
to lower prepaid insurance. This was offset by a $5 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 $9 million, primarily
resulting from payments we made to SS/L for the construction of our Telstar 18
satellite and related equipment. Net Cash Used in Investing Activities Net cash used in investing activities was $11 million and $4 million in
the six months ended June 30, 2004 and 2003, respectively, primarily for
capital expenditures for the construction of our Telstar 18 satellite and
related equipment. Net Cash Used in Financing Activities Net cash used in financing activities was zero and $31 million in the six
months ended June 30, 2004 and 2003, respectively. The decrease in 2004
resulted from the suspension of interest payments on our 10% senior notes on
July 15, 2003. 25




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##### Table of Contents



Related Party Transactions See Note 8 to the financial statements for details of our related party
transactions. 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 our 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 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) or 15-d-15(e)) as of June 30, 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 control 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 have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. 26




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1.Legal Proceedings 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) on July 15, 2003
in the United States Bankruptcy Court for the Southern District of New York
(the Bankruptcy Court). We and our Debtor Subsidiaries continue to manage
their 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. As a result of our commencement of the Chapter 11 Cases, the pursuit of
pending claims and litigation against us 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 us. 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 financial statements. 
 Item 3.Defaults Upon Senior Securities (a) On July 15,
2003, Loral and we, filed voluntary petitions for
reorganization under the Bankruptcy Code in the Bankruptcy Court (Lead Case No.
03-41716 (RDD), Case Nos. 03-41717 (RDD) through 03-41723 (RDD)). As a result
of our voluntary petitions for reorganization, our prepetition debt obligations
were accelerated (see Note 6 to the financial statements). On July 15, 2003, we
suspended interest payments on all of our debt obligations. As of June
30, 2004, the principal amounts of our prepetition outstanding debt obligations
were $699 million. 
 Item 6.Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 12  Computation of Deficiency of Earnings to Cover Fixed Charges Exhibit 31.1  Certification of Chief Executive Officer pursuant to 18
U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act
of 2002 Exhibit 31.2  Certification of Chief Financial Officer pursuant to 18
U.S.C. § 1350, as adopted pursuant to § 302 of the Sarbanes-Oxley Act
of 2002 Exhibit 32.1  Certification of Chief Executive Officer pursuant to 18
U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act
of 2002 Exhibit 32.2  Certification of Chief Financial Officer pursuant to 18
U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act
of 2002 27




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##### Table of Contents



(b) Reports on Form 8-K Date of Report
    
    
    
    DescriptionApril 6, 2004
    
    Item 9  Regulation FD Disclosure
    
    Monthly Operating Report
for the Period of January
24, 2004 through February
22, 2004 as filed with
the U.S. Bankruptcy Court
for the Southern District
of New York.May 11, 2004
    
    Item 9  Regulation FD Disclosure
    
    Monthly Operating Report
for the Period of
February 23, 2004 through
March 31, 2004 as filed
with the U.S. Bankruptcy
Court for the Southern
District of New York.June 4, 2004
    
    Item 9  Regulation FD Disclosure
    
    Monthly Operating Report
for the Period of April
1, 2004 through April 23,
2004 as filed with the
U.S. Bankruptcy Court for
the Southern District of
New York.June 24, 2004
    
    Item 9  Regulation FD Disclosure
    
    Monthly Operating Report
for the Period of April
24, 2004 through May 21,
2004 as filed with the
U.S. Bankruptcy Court for
the Southern District of
New York.June 30, 2004
    
    Item 5  Other Events and
Required FD Disclosure
    
    Telstar 18 launch anomaly.
 28




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Loral Orion, Inc.
Registrant/s/
    Richard J. TownsendRichard J. TownsendSenior Vice President andChief Financial Officer
(Principal Financial Officer)
and Registrants Authorized Officer Date: August 5, 2004 29