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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 Commission file number 0-22085
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LORAL CYBERSTAR, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-1564318
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2440 Research Boulevard, Suite 400, Rockville, Maryland 20850
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(Address of principal executive offices )
301-258-8101
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(Registrant's telephone number, including area code)
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
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No_
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [Not Applicable]
The number of shares of common stock, par value $.01 per share of the registrant
outstanding as of March 15, 2000 was 100, all of which were owned, directly or
indirectly, by Loral Space & Communications Ltd.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING WITH THE REDUCED DISCLOSURE FORMAT
PURSUANT TO GENERAL INSTRUCTION I (2) OF FORM 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
ITEM 1. BUSINESS.
GENERAL
Loral CyberStar, Inc. ("Loral CyberStar" or the "Company"), formerly known
as Orion Network Systems, Inc. ("Orion") prior to its acquisition on March 20,
1998 by Loral Space & Communications Ltd. ("Loral"), is a rapidly growing
provider of satellite-based communications services, providing Fixed Satellite
Services, including video distribution and other satellite transmission services
and Data Network Services, including managed data network services and Internet
services. Loral CyberStar believes that demand for satellite-based
communications services will continue to grow due to accelerating demand for
high speed data services, growing demand for Internet and intranet services,
especially outside the United States, worldwide deregulation and continuing
technological advancement.
BUSINESS SEGMENTS
Loral CyberStar operates in the following two segments:
Fixed Satellite Services
Loral CyberStar, through its agreements with Loral Skynet, a division of
Loral SpaceCom Corporation, provides transmission capacity to cable and
television programmers, news and information networks, telecommunications
companies, Internet service providers ("ISPs") and other carriers for a variety
of applications. Customers include PSINet, HBO, Disney, Cable & Wireless and
United Pan Europe Communications. A majority of the Company's transmission
capacity services consist of video services. The Company generally offers
transmission capacity services under long term contracts and also offers
occasional use services for periods of up to a few hundred hours.
Telstar 11 (formerly known as Orion 1), a high power satellite with 34
Ku-band transponders, commenced operations in January 1995, and provides
coverage to 34 European countries, much of the United States and parts of
Canada, Mexico and North Africa. As of December 31, 1999, Telstar 11 was
operating at approximately 90% utilization.
Telstar 12 (formerly known as Orion 2), a high power satellite with 38
Ku-band transponders, expands Loral Cyberstar's European coverage and extends
coverage to portions of the former Soviet Union, Latin America, the Middle East
and South Africa. Telstar 12 was launched in October 1999 into 15 degrees W.L.
and commenced revenue generating operations in January 2000. Although Telstar 12
was originally intended to operate at 12 degrees W.L., Loral CyberStar reached
an agreement with Eutelsat to operate Telstar 12 at 15 degrees W.L. while
Eutelsat continued to develop its services at 12.5 degrees W.L. Eutelsat has in
turn agreed not to use its 14.8 degrees W.L. orbital slot and to assert its
priority rights at such location on Loral CyberStar's behalf. As part of this
coordination effort, Loral CyberStar agreed to provide to Eutelsat four
transponders on Telstar 12 for the life of the satellite. Eutelsat also has the
right to acquire, at cost, four transponders on the next replacement satellite
for Telstar 12. As part of the international coordination process, Loral
CyberStar continues to conduct discussions with various administrations
regarding Telstar 12's operations at 15 degrees W.L. If these discussions are
not successful, Telstar 12's useable capacity may be reduced.
On May 4, 1999, the Company's Orion 3 satellite was placed into a
lower-than-expected orbit after its launch on a Delta III rocket. According to
Boeing, the Delta III's second stage apparently failed to complete its second
stage burn, and, as a result, the satellite, manufactured by Hughes Space and
Communications Corporation, achieved an orbit well below the planned final
altitude. As a result, the satellite cannot be used for its intended purpose.
The satellite and launch were fully insured for approximately $266 million,
which was received in the third quarter of 1999. DACOM Corporation, a Korean
communications company which had purchased eight transponders on Orion 3 for a
total of $89 million, had made prepayments of approximately $34 million to the
Company. Under Loral CyberStar's agreement with DACOM, the amount prepaid was
refunded in July 1999.
To replace Orion 3, on September 28, 1999, Loral CyberStar purchased from
APT Satellite Company Limited ("APT") all transponder capacity (except for one
C-band transponder retained by APT) and existing customer leases on the Apstar
IIR satellite for approximately $273 million. Insurance proceeds from the May 4,
1999 launch failure of the Orion 3 satellite were used to fund the initial
payments and a significant portion of the final payment of approximately $182
million in March 2000.
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Apstar IIR, which was manufactured by SS/L, was launched in October 1997
and as of September 28, 1999 had an estimated remaining useful life of
approximately 13 years. Loral CyberStar has full use of 27 C-band and 16 Ku-band
transponders aboard Apstar IIR for the remaining life of the satellite. Located
at 76.5 degrees E.L., Apstar IIR covers a region that includes Asia, Europe,
Africa and Australia, which represents over 75% of the world's population. Under
the purchase agreement, Loral CyberStar will also have the option to lease
replacement satellites from APT upon the end of life of Apstar IIR. In November
1999, the satellite was renamed Telstar 10/Apstar IIR. As of December 31, 1999,
Telstar 10/Apstar IIR was operating at approximately 44% utilization.
In March 2000, Loral CyberStar entered into an agreement with a
subsidiary of Loral to assign to the Loral subsidiary, pending regulatory
approval, its Ka-band orbital slots located at 89 degrees W.L., 81 degrees W.L.,
78 degrees E.L. and 47 degrees W.L. In connection with this transaction, Loral
CyberStar also agreed to transfer to the Loral subsidiary all agreements,
including satellite construction contracts, related to such slots. The total
purchase price for the slots and these agreements was $36.5 million, which
purchase price was applied by Loral CyberStar towards the last installment
payment on Telstar 10/Apstar IIR.
Data Network Services
Loral CyberStar provides multinational corporations with managed
communications networks designed to carry high-speed data, fax, video
teleconferencing, voice and other specialized services. The Loral CyberStar
network delivers high-speed data to customers in emerging markets and remote
locations which would otherwise lack the necessary infrastructure to support
these services. Loral CyberStar also offers intranet services and provides high
speed Internet access and transmission services to companies outside the United
States seeking to avoid "last mile" terrestrial connections and to bypass
congested regional Internet network routes. Loral CyberStar provides its
services directly to customer premises using very small aperture terminals.
As a result of a transaction completed in December 1998, Loral CyberStar
has access to technology licensed from The Fantastic Corporation that will
enable it to provide broadband infrastructure for multicast delivery of
multimedia products and services to corporations, content developers,
broadcasters, ISPs and other enterprises that have time sensitive and complex
data requirements. Loral CyberStar continues to introduce new products that
capitalize on the strengths its satellites bring to the global Internet access
market. For example, during the fourth quarter of 1998, Loral CyberStar
introduced its WorldCast Business Edition, which supplies high-bandwidth
satellite capacity to improve businesses' access to the U.S. Internet backbone
from foreign locations. Loral CyberStar has also introduced a new multicast
service, called WorldCast Newsfeed, that will enable ISPs to receive news from
the Internet using Loral satellites, thereby minimizing terrestrial network
costs. More recently, Loral CyberStar has agreed to work together with Real
Networks, a leader in media delivery on the Internet, to deliver streaming
multimedia service to customers of European ISPs, and has entered into a joint
marketing agreement with Akamai to improve delivery of web content to ISPs
worldwide. Loral CyberStar also has an agreement with PSINet to provide a high
speed, satellite-based Internet link into South America.
Based on Internet standards, Loral CyberStar's multicast solution enables
content providers, businesses and ISP to package, manage, and broadcast content
- - including text, audio, video, graphics, pictures, animation software - to end
users around the world. By using the Loral satellites, Loral CyberStar can
achieve efficiencies for its customers by transmitting data once to multiple
locations within a satellite's coverage area rather than to each location
individually as is necessary with terrestrial connections.
In December 1999, the Brazilian government awarded Loral CyberStar a
license to deliver domestic and international data communications services in
Brazil. Under this license -- one of the first to be awarded to a foreign
company under the country's recent market-opening regulations -- Loral CyberStar
can provide the Brazilian and the international business community with
broadband data services capable of delivering content directly to the user's
desktop, as well as a network infrastructure for advanced telecommunications
services.
ACQUISITION OF ORION BY LORAL
On March 20, 1998, Orion was acquired by Loral, through the merger (the
"Merger") of Loral Satellite Corporation, a wholly owned subsidiary of Loral,
with and into Orion. Loral consummated the acquisition by issuing 18 million
shares of its common stock and assuming existing Orion vested options and
warrants to purchase 1.4 million shares of Loral common stock representing an
aggregate purchase price of $472.5 million. Orion was the surviving corporation
of the Merger and thereby became a subsidiary of Loral. At the effective date of
the Merger, Loral contributed its investment in Orion to Loral Space &
Communications Corporation, a wholly owned subsidiary of Loral, and Orion
changed its name to "Loral Orion Network Systems, Inc." The name was
subsequently further changed to "Loral CyberStar, Inc." On December 31, 1999,
Loral
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CyberStar, Inc. merged with and into Loral Orion Services, Inc. and on the same
date Loral Orion Services, Inc. changed its name to Loral CyberStar, Inc.
Following the Merger, the capital stock of Orion ceased to be publicly
traded. However, the Company continues to have registered bonds outstanding and
will continue to have filing requirements with the Securities and Exchange
Commission.
The foregoing description of the Merger does not purport to be complete and
is qualified in its entirety by the terms and conditions of the Merger
Agreement, filed as Exhibits 2.1 and 2.2 to Registration Statement No. 333-46407
on Form S-4.
AGREEMENTS WITH LORAL SKYNET
During the fourth quarter of 1998, Loral completed its integration plan for
Loral CyberStar and transferred management of Loral CyberStar's satellite
capacity leasing and satellite operations to Loral Skynet, effective January 1,
1999. Loral CyberStar and Loral Skynet, a division of Loral SpaceCom
Corporation, which in turn is a wholly-owned subsidiary of Loral, have entered
into agreements (the "Loral Skynet Agreements") effective January 1, 1999,
whereby Loral Skynet provides to Loral CyberStar (i) marketing and sales of
satellite capacity services on the Loral CyberStar satellite network and related
billing and administration of customer contracts for those services (the "Sales
Services") and (ii) telemetry, tracking and control services for the Loral
CyberStar satellite network (the "Technical Services", and together with the
Sales Services, the "Services"). The Company is charged Loral Skynet's costs for
providing these services plus a 5 percent administrative fee.
SUMMARY SATELLITE DATA
The following table presents a brief description of the Company's satellite
network. The Company is subject to regulation and licensing by the U.S. Federal
Communications Commission and other national telecommunications regulatory
bodies, and to the frequency coordination process of the International
Telecommunications Union, or ITU.
All satellite systems are subject to ITU frequency coordination
requirements and must obtain appropriate authority to provide service in a given
territory. The result of the required international coordination process may
limit the extent to which all or some portion of a particular authorized orbital
slot may be used for commercial operations. In addition, the result of the
process by which satellite systems must seek authorization to provide service in
a given territory may limit the extent to which such service may be provided
from a given orbital location.
The Company's ability to provide satellite service in the geographic
regions noted below will be subject to technical constraints, international
coordination, local regulatory approval and any limitations on the scope of the
approval so obtained.
TELSTAR 10/APSTAR IIR TELSTAR 11 TELSTAR 12
--------------------- ---------- ----------
Region Covered ............... China, Japan, Korea, India, Europe, Southeastern Eastern U.S., Southeastern
Hawaii, Southeast Asia, Canada, U.S., East of Canada, Europe, Commonwealth
Australia, New Zealand, the Rockies and parts of Independent States, Middle
Eastern Russia and Oceania of Mexico East, North Africa, Latin
America and South Africa
Satellite Manufacturer ........ Space Systems/Loral MMS Space Systems Space Systems/Loral
(subsidiary of Matra
Marconi Space)
Ku-Band Transponders (1)(2).... 14@54 MHz 28@54 MHz 38@54 MHz
2@36 MHz 6@36 MHz
C-Band Transponders (1)(3)..... 25@36 MHz -- --
2@30 MHz
Usable Bandwidth(4)............ 1788 MHz 1728 MHz 2052 MHz
EIRP(5)........................ 44 - 52Dbw 47 to 52 Dbw 47 to 50 Dbw
30 - 37Dbw
for C-band returns
Total Prime Power(6) .......... 8500 Watts 4500 Watts 7000 Watts
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TELSTAR 10/APSTAR IIR TELSTAR 11 TELSTAR 12
--------------------- ---------- ----------
Expected End of Useful Life(7). 2012 2005 2015
Approximate Percentage of World
Population Covered by
Satellite(8)................... 75% 17.9% 27%
(1) Satellite transponders receive signals up from earth stations and then
convert, amplify and transmit the signals back down to other earth
stations.
(2) Ku-band frequencies are higher than C-band frequencies and are used
worldwide for commercial satellite communications.
(3) C-band frequencies minimize interference from atmospheric conditions such
as rain. C-band satellites share frequencies with terrestrial based
microwave systems and therefore require more on-ground coordination to
avoid interference problems and generally are lower power, requiring the
use of large earth stations to receive signals. A portion of Telstar
10/Apstar IIR is designed to transmit over C-band frequencies, since
Telstar 10/Apstar IIR covers areas of Asia where satellite signals
experience significant interference from rain during several months of the
year.
(4) Bandwidth is a measure of the transponder resource which determines the
information carrying capacity. The actual information carrying capacity of
a transponder is determined by a combination of the transponder's
bandwidth and radio-frequency ("RF") power.
(5) Equivalent isotropic radiated power ("EIRP") is a measure of the RF power
of each transponder. Smaller and less expensive earth terminal antennas
can be used with higher EIRP transponders.
(6) Total prime power is the total amount of power that is required to support
all of the communications and electronics functions of the satellite.
(7) The expected end of a satellite's in-orbit useful life is based on the
period during which the satellite's on board fuel permits proper station
keeping maneuvers for the satellite.
(8) The approximate percentages of world population covered or to be covered
by the Loral CyberStar satellites are not additive. In the aggregate, the
footprints of the Loral CyberStar satellites cover over approximately 85
percent of the world's population.
INSURANCE
Loral CyberStar has obtained satellite in-orbit insurance for Telstar 11
covering the period from August 1998 to August 2003 in an amount of
approximately $195 million providing protection against partial or total loss of
the satellite's communications capability, including loss of transponders,
power, fuel, or ability to control the positioning of the satellite.
Loral CyberStar has obtained launch and in-orbit life insurance for Telstar
12 covering the period from launch to five years after launch in an amount of
approximately $261 million. This coverage provides protection against partial or
total loss of the satellite's communications capability, including loss of
transponders, power, fuel or ability to control the positioning of the
satellite.
5
Loral Cyberstar has obtained satellite in-orbit insurance for Telstar
10/Apstar IIR in an amount of approximately $272 million covering the period
from October 1999 to October 2001. The coverage is provided in a main policy at
an insured value of $163 million and a supplemental policy at an insured value
of $109 million. Both policies provide protection against partial or total loss
of the satellite's communications capacity, including loss of transponders,
power, fuel or ability to control the positioning of the satellite.
In-orbit insurance for its satellites will not protect the Company against
business interruption, loss or delay of revenues and similar losses and may not
fully reimburse the Company for its expenditures.
EMPLOYEES
As of December 31, 1999, Loral CyberStar and its subsidiaries had 232 full
time employees, none of whom are subject to collective bargaining agreements.
CERTAIN FACTORS THAT MAY EFFECT FUTURE RESULTS
This annual report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
from time to time, the Company, Loral or their representatives have made or may
make forward-looking statements, orally or in writing. They can be identified by
the use of forward-looking words such as "believes", "expects", "plans", "may",
"will", "should", or "anticipates" or their negatives or other variations of
these words or other comparable words, or by discussions of strategy that
involve risks and uncertainties. Such forward-looking statements may be included
in, but are not limited to, various filings made by the Company or Loral with
the Securities and Exchange Commission, press releases or oral statements made
by or with the approval of an authorized executive officer of the Company or
Loral. Forward-looking statements are only predictions. Actual events or results
could differ materially from those projected or suggested in any forward-looking
statements as a result of a wide variety of factors and conditions, including,
but not limited to, the factors summarized below.
THE COMPANY HAS SUBSTANTIAL DEBT.
As of December 31, 1999, the Company had approximately $1.04 billion of
debt, including $74.1 million of a note payable to Loral SpaceCom. The
Company's senior notes and senior discount notes, which both mature in 2007,
are non-recourse to Loral.
The Company has sufficient funds in its restricted cash account to make
interest payments on the senior notes through 2000. Thereafter, the Company's
ability to meet its debt service obligations will be dependent upon the future
performance of the Company, including its ability to increase revenues, which
will be subject to financial, business, competitive and other factors, including
factors beyond the Company's control. The Company will also be required to begin
making cash interest payments on the senior discount notes starting in 2002. The
Company expects to continue to incur net losses and have negative cash flow
(after payments for capital expenditures and interest) for the immediate future.
There can be no assurance that the Company will be able to achieve the revenue
increases, or otherwise generate sufficient cash flow to meet its debt service
obligations with respect to all of its outstanding indebtedness.
THE COMPANY'S DEBT IMPOSES RESTRICTIONS AND OTHERWISE AFFECTS THE COMPANY'S
ABILITY TO UNDERTAKE CERTAIN ACTIONS.
The indentures relating to the Company's senior notes contain restrictions,
which among other things, limit the Company's ability to incur other
indebtedness, create liens, make investments, sell assets and engage in mergers
and consolidations. In addition, the level of the Company's indebtedness
adversely affects:
o the Company's ability to generate cash flow to pay expenses and fund
its expenditures, which will be affected by the Company's need to use a
substantial amount of its cash flow to service existing indebtedness.
o the Company's ability to raise additional debt or equity financing in
the future.
o the Company's flexibility in planning for, or reacting to, changes to
its business and market conditions, especially in the rapidly evolving
data business.
6
THE COMPANY HAS FUNDING REQUIREMENTS.
The Company currently anticipates that it will have additional funding
requirements over the next three years to fund the purchase of very small
aperture terminals, other capital expenditures, interest payments on the senior
notes and the senior discount notes and other operating needs. The Company does
not have a revolving credit facility. Accordingly, the Company will need to
secure funding from Loral or raise additional financing. Sources of additional
capital may include public or private debt, equity financings or strategic
investments. To the extent that the Company seeks to raise additional debt
financing, the indentures relating to the senior notes and the senior discount
notes limit the amount of such additional debt and prohibit the Company from
using Telstar 10/Apstar IIR, Telstar 11 and Telstar 12 as collateral for
indebtedness for money borrowed. If the Company is unable to obtain such
financing from Loral or from outside sources in the amounts and at the times
needed, there would be a material adverse effect on the Company.
AFTER LAUNCH, THE COMPANY'S SATELLITES REMAIN VULNERABLE TO IN-ORBIT FAILURE,
WHICH MAY RESULT IN UNINSURED LOSSES.
Random failure of satellite components may result in damage to or loss of a
satellite before the end of its expected life. Satellites are carefully built
and tested and have certain redundant systems in case of failure. However,
in-orbit failure may result from the various causes, including:
o component failure;
o loss of power or fuel;
o inability to control positioning of the satellite;
o solar and other astronomical events; and
o space debris.
Repair of satellites in space is not feasible. Many factors affect the
useful lives of satellites. These factors include fuel consumption, the quality
of construction, gradual degradation of solar panels and the durability of
components. Although some failures may be covered in part by insurance, they may
result in uninsured losses as well.
In November 1995, a component on Telstar 11 malfunctioned, resulting in a
2-hour service interruption. The malfunctioning component supported nine
transponders serving the European portion of Telstar 11's footprint. Full
service was restored using a back-up component. If that back-up component fails,
Telstar 11 would lose a significant amount of usable capacity.
OUR BUSINESS IS REGULATED, CAUSING UNCERTAINTY AND ADDITIONAL COSTS.
Our business is regulated by authorities in many jurisdictions, including
the Federal Communications Commission, the International Telecommunications
Union and the European Union. As a result, some of the activities which are
important to the Company's strategy are beyond its control. The Company's
international service offerings are strategically important activities which are
regulated by various government and quasi-government authorities and
organizations.
Regulatory authorities in the various jurisdictions in which the Company
operates can modify, withdraw or impose charges or conditions upon the licenses
which we need, and so increase the Company's cost of doing business. The
regulatory process also requires potentially costly negotiations with third
parties operating or intending to operate satellites at or near orbital
locations where the Company places its satellites so that the frequencies of the
satellites do not interfere. For example, as part of the Company's coordination
effort on Telstar 12, the Company agreed to provide four transponders on Telstar
12 to Eutelsat for the life of the satellite. The Company also granted Eutelsat
the right to acquire, at cost, four transponders on the next replacement
satellite for Telstar 12. Moreover, the Company, as part of this international
coordination process, continues to conduct discussions with various
administrations regarding Telstar 12's operations at 15 degrees W.L. If these
discussions are not successful, Telstar 12's useable capacity may be reduced.
The Company cannot guarantee successful frequency coordination for its
satellites.
Failure to successfully coordinate the Company's satellites' frequencies or
to receive other required regulatory approvals could have a material adverse
effect on the Company's financial condition and results of operations.
7
THE COMPANY HAS MANY COMPETITORS.
The Company competes for customers and market share. In its fixed satellite
services business, the Company faces competition from companies such as PanAmSat
Corporation, GE Americom, SES Astra and quasi-governmental organizations such as
Intelstat and Eutelsat. Competition in this market may cause downward price
pressures, which may adversely affect the Company's profit.
The Company's data business also faces competition from providers of
land-based data communications services, such as cable operators, digital
subscriber line, or DSL, providers, wireless local loop providers and
traditional telephone service providers. In addition, the Company may face
competition in the future from proposed satellite systems, including Teledesic
Corporation's proposed system and Hughes' Spaceway system.
The services provided by the Company have been subject to decreasing prices
over recent years due to increased competition. This pricing pressure is
expected to continue (and may accelerate) for the foreseeable future,
particularly if, as expected, capacity continues to increase. The Company will
need to increase its volume of sales in order to compensate for such price
reductions.
As land-based telecommunications services expand, demand for some
satellite-based services may be reduced. New technology could render
satellite-based services less competitive by satisfying consumer demand in other
ways or through the use of incompatible standards.
LAUNCH FAILURES MAY DELAY SOME OF OUR OPERATIONS IN THE FUTURE.
Satellite launches are risky and launch attempts have ended in failure. The
Company ordinarily insures against launch failures, but at considerable cost.
The cost and the availability of insurance vary depending on market conditions
and the launch vehicle used. The Company's insurance typically does not cover
business interruption, and so both launch failures and in-orbit satellite
failures result in uninsured losses. Replacement of a lost satellite typically
requires up to 18 months from the time a contract is executed until the launch
date of the replacement satellite.
On May 4, 1999, the Orion 3 broadcast communications satellite was
placed into a lower-than-expected orbit after its launch on a Boeing Delta III
rocket. According to Boeing, the Delta III rocket apparently failed to complete
its second stage burn, and, as a result, the satellite, manufactured by Hughes
Space and Communications Corporation, achieved an orbit well below the planned
final altitude. As a result, the satellite cannot be used for its intended
purpose. This loss resulted in Loral CyberStar having to refund approximately
$34 million to DACOM Corporation, representing the amount of the prepayments
made by DACOM towards its purchase of eight transponders on Orion 3.
THERE ARE RISKS IN CONDUCTING BUSINESS INTERNATIONALLY.
Much of the Company's business is conducted outside the United States,
which imposes more risks. The Company could be harmed financially and
operationally by changes in foreign regulations and telecommunications
standards, tariffs or taxes and other trade barriers. Customers outside of the
developed world could have difficulty in obtaining the U.S. dollars they owe the
Company, including as a result of exchange controls. Additionally, exchange rate
fluctuations may adversely affect the ability of the Company's customers to pay
in U.S. dollars. Moreover, if the Company were ever to need to pursue legal
remedies against its foreign customers and business partners, it may have to sue
them abroad, where it could be hard for the Company to enforce its rights.
EFFECT OF YEAR 2000
The Company's computer systems and software programs are functioning
properly. However, there is still a possibility that some computer systems and
software programs may not function properly later in the year 2000 and beyond
because of a once common programming standard which used two digits instead of
four to signify a year. This problem is often referred to as the "Year 2000"
issue.
If the Company is unable to fix a serious Year 2000 problem, there could be
an interruption or failure of the Company's operations. Likewise, if the
Company's suppliers or customers are unable to fix a material Year 2000 problem,
a resulting interruption or failure of their business could hurt Loral
CyberStar.
ITEM 2. PROPERTIES.
Loral CyberStar owns seven acres of land in Mt. Jackson, Virginia and
leases approximately 78,000 square feet for office space worldwide. Management
believes that the facilities are sufficient for its current operations.
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ITEM 3. LEGAL PROCEEDINGS.
While the Company is party to legal and regulatory proceedings incident to
its business, there are no material legal proceedings pending or, to the
knowledge of management, threatened against the Company or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to General Instruction I of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the Company's outstanding common stock is owned, directly or
indirectly, by Loral Space & Communications Corporation, a wholly owned
subsidiary of Loral. Therefore, there is no public trading market for the
Company's common stock. The Company has never paid dividends on its common
stock. The Company's indentures relating to its senior notes and senior discount
notes include certain restrictions on the Company's ability to pay dividends or
make loans to its parent.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS.
Except for the historical information contained herein, the matters discussed
in this Management's Narrative Analysis of Results of Operations are not
historical facts, but are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. In addition, from time to time,
Loral CyberStar, Loral or their representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but are not limited to, various filings made by
Loral CyberStar or Loral with the Securities and Exchange Commission, press
releases or oral statements made by or with the approval of an authorized
executive officer of Loral CyberStar or Loral. They can be identified by the use
of forward-looking words such as "believes", "expects", "plans", "may", "will",
"should" or "anticipates" or their negatives or other variations of these words
or other comparable words, or by discussions of strategy that involve risks and
uncertainties. The forward-looking statements are only predictions, and actual
events or results could differ materially from those projected or suggested in
any forward-looking statements as a result of a wide variety of factors or
conditions, many of which are beyond the Company's control. Some of these
factors and conditions include: (i) the Company has substantial debt; (ii) the
Company's debt imposes restrictions and otherwise affects the Company's ability
to undertake certain actions; (iii) the Company has funding requirements; (iv)
the Company's satellites may fail prematurely; (v) the Company cannot guarantee
successful coordination for its satellites; and (vi) the Company faces severe
competition.
GENERAL
The principal business of Loral CyberStar, Inc. (the "Company" or "Loral
CyberStar"), formerly known as Orion Network Systems, Inc., ("Orion" or
"Predecessor Company") and its subsidiary guarantors is providing
satellite-based communications services for private communications networks and
video distribution and other satellite transmission services. In 1998, Loral
CyberStar organized its business into two distinct operating segments as follows
(see Note 8 to the consolidated financial statements):
Fixed Satellite Services: Leasing transponder capacity and providing
value-added services to customers for a wide variety of applications,
including the distribution of broadcast programming, news gathering,
business television, distance learning and direct-to-home ("DTH") services.
Loral Skynet began managing the Company's Fixed Satellite Services ("FSS")
assets effective January 1, 1999.
Data Network Services: Business in development, providing managed
communications networks and Internet and intranet services, using
transponder capacity on the Loral Skynet Telstar and Loral CyberStar
fleets.
9
No restrictions exist on the ability of any of the subsidiaries of Loral
CyberStar ("Subsidiary Guarantors") other than inconsequential subsidiaries, to
pay dividends or make other distributions to the Company, except to the extent
provided by law generally (e.g., adequate capital to pay dividends under state
corporate laws).
The Company's revenues are principally generated from two to five year
contracts for delivery of communications services derived principally from
recurring monthly fees from its customers. The revenues from each contract vary,
depending upon the type of service, amount of capacity, data handling ability of
the network, the number of very small aperture terminals ("VSATs") (which
generally are owned by the Company), value-added services and other factors.
Substantially all of the Company's contracts are denominated in U.S. dollars.
The Company begins to record revenues under its contracts upon service
commencement to customers.
The Company believes that customers will increase the data speed in their
communications networks to support new applications, and that such upgrading of
customer networks will lead to increased revenues that will mitigate the effect
of price reductions. However, there can be no assurance that this will occur.
The Company expects to continue to incur net losses and have negative cash flow
(after payments for capital expenditures and interest) for the immediate future.
The Company's direct cost of services includes principally (i) costs
relating to the installation, maintenance and licensing of VSAT earth stations
at its customers' premises; (ii) satellite lease payments for transponder
capacity (generally for services outside of the Loral CyberStar satellite
network footprint); (iii) in-orbit insurance premiums; and (iv) personnel costs
and travel related to telemetry, tracking and control facility ("TT&C"), network
monitoring, network design and similar activities. Regarding TT&C costs, the
Company and Loral Skynet, a division of Loral SpaceCom Corporation, which is in
turn a wholly-owned subsidiary of Loral, have entered into agreements (the
"Loral Skynet Agreements") effective on January 1, 1999, whereby Loral Skynet
provides to Loral CyberStar (i) marketing and sales of satellite capacity
services on the Loral CyberStar satellite network and related billing and
administration of customer contracts for those services (the "Sales Services")
and (ii) telemetry, tracking and control services for the Loral CyberStar
satellite network (the "Technical Services", and together with the Sales
Services, the "Services"). Loral CyberStar is charged Loral Skynet's costs for
providing these services plus a 5 percent administrative fee. Loral Skynet
currently provides the Services for its own Telstar satellite network and
Technical Services for other third parties. Loral CyberStar believes that it
will achieve cost savings as a result of the consolidation of the Services with
Loral Skynet pursuant to the Loral Skynet Agreements and allow Loral CyberStar
to place greater resources and focus on the business of providing Data Network
Services, which will increase as the Company's business grows. Sales and
marketing expenses consist of salaries, sales commissions (including commissions
to third party sales representatives), travel and promotional expenses.
SATELLITE NETWORK
Telstar 11 (formerly Orion 1) Telstar 11, a high power satellite with 34
Ku-band transponders, commenced operations in January 1995, and provides
coverage to 34 European countries, much of the United States and parts of
Canada, Mexico and North Africa.
Telstar 12 (formerly Orion 2). Telstar 12 , a high power satellite with 38
Ku-band transponders, expands Loral CyberStar's European coverage and extends
coverage to portions of the former Soviet Union, Latin America, the Middle East
and South Africa. Telstar 12 was launched aboard an Ariane launch vehicle in
October 1999 into 15 degrees W.L., and commenced operations in January 2000.
Although Telstar 12 was originally intended to operate at 12 degrees W.L., Loral
Cyberstar reached an agreement with Eutelsat to operate Telstar 12 at 15 degrees
W.L. while Eutelsat continued to develop its services at 12.5 degrees W.L.
Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to
assert its priority rights at such location on Loral CyberStar's behalf. As part
of this coordination effort, Loral CyberStar agreed to provide to Eutelsat four
transponders on Telstar 12 for the life of the satellite. 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, the Company
continues to conduct discussions with various administrations regarding Telstar
12's operations at 15 degrees W.L. If these discussions are not successful,
Telstar 12's useable capacity may be reduced.
10
Orion 3. On May 4, 1999, the Orion 3 satellite was placed into a
lower-than-expected orbit after its launch on a Delta III rocket. According to
Boeing, the Delta III rocket apparently failed to complete its second stage
burn, and, as a result, the satellite, manufactured by Hughes, achieved an orbit
well below the planned final altitude. The satellite cannot be used for the
company's intended purpose as a result. The satellite and launch were fully
insured for approximately $266 million, which was received in the third quarter
of 1999. DACOM Corporation, a Korean communications company which had purchased
eight transponders on Orion 3 for a total of $89 million, had made prepayments
of approximately $34 million to the Company. Under the agreement with DACOM, the
amount prepaid was refunded in July 1999.
Telstar 10/Apstar IIR. To replace Orion 3, on September 28, 1999, Loral
Asia Pacific Satellite (HK) Limited ("Loral CyberStar HK"), a subsidiary of
Loral CyberStar, purchased from APT Satellite Company Limited ("APT") the rights
to all transponder capacity (except for one C-band transponder retained by APT)
and existing customer leases on the Apstar IIR satellite, and renamed the
satellite Telstar 10/Apstar IIR, for approximately $273 million. Telstar
10/Apstar IIR, which was manufactured by SS/L, was launched in October 1997 and
as of September 28, 1999, had an expected remaining useful life of 13 years.
Loral CyberStar HK has full use of the transponders for the remaining life of
Telstar 10/Apstar IIR. Located at 76.5 degrees E.L., Apstar IIR covers a region
that includes Asia, Europe, Africa and Australia, which represents over 75% of
the world's population. Under the purchase agreement, Loral CyberStar HK will
also have the option to lease from APT replacement satellites upon the end of
life of Telstar 10/Apstar IIR.
As of December 31, 1999, Loral CyberStar had made initial payments of
approximately $91 million to APT and paid approximately $182 million in March
2000. Insurance proceeds from the Orion 3 failure were used to fund the initial
payments and a significant portion of the final payment.
RESULTS OF OPERATIONS
On March 20, 1998, Orion was acquired by Loral Space & Communications Ltd.,
through the merger (the "Merger") of Loral Satellite Corporation, a wholly owned
subsidiary of Loral, with and into Orion. Loral consummated the acquisition by
issuing 18 million shares of its common stock and assuming existing Orion vested
options and warrants to purchase 1.4 million shares of Loral common stock
representing an aggregate purchase price of $472.5 million. Orion was the
surviving corporation of the Merger and thereby became a subsidiary of Loral. At
the effective date of the Merger, Loral contributed its investment in Orion to
Loral Space & Communications Corporation, a wholly owned subsidiary of Loral,
and Orion changed its name to "Loral Orion Network Systems, Inc." The name was
subsequently further changed to "Loral CyberStar, Inc." On December 31, 1999,
Loral CyberStar, Inc. merged with and into Loral Orion Services, Inc. and on the
same date Loral Orion Services, Inc. changed its name to Loral CyberStar, Inc.
Following the Merger, the capital stock of Orion ceased to be publicly
traded. However, the Company continues to have registered bonds outstanding and
will continue to have filing requirements with the Securities and Exchange
Commission.
For accounting purposes, the Merger was accounted for as of March 31, 1998
using the purchase method. Accordingly, the consolidated balance sheet at
December 31, 1999 and 1998 reflects the push-down of the purchase price
allocations. The purchase price represented $447.7 million in excess of the
Company's net book value, which was primarily allocated to costs in excess of
net assets acquired of $620.4 million and a fair value adjustment of $153.4
million to increase the carrying value of the Company's senior notes and senior
discount notes.
11
In evaluating financial performance, management uses revenues and
earnings before interest, taxes, depreciation and amortization and merger costs
("EBITDA") as a measure of a segment's profit or loss. In order to provide an
understanding of the Company, the results of operations discusses the results
for the year ended December 31, 1999 and on a pro forma basis for the year ended
December 31, 1998. The pro forma results of operations for 1998, include the
results of the Company for the nine months ended December 31, 1998 and the
Predecessor Company for the three months ended March 31, 1998. In addition, the
pro forma results of operations for 1998 has been presented to give the effects
as of January 1, 1998, of the Merger with Loral as described in Note 1 to the
Company's financial statements. The pro forma results of operations does not
purport to present the actual results of operations of the Company had the
Merger with Loral in fact occurred on January 1, 1998, nor is it indicative of
the results of operations that may be achieved in the future.
As a result of the Merger, the pro forma adjustments resulted in an
increase in depreciation and amortization expenses of approximately $4.4 million
for 1998. This increase primarily relates to the step up in the book value of
Telstar 11 and increased amortization expenses for cost in excess of net assets
acquired associated with the Merger. The pro forma results for 1998 include a
$12.8 million adjustment to eliminate merger costs. Pro forma interest expense
for 1998 was $64.5 million, a decrease of $3.1 million from the historical
amount. The decrease in interest expense is primarily attributable to the
elimination of the debentures, as a result of the Merger.
OPERATING REVENUES (IN MILLIONS):
Pro forma
Year ended year ended
December 31, December 31,
1999 1998
--------------- -----------------
Fixed satellite services ................ $ 35.7 $ 33.1
Data network services ................... 69.2 50.3
------------- -----------
Operating revenues ....................... $ 104.9 $ 83.4
============= ===========
EBITDA (1) (IN MILLIONS):
Pro forma
Year ended year ended
December 31, December 31,
1999 1998
--------------- -----------------
Fixed satellite services.................. $ 21.9 $ 21.4
Data network services ................... (8.3) (12.4)
----------- -----------
EBITDA ................................... $ 13.6 $ 9.0
=========== ===========
Revenue and Backlog. Revenues for the year ended December 31, 1999 and 1998
were $104.9 million and $83.4 million, respectively, an increase of $21.5
million or 26 percent. This increase was primarily attributable to the Company's
Data Network Services operations, which grew from an Internet service provider
customer base of 77 in 1998 to 133 in 1999.
- ------------------------
(1) EBITDA (which is equivalent to operating income (loss) before depreciation
and amortization, including amortization of deferred compensation and merger
costs) is provided because it is used as the measure of segment profit or loss
and because it is a measure commonly used in the communications industry to
analyze companies on the basis of operating performance, leverage and liquidity
and is presented to enhance the understanding of Loral CyberStar's operating
results. However, EBITDA is not an alternative to net income as an indicator of
a company's operating performance, or cash flow from operations as a measure of
a company's liquidity. EBITDA may be calculated differently and, therefore, may
not be comparable to similarly titled measures reported by other companies.
12
At December 31, 1999, the Company had a contracted backlog (representing
future revenues under customer contracts) of approximately $628.5 million
compared to $308.5 million at December 31, 1998, an increase of 104 percent.
Revenue from contracted backlog is typically earned over two to five years.
Direct Expenses. Direct expenses for 1999 were $40.8 million, or 39 percent
of sales compared to $26.3 million, or 32 percent of sales for the same period
in 1998. This increase was primarily attributable to lease costs of third party
space segment capacity, Internet access, and terrestrial link charges incurred
to support the Data Network Services segment. The Company also recorded a charge
of $1.8 million in the fourth quarter of 1999, reflecting obsolescence in some
of its private communications network equipment.
Sales and Marketing Expenses. Sales and Marketing expenses were $25.0
million for the year ended December 31, 1999, as compared to $25.2 million for
the same period in 1998.
Engineering and Technical Services Expenses. Engineering and technical
services expenses for the year ended December 31, 1999 were $9.2 million
compared to $8.4 million for the same period in 1998, an increase of $0.8
million or 10 percent. This increase is primarily due to additional salaries
associated with support of the Data Network Services operations.
General and Administrative Expenses. General and administrative expenses
were $16.4 million for the year ended December 31, 1999, compared to $14.5
million for the same period in 1998, an increase of $1.9 million or 13 percent.
The increase was attributable to increased bad debt expense during the period
for the fixed satellite services segment.
Depreciation and Amortization. Depreciation and amortization was $75.8
million for the year ended December 31, 1999 compared to $68.3 million for the
same period in 1998, an increase of $7.5 million or 11 percent. The increase was
primarily due to the acquisition of the Telstar 10/Apstar IIR satellite in
September 1999. The Company also placed into service the Telstar 12 satellite in
December 1999 and recognized additional depreciation expense in conjunction with
the build-out of its infrastructure to support the Data Network Services
segment.
Interest. Interest income was $7.3 million for the year ended December
31, 1999, compared to $14.7 million for the same period in 1998. The decrease in
interest income was due to a reduction in the balances held in the Company's
segregated and restricted funds, which was used for satellite spending and for
interest payments on the Company's senior notes. Interest expense for the years
ended December 31, 1999 and 1998 was $69.8 million and $64.5 million,
respectively, net of capitalized interest of $20.3 million and $19.7 million,
respectively. The increase was primarily due to interest incurred on loans from
Loral.
Income Taxes. The Company is included in the consolidated U.S. federal
income tax return of Loral. Pursuant to a tax sharing agreement for 1999 with
Loral, the Company is entitled to reimbursement for the use of its tax losses
when such losses are utilized by Loral. For the year ended December 31, 1999,
the Company recorded a receivable under this tax sharing agreement of
approximately $15.1 million and a deferred tax provision of $4.7 million. The
deferred tax asset of $49.2 million on the accompanying balance sheet arises
primarily from the tax effect of the temporary differences between the carrying
amount of the senior notes and the senior discount notes payable for financial
and income tax purposes.
RESULTS BY OPERATING SEGMENT
Fixed Satellite Service
Fixed satellite services revenue for 1999 was $35.7 million versus $33.1
million in 1998. EBITDA on the same basis was $21.9 million in 1999, or 61
percent of revenues, versus EBITDA of $21.4 million, or 65 percent of revenues
in 1998.
During the fourth quarter of 1998, Loral completed its integration plan for
the Company and transferred management of the Company's satellite capacity
leasing and satellite operations to Loral Skynet, effective January 1, 1999. In
addition to increasing operational efficiency, the realignment permits Loral
CyberStar to focus on and leverage its experience in the global data services
market.
Data Network Services
Revenues for the data network services segment in 1999 were $69.2 million
versus $50.3 million in 1998, primarily from Loral CyberStar's corporate data
networking and Internet and Intranet services businesses. EBITDA for 1999 was a
loss of approximately $8.3 million versus a loss of $12.4 million in 1998.
13
Also see Note 8 to the consolidated financial statements for additional
information on segment results.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings or financial position. The
Company is required to adopt SFAS 133 on January 1, 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
As of December 31, 1999 and 1998, the fair value of the Company's long-term
debt was estimated to be $556.0 million and $761 million, respectively, using
quoted market prices, for the Company's Senior Notes and Senior Discount Notes.
As of December 31, 1999 and 1998, the long-term debt carrying value exceeded
fair value by $409 million and $173 million, respectively. Market risk on debt
is estimated as the potential increase in annual interest expense resulting from
a hypothetical one percent increase in the interest rates and amounted to $8
million and $9 million, for 1999 and 1998, respectively.
14
ITEM 8.
INDEPENDENT AUDITORS' REPORT
To the Shareholder of Loral Cyberstar, Inc.:
We have audited the accompanying consolidated balance sheets of Loral Cyberstar,
Inc. (formerly Loral Orion, Inc.) and its subsidiaries (collectively, the
Successor Company), a wholly owned subsidiary of Loral Space & Communications
Corporation, as of December 31, 1999 and 1998 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
year ended December 31, 1999 and the nine months ended December 31, 1998. We
have also audited the consolidated statements of operations, changes in
stockholders' equity and cash flows of Orion Network Systems, Inc. and its
subsidiaries (collectively, the Predecessor Company) for the three months ended
March 31, 1998. These financial statements are the responsibility of the
Successor and Predecessor Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Loral
Cyberstar, Inc. and its subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the year ended December 31,
1999 and the nine months ended December 31, 1998 in conformity with generally
accepted accounting principles. Further, in our opinion, the Predecessor
Company's consolidated financial statements referred to above present fairly, in
all material respects, the results of their operations and their cash flows for
the three months ended March 31, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Successor
Company adopted a new accounting basis effective March 31, 1998 in connection
with a change of ownership and recorded net assets as of that date at the new
owner's acquisition cost. Accordingly, depreciation, amortization and interest
charges in the accompanying consolidated statement of operations for the year
ended December 31, 1999 and the nine months ended December 31, 1998, are not
comparable to those of earlier periods presented.
DELOITTE & TOUCHE LLP
McLean, VA
February 22, 2000, except for note 11 as to which the date is March 24, 2000
15
ITEM 8 (CONTINUED).
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors of Loral CyberStar, Inc. (formerly Orion Network
Systems, Inc.):
We have audited the consolidated statements of operations, changes in
stockholders' equity (deficit), and cash flows of Loral CyberStar, Inc.
(formerly Orion Network Systems, Inc.) for the year ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Loral CyberStar, Inc. (formerly Orion Network Systems, Inc.) for the year
ended December 31, 1997, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Washington, DC
February 20, 1998
16
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
----------------- ----------------
1999 1998
----------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 24,117 $ 35,861
Restricted and segregated assets 187,315 50,180
Accounts receivable (less allowance for doubtful accounts
of $2,257 and $1,019 at December 31, 1999 and 1998, respectively) 16,797 15,292
Prepaid expenses and other current assets 11,716 4,299
Due from CyberStar L.P. 181 --
--------------- ---------------
Total current assets 240,126 105,632
Restricted and segregated assets -- 22,675
Property and equipment, at cost:
Land 74 74
Satellite and related equipment 784,344 263,188
Telecommunications equipment 44,747 35,630
Furniture and computer equipment 9,910 8,693
--------------- ---------------
839,075 307,585
Less accumulated depreciation (88,549) (38,706)
Satellite construction in progress, including capitalized
interest of $20,198 at December 31, 1998 16, 951 331,861
--------------- ---------------
Net property and equipment 767,477 600,740
Due from Loral Space and Communications -- 3,619
Cost in excess of net assets acquired associated
with the Loral merger, net 593,219 608,015
Deferred income taxes 49,223 53,915
Other assets, net 34,242 22,908
--------------- ---------------
Total assets $ 1,684,287 $ 1,417,504
=============== ===============
See notes to consolidated financial statements.
17
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par amounts)
(continued)
December 31,
----------------
1999 1998
---------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,071 $ 1,826
Accounts payable 3,098 2,035
Satellite purchase price payable 181,928 --
Accrued and other current liabilities 55,478 16,162
Customer deposits 9,069 7,897
Deferred revenue 2,624 35,841
Interest payable 22,842 22,842
Note payable to Loral SpaceCom 74,114 --
Due to Skynet Delaware 305 --
Due to Space Systems/Loral 9,750 --
--------------- -----------------
Total current liabilities 361,279 86,603
Long-term debt 963,299 931,669
Deferred revenue 5,957 --
Other long-term liabilities 448 141
Due to Space Systems/Loral 5,900 --
Commitments and contingencies:
Stockholders' equity:
Common stock, $.01 par value; 1,000 shares authorized; 100
shares outstanding at December 31, 1999 and 1998 -- --
Capital in excess of par value 544,176 481,791
Unearned compensation (1,804) (3,347)
Accumulated other comprehensive income (loss) (824) 616
Accumulated deficit (194,144) (79,969)
---------------- -----------------
Total stockholders' equity 347,404 399,091
---------------- -----------------
Total liabilities and stockholders' equity $ 1,684,287 $ 1,417,504
================ =================
See notes to consolidated financial statements.
18
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Predecessor Company
Nine months Three months
Year ended ended ended Year ended
December 31, 1999 December 31, 1998 March 31, 1998 December 31, 1997
----------------- ----------------- -------------- ----------------
Service revenue $ 104,882 $ 64,608 $ 18,790 $ 72,741
Operating expenses:
Direct 40,752 19,906 6,406 26,531
Sales and marketing 24,955 19,365 5,790 19,424
Engineering and technical services 9,167 6,486 1,898 7,750
General and administrative 16,416 10,834 3,707 13,956
Depreciation and amortization 75,783 51,434 12,483 48,161
Merger costs -- 612 12,145 --
---------------- -------------- ---------------- ---------------
Total operating expenses 167,073 108,637 42,429 115,822
---------------- -------------- ---------------- ---------------
Loss from operations (62,191) (44,029) (23,639) (43,081)
Interest income 7,335 9,299 5,425 24,711
Interest expense (69,776) (46,439) (21,190) (83,769)
Other income (expense) 100 167 (287) (507)
---------------- -------------- ---------------- ---------------
Loss before income taxes, extraordinary loss
on extinguishment of debt, minority interest
and preacquisition loss of acquired subsidiary (124,532) (81,002) (39,691) (102,646)
Income tax benefit 10,357 1,033 -- --
Extraordinary loss on extinguishment of debt -- -- -- (15,763)
Limited Partners' interest in the net loss of
Orion Atlantic -- -- -- 12,043
Preacquisition loss of acquired subsidiary -- -- -- 626
---------------- -------------- ---------------- ---------------
Net loss (114,175) (79,969) (39,691) (105,740)
Preferred stock dividend, net of forfeitures -- -- 1,387 (6,034)
---------------- -------------- ---------------- ---------------
Net loss attributable to common stockholders $ (114,175) $ (79,969) $ (38,304) $ (111,774)
================ ============== ================ ===============
See notes to consolidated financial statements.
19
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
Common Stock
-----------------------------
Capital in
Number Excess of Accumulated Treasury
of Shares Amount Par Value Deficit Stock 1
--------------- ------------ -------------- ---------------- ------------
Balance December 31, 1996
(Predecessor Company) 11,245 $ 112 $ 86,932 $ (87,482) $ --
Issuance of common stock 11 -- 142 -- --
Conversion of preferred stock 3,352 34 38,812 -- --
Conversion of debentures 735 7 10,285 -- --
Issuance of common stock for the purchase of APSC 86 1 1,199 -- --
Issuance of common stock for interest payments 205 2 2,623 -- --
Issuance of common stock for preferred stock
dividend payments 121 1 2,069 -- --
Issuance of warrants relating to Senior Notes and
Senior Discount Notes, net -- -- 9,224 -- --
Exercise of stock options and warrants 176 2 1,764 -- --
Employee stock purchase plan 28 1 244 -- --
Preferred stock dividend and accretion, net of
forfeitures -- -- -- (6,034) --
Purchase of treasury stock -- -- -- -- (91)
1997 net loss -- -- -- (105,740) --
Other comprehensive loss -- -- -- -- --
Comprehensive loss -- -- -- -- --
--------------- ------------- -------------- ---------------- ------------
Balance December 31, 1997 15,959 $ 160 $ 153,294 $ (199,256) $ (91)
=============== ============= ============== ================ ============
Accumulated
Other Total
Unearned Comprehensive Stockholders'
Compensation Income (Loss) Equity (Deficit)
------------ ------------- ----------------
Balance December 31, 1996
(Predecessor Company) $ -- $ -- $ (438)
Issuance of common stock -- -- 142
Conversion of preferred stock -- -- 38,846
Conversion of debentures -- -- 10,292
Issuance of common stock for the purchase of APSC -- -- 1,200
Issuance of common stock for interest payments -- -- 2,625
Issuance of common stock for preferred stock
dividend payments -- -- 2,070
Issuance of warrants relating to Senior Notes and
Senior Discount Notes, net -- -- 9,224
Exercise of stock options and warrants -- -- 1,766
Employee stock purchase plan -- -- 245
Preferred stock dividend and accretion, net of
forfeitures -- -- (6,034)
Purchase of treasury stock -- -- (91)
1997 net loss -- --
Other comprehensive loss -- (956)
Comprehensive loss -- -- (106,696)
------------- ------------- ----------------
Balance December 31, 1997 $ -- $ (956) $ (46,849)
============= ============= ================
See notes to consolidated financial statements. (continued on next page)
20
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
(IN THOUSANDS)
COMMON STOCK
Common Stock
----------------------------
Capital in
Number Excess of Accumulated Treasury
of Shares Amount Par Value Deficit Stock 1
------------- ----------- ------------ ---------------- ------------
Balance December 31, 1997
(Predecessor Company) 15,959 $ 160 $ 153,294 $ (199,256) $ (91)
Issuance of common stock 14 -- 246 -- --
Conversion of preferred stock 5,739 57 69,831 -- --
Conversion of debentures 3,572 36 49,964 -- --
Issuance of common stock for interest payments 184 2 2,577 -- --
Issuance of common stock for preferred stock
dividend payments 316 3 5,455 -- --
Exercise of stock options and warrants 165 2 1,638 -- --
Employee stock purchase plan 20 -- 292 -- --
Preferred stock dividends and accretion, net
of forfeitures -- -- -- 1,387 --
Recapitalization related to purchase by Loral (25,969) (260) 195,215 237,560 91
Increase purchase price -- -- 3,491 -- --
Net loss for the three months ended March 31, 1998 -- -- -- (39,691) --
Other comprehensive loss -- -- -- -- --
Comprehensive Loss -- -- -- -- --
------ ---------- ---------- ----------- --------
Balance March 31, 1998 -- $ -- $ 482,003 $ -- $ --
Amortization of unearned compensation -- -- -- -- --
Stock option forfeitures -- -- (212) -- --
Net loss for the nine months ended December 31, 1998 -- -- -- (79,969) --
Other comprehensive income -- -- -- -- --
Comprehensive loss -- -- -- -- --
------ ---------- ---------- ----------- --------
Balance December 31, 1998 -- $ -- $ 481,791 $ (79,969) $ --
Amortization of unearned compensation -- -- -- -- --
Loral Space and Communications capital contribution -- -- 62,385 -- --
1999 net loss -- -- -- (114,175) --
Other comprehensive loss -- -- -- -- --
Comprehensive loss -- -- -- -- --
------ ---------- ---------- ----------- --------
Balance at December 31, 1999 -- $ -- $ 544,176 $ (194,144) $ --
Accumulated
Other Total
Unearned Comprehensive Stockholders'
Compensation Income (Loss) Equity (Deficit)
------------ ------------- ----------------
Balance December 31, 1997
(Predecessor Company) $ -- $ (956) $ (46,849)
Issuance of common stock -- -- 246
Conversion of preferred stock -- -- 69,888
Conversion of debentures -- -- 50,000
Issuance of common stock for interest payments -- -- 2,579
Issuance of common stock for preferred stock
dividend payments -- -- 5,458
Exercise of stock options and warrants -- -- 1,640
Employee stock purchase plan -- -- 292
Preferred stock dividends and accretion, net
of forfeitures -- -- 1,387
Recapitalization related to purchase by Loral (4,512) 1,473 429,567
Increase purchase price -- -- 3,491
Net loss for the three months ended March 31, 1998 -- -- --
Other comprehensive loss -- (517) --
Comprehensive Loss -- -- (40,208)
------ ---------- --------------
Balance March 31, 1998 (4,512) $ -- $ 477,491
Amortization of unearned compensation 953 -- 953
Stock option forfeitures 212 -- --
Net loss for the nine months ended December 31, 1998 -- -- --
Other comprehensive income -- 616
Comprehensive loss -- -- (79,353)
------ ---------- --------------
Balance December 31, 1998 (3,347) $ 616 $ 399,091
Amortization of unearned compensation 1,543 -- 1,543
Loral Space and Communications capital contribution -- -- 62,385
1999 net loss -- -- --
Other comprehensive loss -- (1,440) --
Comprehensive loss -- -- (115,615)
------ ---------- --------------
Balance at December 31, 1999 $(1,804) $ (824) $ 347,404
See notes to consolidated financial statements.
1 Includes 269,274 treasury shares of which 255,515 were carried at no cost
through March 31, 1998.
21
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PREDECESSOR COMPANY
-----------------------------------
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31,
1999 1998 1998 1997
--------------- ------------ -------------- ------------------
OPERATING ACTIVITIES:
Net loss $ (114,175) $ (79,969) $ (39,691) $ (105,740)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Extraordinary loss on extinguishment of debt -- -- -- 15,763
Deferred income tax provision 4,692 3,771
Depreciation and amortization 75,783 51,434 12,483 48,161
Amortization of deferred financing costs -- 609 2,410
Provision for bad debts 3,304 1,325 150 1,022
Non-cash interest expense 33,758 21,325 10,070 34,347
Interest earned on restricted assets (2,292) (3,575) (1,431) (18,203)
Other -- (291) 1,644 --
Limited Partners' interest in net loss of Orion Atlantic -- -- -- (12,043)
Loss on obsolescence of assets 1,758 -- -- --
Changes in operating assets and liabilities:
Accounts receivable (4,809) (3,578) (1,408) (2,393)
Prepaid expenses and other current assets (7,417) (502) 693 (2,277)
Other assets (15,619) (1,352) 201 (3,640)
Accounts payable, accrued liabilities and other
current liailities 9,805 (1,367) (2,186) (2,393)
Interest payable -- 12,403 (12,510) 16,180
Customer deposits 1,172 5,071 23 1,612
Due to Space Systems/Loral 5,900 -- -- --
Due to Skynet Delaware 305 -- -- --
Deferred revenue 6,196 10,768 297 11,935
Due from CyberStar, L.P. (181)
Due from Loral Space and Communications -- (3,619) -- --
--------------- ------------ -------------- ------------------
Net cash provided by (used in) operating activities (1,820) 11,844 (31,056) (15,789)
Investing activities:
Increase in restricted and segregated assets (2,942) (15,321) (3,198) (419,187)
Uses of and transfers from restricted and segregated 156,380 273,960 35,938 90,500
assets
Satellite construction costs, including capitalized interest (202,170) (270,429) (14,575) (102,282)
Capital expenditures (See Note 2) (105,354) (13,667) (3,805) (11,062)
Purchase of Teleport Europe GmbH, net of cash acquired -- -- -- (8,375)
--------------- ------------ -------------- ------------------
Net cash provided by (used in) investing activities (154,086) (25,457) 14,360 (450,406)
Financing activities:
Equity contributed from Loral SpaceCom 62,385 -- -- --
Due to Loral SpaceCom 77,733 -- -- --
Due to Space Systems/Loral 9,750 -- -- --
Debt and equity financing costs -- -- -- (26,122)
Proceeds from issuance of common stock, net of Issuance
Costs -- -- 2,117 2,153
Treasury stock purchase -- -- -- (91)
Proceeds from issuance of debt -- -- -- 770,397
Repayment of senior notes and notes payable (1,223) (2,815) (254) (216,723)
Swap termination fee -- -- -- (5,288)
Payment of satellite incentives (246) (2,580) (324) (18,621)
Other (4,237) 1,068 (1,051) (1,689)
--------------- ------------ -------------- ------------------
Net cash provided by (used in) financing activities 144,162 (4,327) 488 504,016
--------------- ------------ -------------- ------------------
Net increase (decrease) in cash and cash equivalents (11,744) (17,940) (16,208) 37,821
Cash and cash equivalents at beginning of period 35,861 53,801 70,009 32,188
--------------- ------------ -------------- ------------------
Cash and cash equivalents at end of period $ 24,117 $ 35,861 $ 53,801 $ 70,009
=============== ============ ============== ==================
See notes to consolidated financial statements.
22
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
1. ORGANIZATION AND BUSINESS
The principal business of Loral CyberStar, Inc. (the "Company" or "Loral
CyberStar"), formerly known as Orion Network Systems, Inc., ("Orion" or the
"Predecessor Company"), and its subsidiary guarantors is providing
satellite-based communications services for private communications networks and
video distribution and other satellite transmission services. In 1998, Loral
CyberStar organized its business into two distinct operating segments as follows
(see Note 8):
Fixed Satellite Services: Leasing transponder capacity and providing
value-added services to customers for a wide variety of applications,
including the distribution of broadcast programming, news gathering,
business television, distance learning and direct-to-home ("DTH") services.
Loral Skynet, a division of Loral Spacecom Corporation, which is in turn a
subsidiary of Loral Space & Communications Ltd. ("Loral"), began managing
the Company's Fixed Satellite Services ("FSS") assets effective January 1,
1999.
Data Network Services: Business in development, providing managed
communications networks and Internet and intranet services, using
transponder capacity on the Loral Skynet Telstar and Loral CyberStar
fleets.
ACQUISITION OF ORION BY LORAL
On March 20, 1998, Orion was acquired by Loral through the merger (the
"Merger") of Loral Satellite Corporation, a wholly owned subsidiary of Loral,
with and into Orion. Loral consummated the acquisition by issuing 18 million
shares of its common stock and assuming existing Orion vested options and
warrants to purchase 1.4 million shares of Loral common stock representing an
aggregate purchase price of $472.5 million. Orion was the surviving corporation
of the Merger and thereby became a subsidiary of Loral. At the effective date of
the Merger, Loral contributed its investment in Orion to Loral Space &
Communications Corporation, a wholly owned subsidiary of Loral, and Orion
changed its name to "Loral Orion Network Systems, Inc." The name was
subsequently further changed to "Loral CyberStar, Inc." On December 31, 1999,
Loral CyberStar, Inc. merged with and into Loral Orion Services, Inc. and on the
same date Loral Orion Services, Inc. changed its name to Loral CyberStar, Inc.
The consolidated financial statements for the three months ended March 31,
1998 and as of and for the year ended December 31, 1997, respectively, reflect
the results of operations of the Predecesor Company. The consolidated financial
statements as of and for the year ended December 31, 1999 and as of and for the
nine months ended December 31, 1998 reflect the results of operations of Loral
CyberStar. Hereafter, references to the "Company" include both Loral
CyberStar,Inc. and its predecessor, Orion Network Sytems, Inc.
Following the Merger, the capital stock of the Company ceased to be
publicly traded. However, the Company continues to have registered bonds
outstanding and will continue to have filing requirements with the Securities
and Exchange Commission.
For accounting purposes, the Merger was accounted for as of March 31, 1998
using the purchase method. Accordingly, the consolidated balance sheet at
December 31, 1998 reflects the push-down of the purchase price allocations. The
purchase price represented $447.7 million in excess of the Company's net book
value, which was primarily allocated to costs in excess of net assets acquired
of $620.4 million and a fair value adjustment of $153.4 million to increase the
carrying value of Company's senior notes and senior discount notes. In addition,
Loral agreed to assume Orion's unvested employee stock options, which resulted
in a new measurement date and an unearned compensation charge of $4.3 million,
to be amortized over the vesting period of the options.
Had the acquisition of the Company occurred on January 1, 1998, the
unaudited pro forma sales, operating loss and net loss for the year ended
December 31, 1998 would have been $83.4 million; $59.3 million; and $108.1
million, respectively. These results, which are based on various assumptions are
not necessarily indicative of what would have occurred had the acquisition been
consummated on January 1, 1998.
23
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
1. ORGANIZATION AND BUSINESS (CONTINUED)
LORAL CYBERSTAR SUBSIDIARIES
All subsidiaries of Loral CyberStar ("Subsidiary Guarantors"), other than
inconsequential subsidiaries, have unconditionally guaranteed the Notes (as
defined below) on a joint and several basis. No restrictions exist on the
ability of Subsidiary Guarantors to pay dividends or make other distributions to
Loral CyberStar, except to the extent provided by law generally (e.g., adequate
capital to pay dividends under state corporate laws).
ACQUISITION OF ORION ATLANTIC LIMITED PARTNERSHIP INTERESTS IN THE EXCHANGE
Through January 31, 1997, Orion Satellite Corporation (whose name was
subsequently changed to Loral Orion Services, Inc.) was the sole general partner
in Orion Atlantic L.P. ("Orion Atlantic") and the Company had a combined 41 2/3
percent equity interest in Orion Atlantic. As a result of the Company's control
of Orion Atlantic, the Company's consolidated financial statements include the
accounts of Orion Atlantic. All of Orion Atlantic's revenues and expenses are
included in the Company's consolidated financial statements, with appropriate
adjustment to reflect the interests of the limited partners in Orion Atlantic's
losses prior to the Exchange as described below. The Company acquired all the
remaining interests in Orion Atlantic on January 31, 1997 during the Exchange as
described below. The Company's consolidated financial statements also include
the accounts of all other subsidiaries of the Company.
On January 31, 1997, the Company acquired all of the limited partnership
interests which it did not already own in the Company's former operating
subsidiary, Orion Atlantic, that owned the Telstar 11 satellite (formerly Orion
1) prior to its merger with Loral Orion Services, Inc. Specifically, the Company
acquired the Orion Atlantic limited partnership interests and other rights
relating thereto held by British Aerospace Communications, Inc., COM DEV
Satellite Communications Limited, Kingston Communications International Limited,
Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate
of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho
Iwai Corp. (collectively, the "Exchanging Partners"). The Company accounted for
this transaction as an acquisition of minority interest, and as a result,
approximately $34.3 million was allocated to the cost of the Telstar 11
satellite and related equipment.
Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the
"Exchange Agreement"), the Exchanging Partners exchanged their Orion Atlantic
limited partnership interests for 123,172 shares of a newly created class of the
Company's Series C Preferred Stock (the "Exchange"). In addition, the Company
acquired certain rights held by certain of the Exchanging Partners to receive
repayment of various advances (aggregating approximately $41.6 million at
January 31, 1997). The 123,172 shares of Series C Preferred Stock issued in the
Exchange were convertible into approximately 7 million shares of the Company's
common stock. As a result of the Exchange, certain of the Exchanging Partners
became principal stockholders of the Company. The exchange is described in
greater detail under the caption "The Merger, the Exchange and the Debenture
Investments" in the Company's Registration Statement on Form S-4 (Registration
No. 333-19795).
The Exchange and the acquisition by the Company of the only outstanding
minority interest in the Company's subsidiary Asia Pacific Space and
Communications, Ltd. from British Aerospace Satellite Investments, Inc. on
January 8, 1997 (in exchange for approximately 86,000 shares of the Company's
common stock) resulted in the Company owning 100 percent of Orion Atlantic and
its other significant subsidiaries and, therefore, a greatly simplified
corporate structure.
THE ORION MERGER
The Exchange was conducted on a tax-free basis by means of an Orion Merger
(defined below) that was consummated on January 31, 1997. Pursuant to the
Exchange Agreement, Orion Oldco Services, Inc., formerly known as Orion Network
Systems, Inc. ("Old Orion"), formed the Company as a new Delaware corporation
with a certificate of incorporation, bylaws and capital structure substantially
identical in all material respects with those of Old Orion. Also pursuant to the
Exchange Agreement, the Company formed a wholly-owned subsidiary, Orion Merger
Company, Inc. ("Orion Merger Subsidiary"). Pursuant to an Agreement and Plan of
Merger, Orion Merger Subsidiary was merged with and into Old Orion, and Old
Orion
24
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
1. ORGANIZATION AND BUSINESS (CONTINUED)
became a wholly-owned subsidiary of the Company (the "Orion Merger"). On January
31, 1997, the effective time of the Orion Merger, all of the stockholders of Old
Orion received stock in the Company with substantially identical rights to the
Old Orion stock they held prior to the effective time of the Orion Merger.
Following the Orion Merger, the Company changed its name from Orion Newco
Services, Inc. to Orion Network Systems, Inc. and the Company's wholly-owned
subsidiary Orion Network Systems, Inc. changed its name to Orion Oldco Services,
Inc. The Exchange and Orion Merger are described in greater detail under the
caption "The Merger, the Exchange and Debenture Investments" in the Company's
Registration Statement on Form S-4 (Registration No. 333-19795).
FINANCINGS
On January 31, 1997, the Company completed a $710 million bond offering
(the "Bond Offering") comprised of approximately $445 million of Senior Note
Units, each of which consisted of one 11.25 percent Senior Note due 2007 (a
"Senior Note") and one Warrant to purchase 0.8463 shares of common stock, par
value $.01 per share ("Common Stock"), of the Company (a "Senior Note Warrant"),
and approximately $265.4 million of Senior Discount Note Units, each of which
consisted of one 12.5 percent Senior Discount Note due 2007 (a "Senior Discount
Note," and together with the Senior Notes, the "Notes") and one Warrant to
purchase 0.6628 shares of Common Stock of the Company (a "Senior Discount Note
Warrant", and together with Senior Note Warrants, the "Warrants"). Interest on
the Senior Notes are payable semi-annually in cash on January 15 and July 15 of
each year, with the first payment made on July 15, 1997. The Senior Discount
Notes will not pay cash interest prior to July 15, 2002. Thereafter, cash
interest will accrue until maturity at an annual rate of 12.5 percent payable
semi-annually on January 15 and July 15 of each year, commencing July 15, 2002.
The exercise price for the Warrants were $.01 per share of common stock. There
were 697,400 Warrants issued in connection with the Notes (see Note 6).
In addition, on January 31, 1997, the Company also completed the sale of
$60 million of its convertible junior subordinated debentures (the "Debentures")
to two investors, British Aerospace Holdings, Inc. ("British Aerospace") and
Matra Marconi Space UK Limited ("Matra Marconi Space"). British Aerospace
purchased $50 million of the Debentures and Matra Marconi Space purchased $10
million of the Debentures (collectively, the "Debentures Offering", and together
with the Bond Offering, the "Financings"). The Convertible Debentures were to
mature in 2012, and bore interest at a rate of 8.75 percent per annum payable
semi-annually in arrears solely in Common Stock of the Company. The Convertible
Debentures were subordinated to all other indebtedness of the Company, including
the Notes. Prior to the acquisition of the Company by Loral, all of the
debentures had been converted to common stock.
The net proceeds of the Bond Offering and Debentures Offering were used by
the Company to repay the Orion 1 credit Facility (as discussed in Note 5 below),
pre-fund the first three years of interest payments on certain of the Notes, and
to build and launch two additional satellites, Telstar 12 (formerly Orion 2) and
Orion 3.
The extraordinary loss on extinguishment of debt of $15.8 million in 1997
was the result of expensing unamortized deferred financing costs associated with
the Orion 1 Credit Facility which was refinanced with the proceeds from the Bond
Offering and termination of a interest rate cap agreement.
ACQUISITION OF TELEPORT EUROPE GMBH
On March 26, 1997, the Company acquired German-based Teleport Europe GmbH
(now known as Loral Orion-Europe GmbH) ("Loral Orion Europe"), a communications
company specializing in private satellite networks for voice and data services.
The Company purchased the shares of Loral Orion Europe held by the German
companies, Vebacom GmbH and
25
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
1. ORGANIZATION AND BUSINESS (CONTINUED)
RWE Telliance AG, now known as o.tel.o, for approximately $9 million. In
addition, the Company acquired Loral Orion Europe's licenses and operating
agreements to provide satellite network services in 40 countries, including 17
countries in which the Company previously did not provide service. The net
purchase price of Loral Orion Europe was $8.4 million and was allocated as
follows (in thousands):
Working capital deficit, net of cash acquired.... $ (683)
Property and equipment ........................... 9,346
Other, net ...................................... (288)
----------
$ 8,375
==========
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements for the year ended December 31, 1999,
the nine months ended December 31, 1998, the three months ended March 31, 1998,
and for the year ended December 31, 1997, include the accounts of Loral
CyberStar, its wholly-owned subsidiaries and Orion Financial Partnership (OFP),
in which Loral CyberStar holds a 50 percent interest.
CASH AND CASH EQUIVALENTS
Loral CyberStar considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash and cash
equivalents includes (in thousands):
December 31,
-------------------------------
1999 1998
----------- -------------
Cash .................. $ 13,339 $ 3,919
Money market funds .... 1,943 4,985
Commercial paper ...... 8,835 26,957
----------- -------------
$ 24,117 $ 35,861
=========== =============
RESTRICTED AND SEGREGATED ASSETS
Restricted and segregated assets are classified as held to maturity and are
recorded at cost and consist of the following (in thousands):
December 31,
----------------------------------
1999 1998
---------------- ----------------
Commercial paper ....................... $ 162,005 $ --
U.S. treasury notes .................... 25,310 72,855
---------------- ----------------
Total restricted and segregated assets.. 187,315 72,855
Less current portion ................... (187,315) (50,180)
---------------- ----------------
Long-term portion ...................... $ -- $ 22,675
================ ================
At December 31, 1999, $49.8 million is restricted for use as interest
payments on the Senior Notes through July 2000. At December 31, 1998, $72.9
million was restricted for use as interest payments on the Senior Notes through
January 2000.
26
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Included in restricted and segregated assets is $2.3 million and $2.1
million of accrued interest at December 31, 1999 and 1998, respectively. The
balance at December 31, 1999 is restricted for use for interest payments on the
Notes through July 2000 and segregated for a significant portion of the final
payment on Telstar 10/Apstar IIR. The U.S. treasury notes held at December 31,
1999 mature January 2000.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject Loral CyberStar to
concentrations of credit risk consist principally of cash and cash equivalents,
restricted and segregated assets and accounts receivable. The Company's cash and
cash equivalents and restricted and segregated assets are maintained with
high-credit-quality financial institutions and U.S treasury notes. Management
believes that its credit evaluation, approval and monitoring processes combined
with negotiated billing arrangements mitigate potential credit risks with regard
to the Company's current customer base.
PROPERTY AND EQUIPMENT
Property and equipment acquired after March 31, 1998 is carried at cost.
All property and equipment at March 31, 1998, was recorded at its estimated fair
market value, as of the date of the Merger. Depreciation expense is calculated
using the straight-line method over the estimated useful lives as follows:
Satellite and related equipment.............. 10.5 -16.5 years
Telecommunications equipment................. 2-7 years
Furniture and computer equipment............. 2-7 years
Costs incurred in connection with the construction and successful
deployment of the Telstar 11 and Telstar 12 satellites and related equipment are
capitalized. Such costs include direct contract cost, allocated indirect costs,
launch costs, launch insurance, construction period interest and the present
value of satellite incentive payments. Similar costs for the two high-powered
Ka-band satellites are included in "Satellites construction in progress." Loral
CyberStar began depreciating the Telstar 11 and Telstar 12 satellites over their
estimated useful life commencing on the date of operational delivery in orbit,
January 1995 and December 1999, respectively. Satellite lives are reevaluated
periodically.
On May 4, 1999, the Orion 3 satellite was placed into a lower-than-expected
orbit after its launch on a Delta III rocket. According to Boeing, the Delta III
rocket apparently failed to complete its second stage burn, and, as a result,
the satellite, manufactured by Hughes, achieved an orbit well below the planned
final altitude. As a result, the satellite cannot be used for its intended
purpose. The satellite and launch were fully insured for approximately $266
million, which was received in the third quarter of 1999. DACOM Corporation, a
Korean communications company which had purchased eight transponders on Orion 3
for a total of $89 million, had made prepayments of approximately $34 million to
the Company. Under the agreement with DACOM, the amount prepaid was refunded in
July 1999.
To replace Orion 3, on September 28, 1999, Loral Asia Pacific Satellite
(HK) Limited ("Loral CyberStar HK"), a subsidiary of Loral CyberStar, purchased
from APT Satellite Company Limited ("APT") the rights to all transponder
capacity (except for one C-band transponder retained by APT) and existing
customer leases on the Apstar IIR satellite, and renamed the satellite Telstar
10/Apstar IIR, for approximately $273 million. Telstar 10/Apstar IIR, had an
estimated remaining useful life of 13 years as of September 28, 1999. Loral
CyberStar HK has full use of the transponders for the remaining life of Telstar
10/Apstar IIR. Under the purchase agreement, Loral CyberStar HK will also have
the option to lease from APT replacement satellites upon the end of life of
Telstar 10/Apstar IIR.
As of December 31, 1999, Loral CyberStar had made initial payments of
approximately $91 million to APT and is scheduled to pay approximately $182
million in March 2000. Insurance proceeds from the Orion 3 failure were used to
fund the initial payments and will be used to fund a significant portion of the
final payment.
27
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VALUATION OF LONG-LIVED ASSETS AND COSTS IN EXCESS OF NET ASSETS ACQUIRED
The carrying value of Loral CyberStar's long-lived assets and costs in
excess of net assets acquired is reviewed for impairment whenever events or
changes in circumstances indicate that an asset may not be recoverable. The
Company looks to current and future profitability, as well as current and future
undiscounted cash flows, excluding financing costs, as primary indicators of
recoverability. If an impairment is determined to exist, any related impairment
loss is calculated based on fair value. In the fourth quarter of 1999, the
Company recorded $1.8 million in direct costs, which is presented in the Data
Services segment, as a result of the obsolescence of private communications
equipment.
DEFERRED FINANCING COSTS
Deferred financing costs related to a debt financing were amortized over
the period the debt was expected to be outstanding. The net deferred financing
costs outstanding at March 31, 1998 were written off to costs in excess of net
assets acquired associated with the Loral Merger. Deferred financing costs of
$10.5 million relating to the Orion 1 Credit Facility were expensed in January
1997 in connection with the Financings and are included in the caption
"Extraordinary loss on extinguishment of debt" for 1997.
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired associated with the Merger amounted
to $620.4 million, which is being amortized over 40 years using the
straight-line method. Accumulated amortization relating to cost in excess of net
assets acquired at December 31, 1999 and 1998 was $27.1 million and $11.7
million, respectively.
OTHER ASSETS
Intangible assets associated with the Merger are primarily amortized over
the remaining useful life of Telstar 11, which was approximately five years at
December 31, 1999. Accumulated amortization relating to other assets at December
31, 1999 and 1998 was $6.3 million and $2.6 million, respectively. The Company
amortizes FCC license application costs related to Telstar 11 and Telstar 12
over the estimated useful lives of the satellites. Software licenses are
amortized over three years which represents the estimated useful life of the
software.
Other assets, net of amortization as of December 31, 1999 and 1998, was as
follows (in thousands):
December 31,
----------------------------------
1999 1998
---------------- ----------------
Note receivable ......................................... $ 1,842 $ 2,476
FCC license application costs ........................... 2,374 1,767
Prepaid satellite insurance ............................. 11,132 --
Software license ........................................ 3,750 --
Intangible assets ....................................... 10,822 15,261
Other .................................................. 4,322 3,404
---------------- ----------------
$ 34,242 $ 22,908
================ ================
28
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
Results of operations for foreign entities, primarily the Company's
Loral Orion Europe GmbH subsidiary, are translated using average exchange rates
during the period. Assets and liabilities are translated to U.S. dollars using
the exchange rate in effect at the balance sheet date. The resulting translation
adjustments are reflected in stockholders' equity (deficit) as accumulated other
comprehensive income (loss).
INTEREST RATE MODIFICATION AGREEMENT
The Company entered into an interest-rate swap and cap agreement to modify
the interest characteristics of the Orion 1 Credit Facility from a floating to a
fixed-rate basis. This agreement involved the receipt of floating rate amount in
exchange for fixed-rate interest payments over the life of the agreement without
an exchange of the underlying principal amount. The differential paid or
received was accrued as interest rates changed and was recognized as an
adjustment to interest expense. The fair value of the swap agreement was not
recognized in the financial statements. This agreement was terminated in January
1997 in connection with the Financings discussed in Note 1. The Company had no
such agreements in place at December 31, 1999 or 1998.
REVENUE RECOGNITION
Revenue is recognized as earned in the period in which telecommunications
and related services are provided.
The following summarizes the Company's domestic and foreign revenues (in
thousands):
Predecessor Company
-------------------------------
Year Nine months Three months Year
ended ended Ended ended
December 31, December 31, March 31, 1998 December 31,
-------------- ------------- --------------- -------------
Revenues from unaffiliated customers:
United States....................... $ 46,801 $ 24,001 $ 6,895 $ 30,927
Germany ........................... 15,573 14,617 4,517 15,437
Other foreign ...................... 42,508 25,990 7,378 22,284
Revenues from related parties........... -- -- -- 4,093
-------------- ------------- --------------- -------------
Total services revenue.................. $ 104,882 $ 64,608 $ 18,790 $ 72,741
============== ============= =============== =============
29
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future consequences of temporary differences between financial reporting and tax
bases of assets and liabilities using enacted tax rates that will be in effect
when the differences are expected to reverse.
Following is a summary of the components of the net deferred income tax
asset balance at December 31, 1999 and 1998 (in thousands):
December 31,
-----------------------------------
1999 1998
-------------- ---------------
Net operating loss carryforward ................. $ 94,305 $ 78,642
Amortization of premium and discount on
Senior Notes and Senior Discount Notes ........ 98,086 69,203
Amortization of intangibles ..................... (3,713) (928)
Depreciation .................................... (11,636) (3,678)
Other ........................................... 3,264 4,209
-------------- ---------------
Subtotal 180,306 147,448
-------------- ---------------
Less valuation allowance......................... (131,083) (93,533)
============== ===============
Net deferred income tax asset.................. $ 49,223 $ 53,915
============== ===============
At December 31, 1999, the Company had approximately $301 million in net
operating loss carryforwards which expire at varying dates from 2003 through
2019. Due to uncertainties regarding its ability to realize the benefits of such
net operating loss carryforwards and certain other net deferred tax assets, the
Company established a valuation allowance of $131 million against these net
deferred tax assets.
In 1999, the Company is included in the U.S. federal income tax return for
Loral. Pursuant to a tax sharing agreement for 1999 with Loral, the Company is
entitled to reimbursement for the use of its tax losses when such losses are
utilized by Loral. For the year ended December 31, 1999, the Company recorded a
receivable under this tax sharing agreement of approximately $15.1 million and a
deferred tax provision of approximately $4.7 million, resulting in a net tax
benefit of approximately $10.4 million. The Company's effective tax benefit rate
(8.3%) differs from the federal statutory rate (35%), primarily due to the
valuation allowance established for the carryforward of the current year tax
loss (22.3%) and the non-deductible amortization of cost in excess of net assets
acquired (4.4%). The deferred tax asset of $49.2 million on the accompanying
balance sheet primarily arises from the tax effect of the temporary differences
between the carrying amount of the Senior Notes and the Senior Discount Notes
payable for financial and income tax purposes.
At December 31, 1998, the Company had approximately $225.9 million in net
operating loss carryforwards which expire at varying dates from 2004 through
2013. The use of these loss carryforwards, may be limited under the Internal
Revenue Code as a result of ownership changes experienced by the Company. Due to
uncertainty regarding its ability to realize the benefits of such net operating
loss carryforwards and certain other net deferred tax assets, the Company
established a valuation allowance against deferred tax assets of $93.5 million.
In 1998, the Company is included in the U.S. federal income tax return for
Loral. Pursuant to a tax sharing agreement for 1998 with Loral, the Company is
entitled to reimbursement for the use of its tax losses when such losses are
utilized by Loral. For the nine months ended December 31, 1998, the Company
recorded a receivable under this tax sharing agreement of approximately $4.9
million and a deferred tax provision of approximately $3.8 million, resulting in
a net tax benefit of approximately $1.1 million. The Company's effective tax
benefit rate (1%) differs from the federal statutory rate (35%), due to the
valuation allowance established for the carryforward of the current year tax
loss (29%) and the non-deductible amortization of cost in excess of net assets
acquired (5%). The deferred tax asset of $53.9 million on the accompanying
balance sheet primarily arises from the tax effect of the temporary differences
between the carrying amount of the Senior Notes and the Senior Discount Notes
payable for financial and income tax purposes.
30
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
STATEMENTS OF CASH FLOWS
Non-cash investing and financing activities and supplemental cash flow
information is (in thousands):
Predecessor Company
---------------------------------------
Year Nine months Three months Year
Ended ended ended ended
December 31, 1999 December 31, 1998 March 31, 1998 December 31, 1997
----------------- --------------- --------------- ---------------
Preferred stock dividend, net of forfeitures $ -- $ -- $ (1,387) $ 6,034
Conversion of redeemable preferred stock to
common stock -- -- 69,888 38,846
Conversion of subordinated debentures, accrued
interest and deferred financing costs to
common stock -- -- 50,000 10,292
Conversion of Company common stock to Loral
common stock as a result of this merger -- -- 469,000 --
Issuance of Series C preferred stock -- -- -- 94,000
Issuance of common stock for preferred stock
dividends -- -- 5,858 2,070
Issuance of common stock and warrants -- -- 4,757 13,407
Interest paid 52,139 25,551 25,237 35,573
Acquisition of Teleport Europe, net of cash acquired $ -- $ -- $ -- $ 8,375
Included in accounts receivable and other current liabilities at December
31, 1998 and March 31, 1998 are customer deposits and up front fees of $3.4
million and in $1.1 million, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
EARNINGS PER SHARE
Earnings per share is not presented since it is not considered
meaningful due to the Merger and the recapitalization of the Company.
31
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
COMPREHENSIVE INCOME
The Company follows Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130") for the reporting and disclosure of
comprehensive income and its components. SFAS 130 requires unrealized gains or
losses on the Company's foreign currency translation adjustments to be included
in other comprehensive income (loss). Total comprehensive loss is as follows (in
thousands):
Predecessor Company
---------------------------------------
Year Nine months Three months Year
As of December 31, Ended ended ended ended
--------------------------------- December 31 December 31, March 31, December 31,
1999 1998 1999 1998 1998 1997
--------------- -------------- ----------- ------------- -------------- --------------
Cumulative translation $ (824) $ 616 $ (1,440) $ 616 $(517) $ (956)
adjustment
Accumulated other
comprehensive (loss) income $ (824) $ 616 $ (1,440) $ 616 $(517) $ (956)
--------------- -------------- ----------- ------------- -------------- --------------
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings or financial position. The
Company is required to adopt SFAS 133 on January 1, 2001.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
3. ORION ATLANTIC
Orion Atlantic was a Delaware limited partnership formed to provide
international private communications networks and basic transponder capacity and
capacity services (including ancillary ground services) to businesses and
institutions with trans-Atlantic and intra-European needs. As of December 31,
1998, Orion Atlantic merged with Loral Orion Services, Inc. The business was
organized by Orion Network Services ("Orion"), the general partner of Orion
Atlantic. The principal purposes of Orion Atlantic was to finance the
construction, launch and operation of up to two telecommunications satellites in
geosynchronous orbit over the Atlantic Ocean and to establish a multinational
sales and service organization. Eight international corporations, including
Orion, invested a total of $90 million in equity as limited partners in Orion
Atlantic. Orion Atlantic through January 1997, was financed by a credit facility
which provided up to $251 million for the first satellite from a syndicate of
major international banks led by Chase Manhattan Bank, N.A. In addition to their
equity investments, the limited partners had agreed to lease capacity on the
satellites up to an aggregate $155 million and had entered into additional
contingent capacity lease contracts ("contingent call") up to an aggregate $271
million, as support for repayment of the senior debt. The firm capacity leases
and contingent calls were payable over a seven-year period after the Orion 1
satellite was placed in service. In July 1995, January and July 1996 the limited
partners (excluding the Company) paid $7.6 million, $18.0 million and $12.1
million, respectively, pursuant to the contingent calls. As discussed in Note 1,
in January 1997, the Company acquired all of the limited partnership interests
it did not already own in Orion Atlantic.
Orion 1 -- The fixed base price of Orion 1, excluding obligations relating
to satellite performance, aggregated $227 million. In addition to the fixed base
price, the contract required payments in lieu of a further contract price
increase, aggregating approximately $44 million through 2007. Such payments are
due, generally, if 24 out of 34 satellite transponders are operating
satisfactorily. Shortly after acceptance of the satellite in January 1995, the
Company filed a warranty claim with the satellite manufacturer relating to one
transponder that was not performing in accordance with contract specifications.
In August 1995, Orion Atlantic received a one time refund of $2.75 million which
was applied as a mandatory prepayment to the senior notes payable -- banks. The
Company believes that since Orion 1 is properly deployed and operational, based
upon industry data and experience, payment of the satellite performance
obligation is highly probable and the Company capitalized the present value of
this obligation of approximately $14.8 million as part of the cost of the
satellite. The present value was estimated by discounting the obligation at 14
percent. As of March 31, 1998, in association with the Loral Merger, the
obligation was revalued and recorded at approximately $16.2 million using a 12
percent discount rate over the remaining expected term.
32
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
3. ORION ATLANTIC (CONTINUED)
Redemption of STET Partnership Interest; Issuance of New Interest to Orion.
- -- In November 1995, Orion Atlantic redeemed the limited partnership interest
held by STET (the "STET Redemption") for $11.5 million, including $3.5 million
of cash and $8 million in 12 percent promissory notes due through 1997. STET's
firm and contingent capacity leases remained in place until released by the
Banks under the Orion 1 Credit Facility. STET's existing contractual
arrangements with Orion Atlantic were modified in a number of respects,
including (i) a reduction of approximately $3.5 million in amounts due by Orion
Atlantic to Telespazio S.p.A., an affiliate of STET, over a ten-year period
under contracts relating to the construction of Orion 2, back-up tracking,
telemetry and command services through a facility in Italy and engineering
consulting services, (ii) the establishment of ground operations and
distribution agreements between Orion Atlantic and Telecom Italia, a subsidiary
of STET, relating to Italy, and the granting to Telecom Italia of exclusive
marketing rights relating to Italy for a period ending December 1998 conditioned
upon Telecom Italia achieving certain sales quotas, and (iii) canceling
exclusive ground operations and sales representation agreements between Orion
Atlantic and STET (or its affiliates) relating to Eastern Europe.
Orion Atlantic funded the STET Redemption by selling a new limited
partnership interest to Orion for $8 million (including $3.5 million in cash and
$4.5 million in 12 percent promissory notes due through 1997). In connection
with the STET redemption, Orion agreed to indemnify Telecom Italia for payments
which were made in July 1995 of approximately $1 million and which would be made
in the future under its firm and contingent capacity agreements with Orion
Atlantic and posted a $10 million letter of credit to support such indemnity.
The Company accounted for this transaction as an acquisition of a minority
interest and, as a result, approximately $3.1 million was allocated to the cost
of the Telstar 11 satellite and related equipment.
During 1995, Orion Atlantic entered into agreements with certain limited
partners (including the Company) under which the participating limited partners
voluntarily gave up their rights to receive capacity under their firm capacity
agreements through January 1996. The participating limited partners continued to
make payments for such capacity but have the right to receive refunds from Orion
Atlantic out of cash available after operating costs and payments under the
Credit Facility. In addition, services revenue included $4.1 million in 1997
from limited partners pursuant to the firm capacity commitments, not subject to
refund. In connection with the Exchange described in Note 1, such rights were
acquired by the Company.
4. COMMITMENTS AND CONTINGENCIES
Telstar 11 (formerly Orion 1) -- In November 1995, a component on Telstar
11 malfunctioned, resulting in a 2-hour service interruption. The malfunctioning
component supported nine transponders serving the European portion of Telstar
11's footprint. Full service was restored using a back-up component. If that
back-up component fails, Telstar 11 would lose a significant amount of usable
capacity. In such event, while the Company would be entitled to insurance
proceeds of approximately $195 million as of December 1999, and could lease
replacement capacity and function as a reseller with respect to such capacity,
the loss of capacity would have a material adverse effect on the Company.
Telstar 12 (formerly Orion 2) -- During the second quarter of 1998, the
Company entered into a satellite procurement contract with Space Systems/Loral
("SS/L"), a wholly owned subsidiary of Loral SpaceCom Corporation, for the
construction and launch of the Telstar 12 satellite for operation in the
Atlantic Ocean region at 12(degree) W.L. (the "SS/L Contract"). In connection
therewith, the Company notified Matra Marconi Space ("Matra") that it was
canceling its satellite procurement contract with Matra for the construction and
launch of a satellite for operation in the Atlantic Ocean region at 12(degree)
W.L. (the "Matra Contract"). The Company had no obligation to make further
payments to Matra as a result of this cancellation, but Matra retained amounts
previously paid by the Company of $49.1 million. As of March 31, 1998, in
association with the Merger, these costs and other internal direct costs,
totaling approximately $61 million, capitalized in connection with the
construction of the Telstar 12 satellite, were written off to costs in excess of
net assets acquired. Loral CyberStar's cash was used to fund the SS/L Contract
up to an amount that when added to the amounts previously paid to Matra, did not
exceed $202 million, the total amount that would otherwise have been due to
Matra if the Matra Contract had not been canceled. All requirements to SS/L in
excess of $202 million for Telstar 12 were funded with
33
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
additional equity contributed from Loral.
Telstar 12 , a high power satellite with 38 Ku-band transponders, expands
Loral CyberStar's European coverage and extends coverage to portions of the
former Soviet Union, Latin America, the Middle East and South Africa. Telstar 12
was launched aboard an Ariane launch vehicle in October 1999 into 15 degrees
W.L., and commenced operations in January 2000. Although Telstar 12 was
originally intended to operate at 12 degrees W.L., Loral Cyberstar reached an
agreement with Eutelsat to operate Telstar 12 at 15 degrees W.L. while Eutelsat
continued to develop its services at 12.5 degrees W.L. Eutelsat has in turn
agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority
rights at such location on Loral CyberStar's behalf. As part of this
coordination effort, Loral CyberStar agreed to provide to Eutelsat four
transponders on Telstar 12 for the life of the satellite. 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, the Company
continues to conduct discussions with various administrations regarding Telstar
12's operations at 15 degrees W.L. If these discussions are not successful,
Telstar 12's useable capacity may be reduced.
Agreements with Loral Skynet - During the fourth quarter of 1998, Loral
completed its integration plan for Loral CyberStar and transferred management of
Loral CyberStar's satellite capacity leasing and satellite operations to Loral
Skynet, effective January 1, 1999. Loral CyberStar and Loral Skynet, a division
of Loral SpaceCom Corporation, which in turn is a wholly-owned subsidiary of
Loral, have entered into agreements (the "Loral Skynet Agreements") effective
January 1, 1999, whereby Loral Skynet provides to Loral CyberStar (i) marketing
and sales of satellite capacity services on the Loral CyberStar satellite
network and related billing and administration of customer contracts for those
services (the "Sales Services") and (ii) telemetry, tracking and control
services for the Loral CyberStar satellite network (the "Technical Services",
and together with the Sales Services, the "Services"). Loral CyberStar is
charged Loral Skynet's costs for providing these services plus a 5 percent
administrative fee (see Note 8).
Litigation -- On November 9, 1996, Orion and Skydata Corporation
("Skydata") executed a letter with respect to the settlement in full of pending
litigation and arbitration related to a patent dispute. As part of the
settlement, Skydata granted Orion (and its affiliates) an unrestricted,
world-wide paid-up license to make, use or sell products or methods under the
patent and all other corresponding continuation and reissue patents. Orion has
paid Skydata $437,000 during 1997 and 1998 as part of this settlement.
The Company is party to various litigation arising in the normal course of
its operations. In the opinion of management, the ultimate liability for these
matters, if any, will not have a material adverse effect on the Company's
financial position or results of operations.
Lease arrangements - The Company has entered into operating leases,
principally for office space and space segment capacity from third parties. Rent
expense was $7.9 million, $2.8 million, $0.3 million and $1.3 million for the
year ended December 31, 1999, the nine months ended December 31, 1998, the three
months ended March 31, 1998 and the year ended December 31, 1997, respectively.
34
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments are as follows (in thousands):
2000............................ $ 15,426
2001............................ 10,868
2002............................ 10,830
2003............................ 5,820
2004............................ 4,650
Thereafter...................... 14,000
--------------
$ 61,594
==============
Future minimum lease receipts due from customers under non-cancelable
operating leases for transponder capacity on satellites in-orbit and for service
agreements as of December 31, 1999, are as follows (in thousands):
2000............................ $ 168,977
2001............................ 130,990
2002............................ 92,024
2003............................ 55,507
2004............................ 39,647
Thereafter...................... 141,328
--------------
$ 628,473
==============
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
December 31,
---------------- ---------------
1999 1998
Senior notes (including premium of $58.7 and
$64.6 million at December 31, 1999 and 1998, respectively $ 501,734 $ 507,573
Senior discount notes (principal amount at maturity
$484 million and accreted principal amount
$378 million at December 31, 1999 and 1998, respectively 448,408 408,812
Notes payable - TT&C Facility.......................... 3,729 4,953
Satellite incentive obligations........................ 11,129 11,376
Other.................................................. 370 781
--------------- -------------
Total debt........................................ 965,370 933,495
Less: current portion.................................. (2,071) (1,826)
--------------- -------------
Long-term debt.................................... $ 963,299 $ 931,669
=============== =============
35
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
Total interest (including commitment fees, capitalized interest and amortization
of deferred financing costs) incurred for the year ended December 31, 1999, the
nine months ended December 31, 1998, the three months ended March 31, 1998 and
the year ended December 31, 1997 was $90.1 million, $62.8 million, $24.5 million
and $91.1 million, respectively. Capitalized interest for the year ended
December 31, 1999, the nine months ended December 31, 1998, the three months
ended March 31, 1998 and the year ended December 31, 1997, was $20.3 million,
$16.4 million, $3.3 million and $7.3 million, respectively. Aggregate annual
maturities of long-term debt consist of the following (in thousands):
2000.................................... $ 2,071
2001.................................... 2,509
2002.................................... 2,623
2003.................................... 1,728
2004.................................... 1,738
Thereafter.............................. 954,701
-----------------
$ 965,370
==================
Senior Notes and Senior Discount Notes -- On January 31, 1997, the Company
completed a $710 million bond offering (the "Bond Offering") comprised of
approximately $445 million of Senior Note Units, each of which consisted of one
11.25 percent Senior Note due 2007 (a "Senior Note") and one Warrant to purchase
0.8463 shares of common stock, par value $.01 per share ("Common Stock") of the
Company (a "Senior Note Warrant"), and approximately $265.4 million of Senior
Discount Note Units, each of which consisted of one 12.5 percent Senior Discount
Note due 2007 (a "Senior Discount Note," and together with the Senior Notes, the
"Notes") and one Warrant to purchase 0.6628 shares of Common Stock of the
Company (a "Senior Discount Note Warrant and together with the Senior Note
Warrants, the "Warrants"). Interest on the Senior Notes is payable semi-annually
in cash on January 15 and July 15 of each year, commencing July 15, 1997. The
Senior Discount Notes do not pay cash interest prior to January 15, 2002.
Thereafter, cash interest accrues until maturity at an annual rate of 12.5
percent payable semi-annually on January 15, and July 15 of each year,
commencing July 15, 2002. These warrants were assumed by Loral as a result of
the Loral Merger and were converted to warrants to acquire Loral common stock.
The Company made cash interest payments of $25.0 million $24.9 million in
January 1998 and July 1998 and $24.9 million in January 1999 and July 1999, on
the Senior Notes. The indentures supporting the Senior Notes and the Senior
Discount Notes contain certain covenants which, among other things, restrict
distributions to stockholders of the Company, the repurchase of equity interests
in the Company and the making of certain other investments and restricted
payments, the incurrence of additional indebtedness by the Company and its
restricted subsidiaries, the creation of liens, certain asset sales, transaction
with affiliates and related parties, and mergers and consolidations. The Company
is in compliance with the requirements of such indentures. The exercise price
for the Warrants will be $.01 per share of common stock. There were 697,400
Warrants issued in connection with the Notes (see Note 6). On May 27, 1998, $2
million of Senior Notes were redeemed at 101 percent of the principal amount of
the notes plus accrued interest to the payment date, and resulted in a gain on
retirement of debt of approximately $0.3 million. The accreted principal value
of the Senior Discount Notes was $378 million and $334 million at December 31,
1999 and 1998, respectively.
Convertible Junior Subordinated Debentures -- On January 31, 1997, in
connection with the Financings discussed in Note 1, the Company completed the
sale of $60 million of its convertible junior subordinated debentures (the
"Convertible Debentures") to two investors, British Aerospace Holdings, Inc.
("British Aerospace") and Matra Marconi Space UK Limited ("Matra Marconi
Space"). British Aerospace purchased $50 million of the Convertible Debentures
and Matra Marconi Space purchased $10 million of the Convertible Debentures. The
Convertible Debentures were to mature in 2012, and bore interest at a rate of
8.75 percent per annum that was to be paid semi-annually in arrears solely in
Common Stock of the Company. The Convertible Debentures were subordinated to all
other indebtedness of the Company, including the Notes. Matra Marconi Space
converted their $10 million of Convertible Debentures and accrued interest into
735,292 shares of common stock in December 1997. In March 1998, British
Aerospace converted their $50 million of Convertible Debentures and accrued
interest into approximately 3.6 million shares of common stock. As of December
31, 1998, all of the debentures had been converted to common stock.
36
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
The net proceeds of the Bond Offering and Debentures Offering were used by
the Company to repay the Orion 1 Credit Facility, pre-fund the first three years
of interest payments on certain of the Notes, and to build and launch two
additional satellites, Telstar 12 and Orion 3.
The extraordinary loss on extinguishment of debt of $15.8 million in 1997
was the result of expensing unamortized deferred financing costs associated with
the Orion 1 Credit Facility which was refinanced with the proceeds from the Bond
Offering and termination of an interest rate cap agreement.
Note Payable - TT&C Facility -- In June 1995 upon acceptance of the TT&C
Facility, the Company refinanced $9.3 million from General Electric Credit
Corporation as a seven-year term loan, payable monthly. The interest rate is
fixed at 13.5 percent. The TT&C debt is secured by the TT&C Facility, the
Satellite Control System Contract and the Company's leasehold interest in the
TT&C Facility land. The TT&C financing agreement contains customary
representations, warranties and covenants regarding certain activities of the
Company. The Company is in compliance with the requirements of the financing
agreement.
Satellite Incentive Obligations --The obligations relating to satellite
performance have been recorded at the present value (discounted at 14 percent
for Orion and 12 percent after the Merger, the Company's estimated incremental
borrowing rate for unsecured financing) of the required payments through 2007.
During 1999 and 1998, payments aggregating $1.6 million and $7.2 million,
respectively, were made pursuant to this obligation.
Notes Payable - STET -- In connection with the STET Redemption, the Company
issued $8 million of promissory notes bearing interest at 12 percent per annum.
At December 31, 1997, the $8 million promissory notes issued in connection with
the STET Redemption had been repaid.
Notes Payable - Limited Partners -- In January 1997, the Company issued
Series C Convertible Preferred Stock in exchange for the Preferred Participation
Units (PPUs) aggregating $8.1 million due to certain former limited partners for
development of Orion Atlantic's network services business. Holders of PPUs
earned interest on aggregate amounts drawn at the rate of 30 percent per annum.
As of March 31, 1998, the Series C Convertible Preferred Stock issued in
exchange for the PPUs have been converted to common stock.
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
As of March 31, 1998, all of the redeemable convertible preferred stock
outstanding at December 31, 1997, including accrued dividends on Series C
Preferred Stock, were converted to approximately 6.1 million shares of common
stock at prices ranging from $8.50 to $17.80 per share.
Redeemable Preferred Stock
In June 1994, the Company issued 11,500 shares of Series A 8 percent
Cumulative Redeemable Convertible Preferred Stock at $1,000 per share and
granted an option to purchase an additional 3,833 shares of similar preferred
stock at $1,000 per share. Dividends on preferred stock accrued at 8 percent per
year and were payable as and when declared. The Company could redeem the
preferred stock at the amount invested plus accrued and unpaid dividends. Upon
such a redemption, the preferred stockholders were to receive a warrant to
acquire at $8.50 per share the number of shares of common stock into which the
preferred stock was convertible. The 11,500 shares issued were convertible into
1,352,941 shares of common stock ($8.50 per share). Upon conversion, accrued and
unpaid dividends were forfeited. After the Company issued preferred stock (along
with warrants and options to make an additional investment) in June 1994, the
Directors and affiliates of Directors who purchased common stock in December
1993 and the institutions and other investors who purchased common stock in June
1994 each exercised its right to receive preferred stock (along with warrants
and options to make an additional investment) in exchange for the common stock
previously acquired and the Company issued an aggregate of 3,000 shares of
37
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
Series A Preferred Stock and related options for 1,000 shares to such persons
and entities. The 3,000 shares issued were convertible into 352,941 shares of
common stock ($8.50 per share). Through December 31, 1997, 7,567 shares of
preferred stock were converted into 890,235 shares of common stock. The
remaining 6,933 shares outstanding were convertible into 815,647 shares of
common stock at December 31, 1997. All Series A Preferred Stock outstanding was
converted into common stock in connection with the Merger.
In June 1995, certain Directors, affiliates of Directors, and certain
holders of Series A Preferred Stock purchased 4,483 shares of Series B Preferred
Stock for approximately $4.5 million. This purchase was pursuant to an option
granted in June 1995 to purchase $1 of preferred stock similar to the Series A
Preferred Stock for each $3 of Series A Preferred Stock purchased in June 1994,
except that such similar preferred stock would be convertible at any time with
Common Stock at a price within a range of $10.20 to $17.00 per share of common
stock based upon when the option is exercised. The Series B Preferred Stock had
rights, designations and preferences substantially similar to those of the
Series A Preferred Stock, and was subject to similar covenants, except that the
Series B Preferred Stock was convertible into 439,510 shares of Common Stock at
an initial price of $10.20 per share, subject to certain anti-dilution
adjustments, and purchases of Series B Preferred Stock did not result in the
purchaser receiving any rights to purchase additional preferred stock. Through
December 31, 1997, 2,424 shares of preferred stock were converted into 237,647
shares of common stock. The remaining 2,059 shares outstanding were convertible
into 201,862 shares of common stock at December 31, 1997. All Series B Preferred
Stock outstanding was converted into common stock in connection with the Merger.
In January 1997 the Company issued 123,172 shares of Series C
Cumulative Redeemable Preferred Stock to British Aerospace Communications, Inc.,
COM DEV Satellite Communications Limited, Kingston Communications International
Limited, Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., and
Trans-Atlantic Satellite, Inc. in exchange for their Orion Atlantic partnership
interests. Dividends on the preferred stock accrued at 6 percent per year and
were distributable in the Company's common stock calculated based on the market
price of such stock under a formula provided in the Certificate of Designations.
The shares were convertible into approximately 7 million shares ($17.50 per
share) of the Company's common stock. Through December 31, 1997, 40,531 shares
of preferred stock, including dividends, were converted into approximately 2.4
million shares of common stock. Series C Cumulative Preferred Stock was recorded
net of deferred offering costs of approximately $3.3 million. The Series C
Cumulative Preferred Stock was subject to mandatory redemption at par value in
25 years. The difference between the carrying value and par value was being
accreted over such period.
The preferred stock had a liquidation preference equal to the amount
invested plus accrued and unpaid dividends. Preferred stockholders were entitled
to vote on an as-converted basis and had the right to put the stock to the
Company upon a merger, change of control or sale of substantially all assets at
the greater of liquidation value or fair value. All Series C Preferred Stock was
converted into common stock in connection with the Merger.
Stockholders' Equity
1987 Employee Stock Option Plan - Under the 1987 Employee Stock Option
Plan, 1,470,588 shares of common stock were reserved for issuance upon exercise
of options granted. Shares of common stock were generally purchased under this
plan at prices not less than the fair market value, as determined by the Board
of Directors, on the date the option was granted.
38
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
6. Redeemable Preferred Stock and Stockholders' Equity (continued)
In November 1993, stock options for 95,588 shares of common stock were
granted to key executives which may be exercised only upon the achievement of
certain business and financial objectives. At December 31, 1995, the executives
had earned the right to exercise 40,441 of these options based on the
achievement of such objectives. The remaining options were canceled during 1996.
Stock options vested annually over a one to five-year period. All options
were exercisable up to seven years from the date of grant. The Company's 1987
Employee Stock Option Plan expired in 1997. No further shares are available for
grant under this plan. There were 506,803 options exercisable at December 31,
1997.
In July 1996, the Company granted, subject to shareholder approval, the
Chairman of the Executive Committee 100,000 options at $9.83 per share. These
options vested as follows, 50,000 on January 17, 1997 and 50,000 upon successful
completion of either a refinancing of the Orion 1 satellite, financing for
construction, launch and insurance for Orion 2 or Orion 3 or a substantial
acquisition or relationship with a strategic partner. These requirements were
met in January 1997.
In March 1998, the 1987 Employee Stock Option Plan was assumed by Loral and
all outstanding options were converted to options to acquire Loral common stock.
Stock options under the 1987 Employee Stock Option Plan outstanding at:
Predecessor Company
March 31, December 31,
--------------- ----------------
1998 1997
Range of exercise price.............. $8.16 - $12.29 $8.16 - $12.29
============== ==============
Outstanding at beginning of period . 1,174,310 911,663
Granted during period................ -- 400,670
Exercised............................ (157,041) (81,383)
Canceled............................. (1,250) (56,640)
Converted to options to acquire
Local common stock.............. (1,016,019) --
-------------- --------------
Outstanding at end of period......... -- 1,174,310
============== ==============
1997 Employee Stock Option Plan - In 1997, the Company adopted a second
stock option plan. Under this plan, as amended, 1,300,000 shares of common stock
were reserved for issuance upon exercise of options granted. Shares of common
stock could be purchased under this plan at prices not less than the fair value
as determined by the Board of Directors, on the date the option were granted.
In March 1998, the 1997 Employee Stock Option Plan was assumed by Loral and
all outstanding options were converted to options to acquire Loral common stock.
Stock options under the 1997 Employee Stock Option Plan outstanding at:
Predecessor Company
--------------------------------
March 31, December 31,
1998 1997
-------------- ---------------
Range of exercise price............. $9.30 - $17.06 $9.30 - $17.06
============== ===============
Outstanding at beginning of period.. 552,000 --
Granted during period............... -- 556,000
Exercised ......................... (5,000) --
Canceled ......................... (80,000) (4,000)
Converted to options to acquire
Local common stock............. (467,000) --
-------------- ---------------
Outstanding at end of period........ -- 552,000
============== ===============
Non-Employee Director Stock Option Plan - In 1996, the Company adopted a
Non-Employee Director Stock Option plan. Under this plan, 380,000 shares of
common stock were reserved for issuance. During 1997, there were 80,000 options
granted pursuant to this plan at $9.60 per share. At December 31, 1997,
aggregate options outstanding pursuant to this plan totaled 270,000, of which,
180,000 were exercisable at prices ranging from $8.49 to $12.53 per share.
In March 1998, the Non-Employee Director Stock Option Plan was assumed by
Loral and all outstanding options were converted to options to acquire Loral
common stock.
39
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
Compensation expense relating to these plans was not significant.
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related
Interpretations in accounting for its employee stock based award programs,
because the alternative fair value accounting provided for under FASB Statement
No. 123, Accounting for Stock Based Compensation ("SFAS 123") which is effective
for awards after January 1, 1996, requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25, when
the exercise price of the employee award equals the market price of the
underlying stock on the date of grant, as has been the case historically with
the Company's awards, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share required
by SFAS 123, has been determined as if the Company had accounted for its stock
options under the fair value method of that statement. The fair value of these
options was estimated at the date of the grant using a Black-Scholes valuation
model with the following assumptions as of March 31, 1998 and December 31, 1997:
Risk-free interest rate ............. 6.5%
Expected dividend yields ............ 0.0%
Expected life of option ............. 6.5 years
Volatility of the Company's stock ... 69%
40
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The effect of
applying SFAS 123 on pro forma net loss is not necessarily representative of the
effects on reported net loss for future years due to, among other things, (1)
the vesting period of the stock options and the (2) fair value of additional
stock options in future years. The Company's pro forma information are as
follows (in thousands, except per share information):
Predecessor Company
-------------------------------
Three months Year Ended
Ended December 31,
March 31, 1997
1998
--------------- ----------------
Pro forma net loss ......................... $ (40,777) $ (110,703)
=============== ================
Pro forma net loss per share ............... -- $ (10.03)
=============== ================
401(k) Profit Sharing Plan -- In September 1996, the Company amended the
401(k) profit sharing plan. Under this plan, 100,000 shares of common stock were
reserved for issuance as the Company's discretionary match of employee
contributions. The Company's matching contributions may be made in either cash
or in the equivalent amount of the Company's common stock. For the four months
ended April 30, 1998 and the year ended December 31, 1997, the Company's
matching contribution was 3,341 and 10,480 shares of the Company's common stock
with a value of approximately $60,000 and $180,000, respectively.
Effective May 1, 1998, the 401(k) Profit Sharing Plan was merged into the
Loral Space and Communications Ltd. Savings Plan and $0.8 million of matching
contributions were incurred in this plan for the period May 1, 1998 through
December 31, 1998. During the period ended December 31, 1999, $0.4 million of
matching contributions were incurred in this plan.
Stock Purchase Plan -- In September 1996, the Company adopted an employee
stock purchase plan. Under this plan, 500,000 shares of common stock were
reserved for issuance. Shares of common stock were purchased under this plan
through payroll deduction. The purchase price of each share of common stock
purchased under the plan was 85 percent of the fair market value of the common
stock on the measurement date. During 1998 and 1997 the Company issued 20,180
and 27,731 shares, respectively, pursuant to the Plan. In March 1998 the Stock
Purchase Plan was terminated.
Stock Warrants - In November 1996, the Company granted 50,000 warrants to
DACOM to purchase shares of common stock at $14 per share. The warrants were
exercisable for a six month period beginning six months after the commencement
date, as defined in the Joint Investment Agreement with DACOM, and ending one
year after the commencement date and terminated at that time or at any time the
Joint Investment Agreement was terminated. The fair value of the warrants at the
date of issue was $300,000 and was estimated using a Black Scholes valuation
model.
41
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
Warrants outstanding (including the warrants issued to DACOM as discussed
above) at:
Predecessor Company
-------------------------------------
March 31, December 31,
1998 1997
---------------- -------------------
Range of exercise price............. $ 0.01 - $14.00 $ 0.01 - $14.00
================ ===================
Outstanding at beginning of period.. 740,550 142,115
Granted during period............... -- 697,400
Exercised ......................... (2,518) (96,159)
Canceled ......................... -- (2,806)
Converted to warrants to acquire
Local common stock............. (738,032) --
---------------- -------------------
Outstanding at end of period........ -- 740,550
================ ===================
There were 690,550 warrants exercisable at December 31, 1997.
The holders of preferred stock also held warrants to purchase 1,017,509
shares of common stock at the conversion price of such preferred stock. These
warrants did not become exercisable unless the Company exercised its right to
repurchase the preferred stock at the liquidation value, plus accrued and unpaid
dividends. As of March 31, 1998, these warrants were forfeited as a result of
the conversion of all preferred stock to common stock.
In January 1997, the Company issued Senior Note Warrants and Senior
Discount Note Warrants to acquire 376,608 and 320,792 shares of common stock,
respectively at $.01 per share in connection with the Bond Offering. The
warrants were not exercisable prior to six months after the closing date of the
Bond Offering and became separately transferable from the Notes six months from
date of issuance. The estimated fair value of the warrants aggregating $9.6
million was allocated $5.2 million to Senior Notes and $4.4 million to Senior
Discount Notes as debt discount. At December 31, 1997, 6,850 warrants were
converted into 5,797 shares of common stock. In March 1998, the warrants were
converted to warrants to purchase Loral common stock.
Shares Reserved for Issuance - The Company had no shares of common stock at
December 31, 1999 and 1998, reserved for issuance upon conversion of debentures
and preferred stock, exercise of outstanding stock options and warrants, and
common stock issued under the stock purchase and 401(k) profit sharing plans.
Loral's 1996 Stock Option Plan - Certain employees of Loral CyberStar
participate in Loral's 1996 Stock Option Plan. Under this plan, options are
granted at the discretion of Loral's Board of Directors to employees of Loral
and its affiliates. Such options become exercisable as determined by the Board,
generally over five years, and generally expire no more than 10 years from the
date of grant. For the year ended December 31, 1999, Loral granted certain key
employees of Loral CyberStar 519,000 options to purchase Loral common stock at a
weighted average price of $17.22 per share (weighted average fair value of $5.72
per share). For the nine months ended December 31, 1998, Loral granted options
at a weighted average price of $24.55 per share (weighted average fair value of
$5.88 per share). During 1999, 620 options were exercised and 179,860 were
cancelled and at December 31, 1999, options to purchase 807,180 shares were
outstanding, 63,836 of which were exercisable and at December 31, 1998, no
options were exercised, options to purchase 513,420 shares were outstanding,
1,200 of which were exercisable.
42
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
6. REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
As described above, Loral CyberStar accounts for its stock-based awards
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and its related
interpretations. SFAS No. 123, "Accounting for Stock-Based Compensation"
requires the disclosure of pro forma net income (loss) as if Loral CyberStar had
adopted the fair value method. SFAS No. 123 requires that equity instruments
granted to an employee by a principal stockholder be included as part of the
disclosure. The pro forma incremental effect on net loss required to be
disclosed under SFAS No. 123 is approximately $0.8 million and $1.9 million for
the year ended December 31, 1999 and the nine months ended December 31, 1998,
respectively.
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, 30% in 1999 and 25% for the
nine months ended December 31, 1998; risk free interest rate, 4.4% to 6.6% based
on date of grant; and no dividends during the expected term.
7. FAIR VALUES OF FINANCIAL INSTRUMENTS
Other than amounts due under the Senior Notes and Senior Discount Notes,
CyberStar believes that the carrying amounts reported in the balance sheets of
its other financial assets and liabilities approximates their fair value at
December 31, 1999 and 1998. The fair value of the Company's Senior Notes and
Senior Discount was estimated based on quoted market prices and at December 31,
1999 and 1998, were approximately $327.8 million and $438.6 million, and $213.0
million and $304.9 million, respectively.
8. SEGMENTS
The Company has two reportable business segments: Fixed Satellite Services
and Data Network Services (see Note 1).
In evaluating financial performance, management uses revenues and
earnings before interest, taxes and depreciation and amortization ("EBITDA") as
the measure of a segment's profit or loss. The accounting policies of the
reportable segments are the same as those described in Note 2.
Summarized financial information concerning the reportable segments is as
follows:
1999
SEGMENT INFORMATION
(in millions)
FIXED TOTAL
SATELLITE SERVICES REPORTABLE INTERSEGMENT
SERVICES DATA NETWORK SEGMENTS ELIMINATIONS CONSOLIDATED
--------------- --------------- --------------- --------------- --------------
Revenue from external customers ...... $ 35.7 $ 69.2 $ 104.9 $ -- $ 104.9
Intersegment revenue ................. 7.1 -- 7.1 (7.1) --
--------------- --------------- --------------- --------------- --------------
Gross revenue ........................ $ 42.8 $ 69.2 $ 112.0 $ (7.1) $ 104.9
=============== =============== =============== =============== ==============
EBITDA1 .............................. $ 21.9 $ (8.3) $ 13.6 $ -- $ 13.6
Depreciation and amortization ........ 60.4 15.4 75.8 -- 75.8
--------------- --------------- --------------- --------------- --------------
Loss from operations ................. $ (38.5) $ (23.7) $ (62.2) $ -- $ (62.2)
=============== =============== =============== =============== ==============
Total assets ......................... $ 1,605.0 $ 589.5 $ 2,194.5 $ (510.2) $ 1,684.3
=============== =============== =============== =============== ==============
Capital expenditures.................. $ 292.9 $ 14.6 $ 307.5 $ -- $ 307.5
=============== =============== =============== =============== ==============
43
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
8. SEGMENTS (CONTINUED)
NINE MONTHS ENDED DECEMBER 31, 1998
SEGMENT INFORMATION
(IN MILLIONS)
FIXED TOTAL
SATELLITE DATA NETWORK REPORTABLE
SERVICES SERVICES SEGMENTS CONSOLIDATED
--------------- --------------- -------------- --------------
Revenue from external customers ...... $ 25.2 $ 39.4 $ 64.6 $ 64.6
=============== =============== ============== ==============
EBITDA 1 ............................. $ 16.3 $ (8.3) $ 8.0 $ 8.0
Depreciation and amortization ........ 41.6 9.8 51.4 51.4
Merger costs ......................... -- -- -- 0.6
--------------- --------------- -------------- --------------
Income (loss) from operations ........ $ (25.3) $ (18.1) $ (43.4) $ (44.0)
=============== =============== ============== ==============
Total assets ......................... $ 1,325.7 $ 91.8 $ 1,417.5 $ 1,417.5
=============== =============== ============== ==============
Capital expenditures ................. $ 272.1 $ 12.0 $ 284.1 $ 284.1
=============== =============== ============== ==============
THREE MONTHS ENDED MARCH 31, 1998
SEGMENT INFORMATION
PREDECESSOR COMPANY
(IN MILLIONS)
FIXED TOTAL
SATELLITE DATA NETWORK REPORTABLE
SERVICES SERVICES SEGMENTS CONSOLIDATED
--------------- --------------- -------------- --------------
Revenue from external customers ...... $ 7.9 $ 10.9 $ 18.8 $ 18.8
=============== =============== ============== ==============
EBITDA 1 ............................. $ 5.1 $ (4.1) $ 1.0 $ 1.0
Depreciation and amortization ........ 9.6 2.9 12.5 12.5
Merger costs ......................... -- -- -- 12.1
--------------- --------------- -------------- --------------
Income (loss) from operations......... $ (4.5) $ (7.0) $ (11.5) $ (23.6)
=============== =============== ============== ==============
Total assets ......................... $ 1,333.0 $ 98.2 $ 1,431.2 $ 1,431.2
=============== =============== ============== ==============
Capital expenditures ................. $ 14.8 $ 3.6 $ 18.4 $ 18.4
=============== =============== ============== ==============
44
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
8. SEGMENTS (CONTINUED)
1997
SEGMENT INFORMATION
PREDECESSOR COMPANY
(IN MILLIONS)
FIXED TOTAL
SATELLITE DATA NETWORK REPORTABLE
SERVICES SERVICES SEGMENTS CONSOLIDATED
--------------- --------------- -------------- --------------
Revenue from external customers ...... $ 31.3 $ 41.4 $ 72.7 $ 72.7
=============== =============== ============== ==============
EBITDA 1 ............................. $ 21.3 $ (16.2) $ 5.1 $ 5.1
Depreciation and amortization ........ 34.1 14.1 48.2 48.2
--------------- --------------- -------------- --------------
Income (loss) from operations......... $ (12.8) $ (30.3) $ (43.1) $ (43.1)
=============== =============== ============== ==============
Capital expenditures ................. $ 102.3 $ 11.0 $ 113.3 $ 113.3
=============== =============== ============== ==============
Total assets ......................... $ 849.0 $ 47.5 $ 896.5 $ 896.5
=============== =============== ============== ==============
- ----------
1 EBITDA (which is equivalent to operating income (loss) efore deprciation
and amortization and merger costs) is provided because it is a measure
commonly used in the communication industry to analyze companies on the
basis of operating performance, leverage and liquidity and is presented to
enhance the understanding of Loral CyberStar's operating results. However,
EBITDA is not an alternative to net income as an indicator of a company's
operating performance, or cash flow from operations as a measure of a
company's liquidity. EBITDA may be calculated differently ans, therefore,
may not be comparable to similarly titled measures reported by other
companies.
With the exception of the Company's satellites in orbit, the Company's
long-lived assets are primarily located in the United States, Germany and other
foreign countries, and at December 31, 1999 and December 31, 1998, amounted to
approximately $65.0 million and $4.6 million, $2.1 million and $365.1 million,
$10.1 million and $1.2 million, respectively.
45
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
9. RELATED PARTY TRANSACTIONS
During 1999, Loral CyberStar, Inc. obtained additional financing (via an
intercompany note from Loral Space & Communications Corporation) to complete the
construction of its satellite fleet and meet its operating requirements.
Borrowings under this note can be made for periods of 1, 2, 3 or 6 months and
bear interest at LIBOR (5.31% at December 31, 1999) plus 275 basis points. The
intercompany note can be prepaid at any time without penalty and is payable on
demand. During 1999, the note was transferred from Loral Space & Communications
Corporation to Loral SpaceCom Corporation. At December 31, 1999, the outstanding
borrowing amount under this intercompany note was $74.1 million (including
accrued interest of $4.1 million) and is reflected on the balance sheet as a
note payable to Loral SpaceCom.
Space Systems/Loral built the Telstar 12 satellite for Loral CyberStar,
Inc. that was launched in October 1999 and commenced revenue generating
operations in January 2000. At December 31, 1999, Loral CyberStar had a payable
balance to Space Systems/Loral of $15.7 million, representing the final payment
on the satellite construction contract of $9.8 million (due in March 2000) and
$5.9 million of long-term insurance costs (due in 2001).
Loral CyberStar Data Network Services leases transponder capacity from
Loral Skynet. At December 31, 1999, Loral CyberStar, Inc. had a payable to Loral
Skynet of $0.3 million. Loral Skynet also provides telemetry, tracking and
control services for the Loral CyberStar satellite network. The Company is
charged Loral Skynet's costs for providing these services plus a 5 percent
administrative fee, which amounted to $18.7 million for 1999.
At December 31, 1999, Loral CyberStar maintained a receivable balance from
Cyberstar L.P. of $0.2 million, which represented total amounts earned during
the year and as of year end for services performed on behalf of CyberStar L.P..
At December 31, 1998, Loral CyberStar had a receivable from Loral of $3.6
million. This receivable balance was generated from Loral's use of Loral
CyberStar's tax losses pursuant to a tax sharing agreement entered into in 1998.
In December 1999, in connection with a contractual arrangement between
Space Systems/Loral, a subsidiary of Loral, and one of SS/L's customers, Loral
Cyberstar agreed to lease to SS/L the capacity of three transponders on Telstar
10/Apstar IIR through the end of life of the satellite. Under this arrangement,
Loral Cyberstar will receive a reimbursement of costs until such time as Telstar
10/Apstar IIR is fully leased up, at which time thereafter, the lease rates
would be increased to market rates.
10. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1999 and 1998 (in thousands):
March 31, June 30, September 30, December 31,
---------------- -------------- -------------- --------------
1999
Revenues................................... $ 22,538 $ 24,072 $ 25,168 $ 33,104
Loss from operations....................... (13,471) (11,928) (13,972) (22,820)
Loss before income taxes................... (26,069) (28,320) (31,136) (39,007)
Net loss .................................. (24,235) (27,515) (31,622) (30,803)
Predecessor
Company
March 31, June 30, September 30, December 31,
---------------- -------------- -------------- --------------
1998
Revenues................................... $ 18,790 $ 20,243 $ 21,153 $ 23,212
Loss from operations....................... (23,639) (15,296) (13,951) (14,782)
Loss before income taxes................... (39,691) (28,000) (26,301) (26,701)
Net loss................................... (39,691) (19,755) (29,614) (30,600)
46
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
11. SUBSEQUENT EVENT
On March 24, 2000, Loral CyberStar entered into an agreement with a
subsidiary of Loral to assign to the Loral subsidiary, pending regulatory
approval, its Ka-band orbital slots located at 89 degrees W.L., 81 degrees W.L.,
78 degrees E.L. and 47 degrees W.L. In connection with this transaction, Loral
CyberStar also agreed to transfer to the Loral subsidiary all agreements,
including satellite construction contracts, related to such slots. The total
purchase price for the slots and these agreements was $36.5 million, which
purchase price was applied by Loral CyberStar towards the last installment
payment on Telstar 10/Apstar IIR.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURES.
As a result of the Merger, the Board of Directors of the Company appointed
Deloitte & Touche LLP ("Deloitte & Touche") as independent auditors, effective
May 13, 1998. Deloitte & Touche replaced Ernst & Young LLP ("Ernst & Young"),
which served as the Company's independent auditors for the fiscal year ended
December 31, 1997 and was dismissed, effective May 13, 1998.
The report issued by Ernst & Young on the Company's financial statements
for the fiscal year ended December 31, 1997 did not contain any adverse opinion
or disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles.
During the fiscal year ended December 31, 1997, and during the interim
period preceding May 13, 1998, (i) there were no disagreements with Ernst &
Young on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure and which, if not resolved to the
satisfaction of Ernst & Young, would have caused Ernst & Young to make reference
to these matters in their report and (ii) there were no "reportable events" (as
that term is described in Item 304(a)(i)(v) of Regulation S-K).
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omitted pursuant to General Instruction I of Form 10-K.
47
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) (1) and (2) List of Financial Statements and Financial Statement
Schedules
The following consolidated financial statements of Loral CyberStar are
included in Item 8:
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Operations - Year ended December 31,
1999 and the nine months ended December 31, 1998, and for the
Predecessor Company the three months ended March 31, 1998, and the
year ended December 31, 1997
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) - Year ended December 31, 1999 and the nine months ended
December 31, 1998, and for the Predecessor Company the three
months ended March 31, 1998, and the year ended December 31, 1997
Consolidated Statements of Cash Flows - Year ended December 31,
1999 and the nine months ended December 31, 1998, and for the
Predecessor Company the three months ended March 31, 1998, and the
year ended December 31, 1997
Notes to Consolidated Financial Statements
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(b) Reports on Form 8-K filed in the fourth quarter of 1999:
October 13, 1999 Item 5 - Other Events Apstar IIR Closing
December 2, 1999 Item 5 - Other Events Name Change
(c) Exhibits
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of October 7, 1997, by
and among Orion, Loral and Loral Satellite Corporation.
(Incorporated by reference to exhibit number 2.1 in Current
Report on Form 8-K dated October 9, 1997).
2.2 Principal Stockholder Agreement among Orion, Loral, Loral
Satellite Corporation and the stockholders that are
signatories thereto, dated as of October 7, 1997.
(Incorporated by reference to exhibit number 2.2 in Current
Report on Form 8-K dated October 9, 1997).
2.3 Amendment No. 1 Agreement and Plan of Merger, dated as of
February 11, 1998, by and among Orion, Loral and Loral
Satellite Corporation. (Incorporated by reference to exhibit
number 2.2 in Registration Statement No. 333-46407 on Form
S-4).
2.4 Amendment No. 1 to Principal Stockholder Agreement among
Orion, Loral, Loral Satellite Corporation and the stockholders
that are signatories thereto, dated as of December 1, 1997.
(Incorporated by reference to Exhibit number 2.4 in Annual
Report on Form 10-K for fiscal year ended December 31, 1997).
3.1 Certificate of Merger of Loral Satellite Corporation into
Orion dated March 20, 1998 and Exhibit A thereto, Restated
Certificate of Incorporation of the Company. (Incorporated by
reference to Exhibit 3.1 in Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.)
48
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
3.2 Certificate of Merger of Loral CyberStar, Inc. into Loral
Orion Services, Inc.*
3.3 Merger Agreement between Loral CyberStar, Inc. and Loral Orion
Services, Inc.*
3.4 Certificate of Incorporation of the Company and amendments
thereto.*
3.5 Amended and Restated Bylaws of the Company.*
4.1 Form of Senior Note Indenture and Form of Note included
therein. (Incorporated by reference to Exhibit number 4.1 to
Registration Statement No. 333-19167 on Form S-1).
4.2 Form of Senior Discount Note Indenture and Form of Note
included therein. (Incorporated by reference to Exhibit number
4.2 to Registration Statement No. 333-19167 on Form S-1).
4.3 Form of Collateral Pledge and Security Agreement.
(Incorporated by reference to Exhibit number 4.3 to
Registration Statement No. 333-19167 on Form S-1).
10.1 Second Amended and Restated Purchase Agreement, dated
September 26, 1991 ("Satellite Contract") by and between Loral
Orion Services, Inc. (formerly known as Orion Satellite
Corporation) and British Aerospace PLC and the First
Amendment, dated as of September 15, 1992, Second Amendment,
dated as of November 9, 1992, Third Amendment, dated as of
March 12, 1993, Fourth Amendment, dated as of April 15, 1993,
Fifth Amendment, dated as of September 22, 1993, Sixth
Amendment, dated as of April 6, 1994, Seventh Amendment, dated
as of August 9, 1994, Eighth Amendment, dated as of December
8, 1994, and Amendment No. 9 dated October 24, 1995, thereto.
[CONFIDENTIAL TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THESE
DOCUMENTS.] (Incorporated by reference to exhibits number
10.13 and 10.14 in Registration Statement No. 33-80518 on Form
S-1).
10.2 Restated Amendment No. 10 dated December 10, 1996, between
LOSI and Matra Marconi Space to the Second Amended and
Restated Purchase Agreement, dated September 16, 1991 by and
between OrionServ and British Aerospace PLC (which contract
and prior exhibits thereto were incorporated by reference as
exhibit number 10.1). (Incorporated by reference to exhibit
number 10.2 in Registration Statement No. 333-19795 on Form
S-4).
10.3 Contract for a Satellite Control System, dated December 7,
1992, by and between Loral Orion Services, Inc., Telespazio
S.p.A. and Martin Marietta Corporation. [CONFIDENTIAL
TREATMENT HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.]
(Incorporated by reference to exhibit number 10.31 in
Registration Statement No. 33-80518 on Form S-1).
10.4 Credit Agreement, dated as of November 23, 1993, by and
between Loral Orion Services, Inc. (as successor in interest
to Orion Atlantic, L.P.) and General Electric Capital
Corporation (`GECC'). [CONFIDENTIAL TREATMENT HAS BEEN GRANTED
FOR PORTIONS OF THIS DOCUMENT.] (Incorporated by reference to
exhibit number 10.32 in Registration Statement No. 33-80518 on
Form S-1).
10.5 Security Agreement, dated as of November 23, 1993, by and
between Loral Orion Services, Inc. and GECC. (Incorporated by
reference to exhibit number 10.33 in Registration Statement
No. 33-80518 on Form S-1).
10.6 Assignment and Security Agreement, dated as of November 23,
1993, by and between Loral Orion Services, Inc. and GECC.
(Incorporated by reference to exhibit number 10.34 in
Registration Statement No. 33-80518 on Form S-1).
10.7 Consent and Agreement, dated as of November 23, 1993, by and
between Loral Orion Services, Inc., Martin Marietta
Corporation and GECC. (Incorporated by reference to exhibit
number 10.35 in Registration Statement No. 33-80518 on Form
S-1).
49
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
10.8 Deed of Trust, dated as of November 23, 1993, by and between
Loral Orion Services, Inc., W. Allen Ames, Jr. and Michael J.
Schwel, as Trustees, and GECC. (Incorporated by reference to
exhibit number 10.37 in Registration Statement No. 33-80518 on
Form S-1).
10.9 Lease Agreement, dated as of November 23, 1993, by and between
OrionNet, Inc. and Loral Orion Services, Inc. (as successor in
interest to Orion Atlantic, L.P.), as amended by an Amendment,
dated January 3, 1995. [CONFIDENTIAL TREATMENT HAS BEEN
GRANTED FOR PORTIONS OF THESE DOCUMENTS. (Incorporated by
reference to exhibit number 10.38 in Registration Statement
No. 33-80518 on Form S-1).
10.10 Note for Interim Loans, dated as of November 23, 1993, by and
between Loral Orion Services, Inc. (as successor in interest
to Orion Atlantic, L.P.) and GECC. (Incorporated by reference
to exhibit number 10.42 in Registration Statement No. 33-80518
on Form S-1).
10.11 Lease Agreement, dated as of October 2, 1992, by and between
OrionNet and Research Grove Associates, as amended by
Amendment No. 1 dated March 26, 1993. Amendment No. 2 dated
August 23, 1993, and Amendment No. 3 dated December 20, 1993.
(Incorporated by reference to exhibit number 10.39 in
Registration Statement No. 33-80518 on Form S-1).
10.12 Restated Definitive Agreement, dated October 29, 1998, by and
between Orion and Republic of the Marshall Islands.
[CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS OF
THIS DOCUMENT.](Incorporated by reference to Exhibit 10.12 in
Annual Report on Form 10-K for the fiscal year ended December
31, 1998).
10.13 TT&C Earth Station Agreement, dated as of November 11, 1996,
by and between Loral Orion Services, Inc. (by assignment from
Loral Orion-Asia Pacific, Inc., formerly known as Orion Asia
Pacific Corporation and DACOM Corp. [CONFIDENTIAL TREATMENT
HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated
by reference to exhibit number 10.39 in Registration Statement
No. 333-19795 on Form S-4).
10.14 Joint Investment Agreement, dated as of November 11, 1996, by
and between Loral Orion Services, Inc. (by assignment from
Loral Orion-Asia Pacific, Inc., formerly known as Orion Asia
Pacific Corporation) and DACOM Corp. [CONFIDENTIAL TREATMENT
HAS BEEN GRANTED FOR PORTIONS OF THIS DOCUMENT.] (Incorporated
by reference to exhibit number 10.40 in Registration Statement
No. 333-19795 on Form S-4).
10.15 Orion 3 Spacecraft Purchase Contract, dated January 15, 1997,
by and among Hughes Space and Communications International,
Inc., Loral Orion Services, Inc. (by assignment from Loral
Orion-Asia Pacific, Inc., formerly known as Orion Asia
Pacific, Inc.) and Orion. [CONFIDENTIAL TREATMENT HAS BEEN
GRANTED FOR PORTIONS OF THIS DOCUMENT.]. (Incorporated by
reference to Exhibit number 10.52 to Registration Statement
No. 333-19167 on Form S-1).
10.16 Letter Agreement, effective as of May 20/21, 1997, by and
between Orion and Morgan Stanley & Co. (Incorporated by
reference to Exhibit number 10.53 to Annual Report on Form
10-K for the fiscal year ended December 31, 1997).
10.17 Orion-Z Spacecraft Purchase Contract, dated May 15, 1998, by
and between Loral Orion Services, Inc. and Space
Systems/Loral, Inc. and Amendment No. 1 dated December 29,
1998. [CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR PORTIONS
OF THIS DOCUMENT.] (Incorporated by reference to Exhibit 10.17
in Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).
10.18 Agreement, dated January 1, 1999, by and between Loral Orion
Services, Inc. and Loral Skynet. (Incorporated by reference to
Exhibit 10.18 in Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
50
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
10.19 Agreement, dated January 1, 1999, by and between Loral Orion
Services, Inc. and Loral Skynet. (Incorporated by reference to
Exhibit 10.19 in Annual Report on Form 10-K for the fiscal
year ended December 31, 1998).
10.20 Lease Agreement dated as of August 18, 1999 by and between
Loral Asia Pacific Satellite (HK) Limited and APT Satellite
Company Limited (incorporated by reference to Exhibit number
99.1 to Current Report on Form 8-K filed on August 23, 1999).
23 None
27 Financial Data Schedule.*
- -----------------
* Filed herewith.
(d) Financial statement schedule - none
51
SIGNATURES
CORPORATE UPDATE TITLES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LORAL CYBERSTAR, INC.
By: /s/ W. Neil Bauer
--------------------------------
Title: President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Bernard L. Schwartz Chairman of the Board March 30, 2000
- -------------------------- and Chief Executive Officer
Bernard L. Schwartz
Director March 30, 2000
- --------------------------
George Baker
/s/ Eric J. Zahler Executive Vice President March 30, 2000
- ---------------------------- and Director
Eric J. Zahler
/s/ Michael P. DeBlasio First Senior Vice President March 30, 2000
- ------------------------- and Director
Michael P. DeBlasio
/s/ Daniel Hirsch Director March 30, 2000
- --------------------------
Daniel Hirsch
/s/ W. Neil Bauer President and Director March 30, 2000
- --------------------------
W. Neil Bauer
/s/ Richard J. Townsend Senior Vice President March 30, 2000
- ------------------------ and Chief Financial Officer
Richard J. Townsend (Principal Financial Officer)
/s/ Harvey B. Rein Vice President and March 30, 2000
- ------------------------- Controller
Harvey B. Rein (Principal Accounting Officer)
52