LORAL SPACE & COMMUNICATIONS LTD - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

Commission File Number 1-14180

Loral Space & Communications Ltd.

c/o Loral SpaceCom Corporation

600 Third Avenue

New York, New York 10016

Telephone: (212) 697-1105

Jurisdiction of incorporation: Bermuda

IRS identification number: 13-3867424

The registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ü] No [ ]

As of April 30, 2003, there were 437,507,302 shares of Loral Space & Communications Ltd. common stock outstanding.

PART 1.

FINANCIAL INFORMATION

LORAL SPACE & COMMUNICATIONS LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par values)

(Unaudited)


			March 31,			December 31,
			2003			2002

ASSETS
Current assets:
	Cash and cash equivalents		$	101,501		$	65,936
	Accounts receivable, net			31,566			28,893
	Contracts-in-process			77,467			113,154
	Vendor financing receivables			—			38,016
	Inventories			96,339			95,733
	Other current assets			69,845			48,695

		Total current assets		376,718			390,427
Property, plant and equipment, net				1,882,532			1,897,343
Long-term receivables				164,051			163,191
Investments in and advances to affiliates				87,454			95,443
Deposits				58,250			58,250
Other assets				84,622			88,148

		Total assets	$	2,653,627		$	2,692,802

LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
	Current portion of long-term debt		$	146,774		$	131,898
	Accounts payable			63,699			58,323
	Accrued employment costs			42,173			34,531
	Customer advances			81,718			114,080
	Accrued interest and preferred dividends			29,324			37,370
	Income taxes payable			37,545			37,936
	Other current liabilities			52,006			47,005

		Total current liabilities		453,239			461,143
Pension and other postretirement liabilities				126,813			124,193
Long-term liabilities				209,271			207,835
Long-term debt				2,115,355			2,112,627
Minority interest				16,189			16,150
Convertible redeemable preferred stock:
	6% Series C ($118,496 and $106,009 redemption value), $.01 par value			116,901			104,582
	6% Series D ($23,610 and $21,122 redemption value), $.01 par value			22,913			20,499
Commitments and contingencies (Notes 8, 9 and 10)
Shareholders’ (deficit) equity:
	6% Series C convertible redeemable preferred stock ($68,778 and $81,265 redemption value), $.01 par value			67,852			80,171
	6% Series D convertible redeemable preferred stock ($13,097 and $15,585 redemption value), $.01 par value			12,711			15,125
	Common stock, $.01 par value			4,356			4,293
	Paid-in capital			3,391,220			3,389,035
	Treasury stock			(3,360	)		(3,360	)
	Unearned compensation			(228	)		(151	)
	Retained deficit			(3,833,641	)		(3,782,107	)
	Accumulated other comprehensive loss			(45,964	)		(57,233	)

		Total shareholders’ deficit		(407,054	)		(354,227	)

		Total liabilities and shareholders’ deficit	$	2,653,627		$	2,692,802

See notes to condensed consolidated financial statements.

LORAL SPACE & COMMUNICATIONS LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



		Three Months Ended
		March 31,

		2003			2002

Revenues from satellite sales		$	115,037		$	198,471
Revenues from satellite services			83,196			109,705

	Total revenues		198,233			308,176
Cost of satellite sales			130,136			186,428
Cost of satellite services			61,166			66,296
Selling, general and administrative expenses			35,930			40,747

Operating (loss) income			(28,999	)		14,705
Interest and investment income			7,046			5,409
Interest expense			(16,804	)		(18,570	)
Gain on investment			1,107			—

(Loss) income before income taxes, equity in net losses of affiliates, minority interest and cumulative effect of change in accounting principle			(37,650	)		1,544
Income tax expense			(1,982	)		(5,528	)

Loss before equity in net losses of affiliates, minority interest and cumulative effect of change in accounting principle			(39,632	)		(3,984	)
Equity in net losses of affiliates, net of taxes of $968 in 2002			(8,503	)		(15,950	)
Minority interest, net of taxes			(39	)		74

Loss before cumulative effect of change in accounting principle			(48,174	)		(19,860	)
Cumulative effect of change in accounting principle, net of taxes of $13,809 in 2002			—			(876,500	)

Net loss			(48,174	)		(896,360	)
Preferred dividends			(3,360	)		(11,963	)

Net loss applicable to common shareholders		$	(51,534	)	$	(908,323	)

Basic and diluted loss per share:
	Before cumulative effect of change in accounting principle	$	(0.12	)	$	(0.09	)
	Cumulative effect of change in accounting principle		—			(2.60	)

	Loss per share	$	(0.12	)	$	(2.69	)

Weighted average shares outstanding:
	Basic and diluted		432,126			337,052

See notes to condensed consolidated financial statements.

LORAL SPACE & COMMUNICATIONS LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



			Three Months Ended
			March 31,

			2003			2002

Operating activities:
	Net loss		$	(48,174	)	$	(896,360	)
	Non-cash items:
		Equity in net losses of affiliates, net of taxes		8,503			15,950
		Minority interest, net of taxes		39			(74	)
		Cumulative effect of change in accounting principle, net of taxes		—			876,500
		Deferred taxes		1,663			3,510
		Depreciation and amortization		44,817			47,066
		Charge on vendor financing receivables		10,008			—
		Provisions for inventory obsolescence		—			3,013
		Provisions for bad debts		3,963			987
		Gain on investment		(1,107	)		—
		Non-cash interest		(420	)		(141	)
	Changes in operating assets and liabilities:
		Accounts receivable		(6,636	)		(4,063	)
		Contracts-in-process		36,656			11,649
		Inventories		(606	)		(8,351	)
		Long-term receivables		(860	)		(4,416	)
		Deposits		—			(5,800	)
		Other current assets and other assets		12,342			11,526
		Accounts payable		5,344			12,358
		Accrued expenses and other current liabilities		(1,466	)		(851	)
		Customer advances		(32,362	)		28,115
		Income taxes payable		(391	)		1,176
		Pension and other postretirement liabilities		2,620			2,213
		Long-term liabilities		(2,737	)		(5,307	)
		Other		419			(177	)

Net cash provided by operating activities				31,615			88,523

Investing activities:
	Capital expenditures			(23,240	)		(51,035	)
	Investments in and advances to affiliates			(514	)		(9,614	)
	Proceeds from sale of investment			9,704			—

Net cash used in investing activities				(14,050	)		(60,649	)

Financing activities:
	Borrowings under revolving credit facilities			66,000			2,000
	Repayments under term loans			(16,250	)		(16,250	)
	Repayments under revolving credit facilities			—			(56,000	)
	Interest payments on 10% senior notes			(30,634	)		—
	Repayments of other long-term obligations			(1,090	)		(330	)
	Payment of bank amendment costs			(2,183	)		—
	Preferred dividends			—			(11,963	)
	Proceeds from stock issuances			2,157			2,857

Net cash provided by (used in) financing activities				18,000			(79,686	)

Increase (decrease) in cash and cash equivalents				35,565			(51,812	)
Cash and cash equivalents — beginning of period				65,936			159,949

Cash and cash equivalents — end of period			$	101,501		$	108,137

Non-cash activities:
	Unrealized gains on available-for-sale securities, net of taxes		$	10,421		$	6,494

	Accrual of preferred dividends		$	3,360

	Unrealized net gains on derivatives, net of taxes		$	427		$	72

See notes to condensed consolidated financial statements.

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.	Organization and Principal Business

Loral Space & Communications Ltd. together with its subsidiaries (“Loral” or the “Company”) is one of the world’s leading satellite communications companies with substantial activities in satellite-based communications services and satellite manufacturing. Loral is organized into two operating businesses (see Note 12):

Fixed Satellite Services (“FSS”). The Company leases transponder capacity to customers for various applications, including television and cable broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television (“DTH”) and provides satellite telemetry, tracking and control services (“TT&C”). Loral also provides network services such as managed communications networks, Internet and intranet services, business television and business media services to customers.

Satellite Manufacturing and Technology. The Company designs and manufactures satellites and space systems and develops satellite technology for a broad variety of customers and applications through Space Systems/ Loral, Inc. (“SS/ L”).


2.	Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission (“SEC”) and, in the opinion of the Company, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of results of operations, financial position and cash flows as of and for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted pursuant to SEC rules. The Company believes that the disclosures made are adequate to keep the information presented from being misleading. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for the full year. The December 31, 2002 balance sheet has been derived from the audited consolidated financial statements at that date. It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto of Loral included in Loral’s latest Annual Report on Form 10-K.


	Risks and Uncertainties

The Company had total long-term debt of $2.3 billion, including current portion of $147 million, outstanding at March 31, 2003, much of which matures in 2005 and 2006. On March 31, 2003, the Company amended its Loral SpaceCom Corporation (“Loral SpaceCom” or “LSC”) and Loral Satellite, Inc. (“Loral Satellite”) credit facilities which, among other changes, amended its financial performance covenants and imposed additional restrictions, including on its capital expenditures. In addition to its debt service requirements, the Company’s business is capital intensive and requires substantial investment. At March 31, 2003, the Company had already incurred costs of approximately $291 million and will need to incur costs of approximately $97 million more in order to construct, launch and insure three new satellites currently under construction for the Fixed Satellite Services business and an additional $58 million to acquire additional transponders in the future. In addition, the Company has incurred costs of $266 million on a fourth satellite. Additional expenditures to launch and insure such satellite, however, will require the consent of the Company’s lenders. Subject to restrictions contained in the credit facilities, the timing of when certain of these costs will be incurred is largely discretionary.

At March 31, 2003, the Company had an accumulated deficit of $407 million. The Company has generated cash from operating activities of $32 million and $89 million for the three months ended March 31, 2003 and 2002, respectively. The Company believes its existing cash, as well as net cash provided by operating activities and the proceeds from certain asset sales will be adequate to meet its expected requirements through

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

at least March 31, 2004. A substantial reduction in FSS revenues, the inability of SS/L to replace existing backlog with several new contract awards in 2003 at assumed terms or the failure to consummate certain of these asset sales, including the sale of approximately $60 million of certain long-term SS/L customer receivables as described in Note 8, would, however, impact the Company’s ability to meet its cash requirements, possibly in the near-term. In such event, the Company may seek to postpone its planned satellite construction and launch plans, which could impact the Company’s ability to achieve profitability. If the Company is unable to generate sufficient cash from its operating activities and asset sales to satisfy its debt service and operating requirements, the Company may be required to seek alternative financing or renegotiate its current financing agreements. There can be no assurance that the Company will be able to do so, especially in light of current market conditions.


	Income Taxes

Loral continues to record a 100% valuation allowance against its domestic net deferred tax asset under the criteria of SFAS No. 109, Accounting for Income Taxes. Therefore, no benefit was recorded on the domestic loss in the first quarter of 2003 while a provision was recorded on the domestic income in the first quarter of 2002.


	Reclassifications

Certain reclassifications have been made to conform prior year amounts to the current year’s presentation.


3.	Accounting for Stock Based Compensation

In accordance with SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“SFAS 148”), an amendment of SFAS 123, presented below are the pro forma results as if the Company applied the fair value based method of accounting for stock-based employee compensation. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company’s calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, six to twelve months following vesting; stock volatility, 90%; risk free interest rate, 2.4% to 6.6% based on date of grant; and no dividends during the expected term. The Company’s calculations are based on a multiple option valuation approach and forfeitures are recognized as they occur. The following table summarizes what the

LORAL SPACE & COMMUNICATIONS LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Company’s pro forma net loss and pro forma loss per share would have been if the fair value method under SFAS 123 was used (in millions):



	Three Months Ended
	March 31,

	2003			2002

Reported loss before cumulative effect of change in accounting principle	$	(48.2	)	$	(19.9	)
Add: Total stock based compensation charged to operations under the intrinsic value method, net of taxes		—			0.6
Less: Total stock based employee compensation determined under the fair value method for all awards, net of taxes		(0.6	)		(2.8	)

Pro forma net loss before cumulative effect of change in accounting principle		(48.8	)		(22.1	)
Cumulative effect of change in accounting principle, net of taxes		—			(876.5	)

Pro forma net loss		(48.8	)		(898.6	)
Preferred dividends		(3.4	)		(12.0	)

Pro forma net loss applicable to common shareholders	$	(52.2	)	$	(910.6	)

Reported basic and diluted loss per share before cumulative effect of change in accounting principle	$	(0.12	)	$	(0.09	)
Pro forma basic and diluted loss per share before cumulative effect of change in accounting principle		(0.12	)		(0.10	)
Reported loss per share applicable to common shareholders		(0.12	)		(2.69	)
Pro forma loss per share applicable to common shareholders		(0.12	)		(2.70	)


4.	Comprehensive Loss

The components of comprehensive loss are as follows (in thousands):



	Three Months Ended
	March 31,

	2003			2002

Net loss	$	(48,174	)	$	(896,360	)
Cumulative translation adjustment		421			(244	)
Unrealized gains on available-for-sale securities, net of taxes


	Fixed Satellite Services (“FSS”). The Company leases transponder capacity to customers for various applications, including television and cable broadcasting, news gathering, Internet access and transmission, private voice and data networks, business television, distance learning and direct-to-home television (“DTH”) and provides satellite telemetry, tracking and control services (“TT&C”). Loral also provides network services such as managed communications networks, Internet and intranet services, business television and business media services to customers.

	Satellite Manufacturing and Technology. The Company designs and manufactures satellites and space systems and develops satellite technology for a broad variety of customers and applications through Space Systems/ Loral, Inc. (“SS/ L”).