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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, 2000 Commission file number 0-22085
LORAL CYBERSTAR, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1564318
------------------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2440 Research Boulevard, Suite 400, Rockville, Maryland 20850
(Address of principal executive offices )
301-258-8101
(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, 2001 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
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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 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 ownership of three high power geostationary
satellites, and with 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 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.
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 and has retained risk
of loss. 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.
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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.
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 percent 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.
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 was applied by
Loral CyberStar towards the last installment payment on Telstar 10/Apstar IIR.
This assignment was approved by the Federal Communications Commission on
December 11, 2000.
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.
Based on Internet standards, Loral CyberStar's multicast solution enables
content providers, businesses and ISPs to package, manage, and broadcast content
- - including text, audio, video, graphics, pictures, animation software - to end
users around the world. By using the Loral and third party 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.
Loral CyberStar also recently began beta trials for its streaming media
services with a select group of corporate customers. Loral CyberStar believes
that with the technical advantages inherent in satellite delivery, streaming
media service will be a valuable addition to its service offering to its
customers.
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
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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,
which are non-recourse to Loral, and thus continues 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
Loral CyberStar and Loral Skynet, a division of Loral SpaceCom Corporation,
which in turn is a wholly-owned subsidiary of Loral, 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. Loral CyberStar
believes it has achieved cost efficiencies in connection with the Loral Skynet
Agreements.
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.
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TELSTAR 10/APSTAR IIR TELSTAR 11 TELSTAR 12
--------------------- ---------- ----------
Region Covered................... China, Japan, Korea, Europe, Southeastern Eastern U.S.,
India, Hawaii, Canada, U.S., east of Southeastern Canada,
Southeast Asia, the Rockies and parts Europe, Commonwealth of
Australia, New Zealand, of Mexico Independent States,
Eastern Russia and Middle East, North
Oceania 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 - 52 dBW 47 - 52 dBW 47 - 50 dBW
30 - 37 dBW
for C-band returns
Total Prime Power (6)............ 8500 Watts 4500 Watts 7000 Watts
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.
5
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.
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 may 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, 2000, Loral CyberStar and its subsidiaries had 290 full
time employees, none of whom are subject to collective bargaining agreements.
Management believes its relations with employees are good.
CERTAIN FACTORS THAT MAY AFFECT 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 undertakes no
obligation to update any forward-looking statements.
THE COMPANY HAS SUBSTANTIAL DEBT.
As of December 31, 2000, the Company had approximately $1.11 billion of
debt, including $107.9 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'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
6
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 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.
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 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.
7
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.
The Company's Telstar 10/Apstar IIR satellite has experienced minor losses
of power from its solar arrays. Space Systems/Loral ("SS/L") is currently
investigating the cause of these failures. Although, to date, Telstar 10/Apstar
IIR has not experienced any degradation in performance, there can be no
assurance that it will not experience additional power loss that could result in
performance degradation, including loss of transponder capacity. In the event of
additional power loss, the extent of the performance degradation, if any, will
depend on numerous factors, including the amount of the additional power loss,
when in the life of Telstar 10/Apstar IIR the loss occurred and the number and
type of use being made of transponders then in service. A complete or partial
loss of Telstar 10/Apstar IIR would result in a loss of revenue and customers to
the Company. This investigation is in its very early stages and not all relevant
information is now known. Based upon information currently available, the
Company believes that this matter will not have a material adverse effect on the
consolidated financial position or results of operations to the Company.
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 and has retained risk of loss. 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.
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 Company faces
continued price pressures from fiber competitors for its Internet services.
8
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 24 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 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.
ITEM 2. PROPERTIES.
Loral CyberStar owns seven acres of land in Mt. Jackson, Virginia and
leases approximately 86,000 square feet for office space worldwide. Management
believes that the facilities are sufficient for its current operations.
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.
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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 frequency coordination for its satellites; and (vi) the Company faces
severe competition. The Company undertakes no obligation to update any
forward-looking statements.
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. Loral CyberStar is
organized into two distinct operating segments as follows (see Note 7 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 services
("DTH"). Loral Skynet, a division of Loral SpaceCom Corporation, which
is a subsidiary of Loral Space & Communications Corporation, which is
in turn a subsidiary of Loral Space and Communications, Ltd. ("Loral"),
manages the Company's Fixed Satellite Services ("FSS") segment.
Data Services: Providing managed communications networks and Internet
and intranet services, using transponder capacity primarily on the
Loral Skynet and Loral CyberStar fleets.
10
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 Fixed Satellite Services revenues are principally generated
from long-term contracts or occasional use services for transmission capacity
services.
The Company's Data Services 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 by its 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 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.
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 (for services outside of the Loral CyberStar satellite network
footprint); (iii) in-orbit insurance premiums; and (iv) personnel costs and
travel related to the telemetry, tracking and control facility ("TT&C"), network
monitoring, network design and similar activities. Regarding TT&C costs, the
Company and Loral Skynet, 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 CyberStar believes it has achieved
cost efficiencies in connection with the Loral Skynet Agreements. Loral Skynet
currently provides the Services for its own Telstar satellite network and
Technical Services for other third parties. 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.
11
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 and retained the risk
of loss. 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.
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 and cannot be used for its intended
purpose. The satellite and launch were fully insured for approximately $266
million, which was received in 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., Telstar 10/Apstar IIR
covers a region that includes Asia, Europe, Africa and Australia, which
represents over 75 percent 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.
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." Following the Merger,
the capital stock of Orion ceased to be publicly traded. However, the Company
continues to have registered bonds outstanding, which are non-recourse to Loral,
and thus continues to have filing requirements with the Securities and Exchange
Commission. 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.
For accounting purposes, the Merger was accounted for as of March 31, 1998
using the purchase method. Accordingly, the consolidated balance sheets reflect
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
12
allocated to cost 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.
In evaluating financial performance, management uses revenues and earnings
before interest, taxes, depreciation and amortization ("EBITDA") as a measure of
a segment's profit or loss. The following discusses the results of Loral
CyberStar for the years ended December 31, 2000 and 1999.
13
OPERATING REVENUES (IN MILLIONS):
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000
---- ----
Fixed Satellite Services ................... $109.4 $ 42.8
Data Services .............................. 106.7 69.2
Eliminations ............................... (28.9) (7.1)
------ ------
Operating revenues ......................... $187.2 $104.9
====== ======
EBITDA (1) (IN MILLIONS):
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000
---- ----
Fixed Satellite Services ..................... $81.9 $21.9
Data Services ................................ (14.8) (8.3)
Eliminations ................................. (2.9) --
----- -----
EBITDA ....................................... $64.2 $13.6
===== =====
- ----------------
(1) EBITDA (which is equivalent to operating income (loss) before
depreciation and amortization, including amortization of unearned compensation)
is provided 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 the Company's
operating results. However, EBITDA should not be construed as 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.
Revenues for the year ended December 31, 2000 and 1999 were $187.2 million
and $104.9 million, respectively, an increase of $82.3 million or 78 percent.
This increase was primarily attributable to the faster than expected loading of
Telstar 12 and Telstar 10/Apstar IIR, improved results in the private
communications network services operations, which added 209 customer sites for
the year ended December 31, 2000 as compared to the same period in 1999 and a
contract termination settlement with a customer.
At December 31, 2000, the Company had an external contracted backlog
(representing future revenues under customer contracts) of approximately $930.2
million compared to $628.5 million at December 31, 1999, an increase of 48
percent. Revenue from contracted backlog is typically earned over two to five
years.
Direct expenses for 2000 were $64.9 million compared to $38.7 million for
1999. This increase was primarily attributable to increased lease costs of third
party transponder capacity, Internet access, in-orbit satellite insurance for
Telstar 12 and Telstar 10/Apstar IIR, and terrestrial link charges incurred to
support the Data Services segment.
14
Sales and marketing expenses were $25.8 million for 2000, as compared to
$25.0 million for 1999.
Engineering and technical services expenses for 2000 were $10.9 million
compared to $9.2 million for 1999, an increase of $1.7 million or 18 percent.
This increase is primarily due to additional salaries associated with support of
the Data Services operations.
General and administrative expenses were $21.3 million for the year ended
December 31, 2000, compared to $18.4 million for the same period in 1999, an
increase of $2.9 million or 16 percent. The increase was attributable to
legal and other costs in support of the Company's operations in 2000.
Depreciation and amortization was $107.7 million for 2000 compared to $75.8
million for 1999, an increase of $31.9 million or 42 percent. The increase was
primarily due to the acquisition of the Telstar 10/Apstar IIR satellite in
September 1999 and placing the Telstar 12 satellite into service in December
1999.
Interest income was $4.2 million for 2000, compared to $7.3 million for
1999. The decrease in interest income was due to a reduction in the balances
held in the Company's restricted and segregated funds, which was used for
satellite acquisition and for interest payments on the Company's Senior Notes.
Interest expense for the years ended December 31, 2000 and 1999 was $97.2
million and $69.8 million, respectively, net of capitalized interest of $0
million and $20.3 million, respectively. The increase was primarily due to the
decrease in capitalized interest and interest incurred on loans from Loral.
The Company is included in the consolidated U.S. federal income tax return
of Loral Space & Communications Corporation. Pursuant to a tax sharing agreement
for 2000 with Loral Space & Communications Corporation, the Company is entitled
to reimbursement for the use of its tax losses when such losses are utilized by
Loral Space & Communications Corporation. For the year ended December 31, 2000,
the Company recorded a current income tax benefit of approximately $3.1 million
under this tax sharing agreement (a receivable from Loral Space & Communications
Corporation) and a deferred tax provision of $4.2 million.
RESULTS BY OPERATING SEGMENT
Fixed Satellite Service
Fixed Satellite Services revenue for 2000 was $109.4 million versus $42.8
million in 1999. EBITDA on the same basis was $81.9 million in 2000, or 75
percent of revenues, versus EBITDA of $21.9 million, or 51 percent of revenues
in 1999. These increases are due to the faster than expected loading of Telstar
12 and Telstar 10/Apstar IIR and the leasing revenues to Data Services for
capacity.
Data Services
Data Services revenue for 2000 was $106.7 million versus $69.2 million in
1999. This increase is mainly due to the added customer sites in 2000 and $12.0
million resulting from a contract termination settlement with a customer. EBITDA
for 2000 was a loss of approximately $14.8 million versus a loss of $8.3 million
in 1999. The increase in EBITDA loss is primarily due to the increased direct
costs from both third party and intercompany leasing activities incurred in
connection with the expansion of the business.
See Note 7 to the consolidated financial statements for additional
information on segment results.
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities ("SFAS 133"), 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. They key criterion for hedge accounting is that the derivative must
be highly
15
effective in achieving offsetting changes in fair value or cash flows of the
hedged items during the term of the hedge. The Company adopted SFAS No. 133, as
amended, on January 1, 2001. There was no effect on the Company's consolidated
financial position due to adoption of this standard.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101, as amended, was effective for the Company in the
fourth quarter of 2000 and clarified the SEC's views on U.S. GAAP relating to
revenue recognition in financial statements. The requirements of SAB No. 101 did
not have a significant impact on the Company's consolidated financial position
or results of operations.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. The Company has adopted the
applicable disclosure requirements of SFAS No. 140 in its consolidated financial
statements as of December 31, 2000. The Company is currently evaluating the
impact of adopting the remaining provisions of SFAS No. 140, which will be
effective for transactions entered into after March 31, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
As of December 31, 2000 and 1999, the fair value of the Company's long-term
debt was estimated to be $285 million and $556 million, respectively, using
quoted market prices, for the Company's Senior Notes and Senior Discount Notes.
As of December 31, 2000 and 1999, the long-term debt carrying value exceeded
fair value by $716 million and $409 million, respectively. Market rate risk on
debt is estimated as the potential increase in annual interest expense resulting
from a hypothetical one percentage point increase in the interest rates and
amounted to $9 million and $8 million, for 2000 and 1999, respectively.
16
ITEM 8.
INDEPENDENT AUDITORS' REPORT
To the Stockholder 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, 2000 and 1999 and the related consolidated
statements of operations, stockholder's equity and cash flows for the years
ended December 31, 2000 and 1999 and the nine months ended December 31, 1998. We
have also audited the consolidated statements of operations, 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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, 2000 and 1999, and the
results of their operations and their cash flows for the years ended December
31, 2000 and 1999 and the nine months ended December 31, 1998 in conformity with
accounting principles generally accepted in the United States of America.
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 accounting principles generally accepted in
the United States of America.
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 statements of operations for the years
ended December 31, 2000 and 1999 and the nine months ended December 31, 1998,
are not comparable to the results presented for the three months ended March 31,
1998.
DELOITTE & TOUCHE LLP
San Jose, CA
February 15, 2001
17
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR AMOUNTS)
DECEMBER 31,
--------------------------------------------
2000 1999
----------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 37,169 $ 24,117
Restricted and segregated cash -- 187,315
Accounts receivable, net 22,204 16,797
Prepaid expenses and other current assets 8,218 11,716
Due from Loral companies 9,545 181
----------------- ----------------
Total current assets 77,136 240,126
Property and equipment, net 702,311 767,477
Cost in excess of net assets acquired, net 577,710 593,219
Deferred tax assets 44,982 49,223
Other assets, net 26,810 34,242
----------------- ----------------
TOTAL ASSETS $ 1,428,949 $ 1,684,287
================= ================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt $ 2,551 $ 2,071
Accounts payable 7,368 3,098
Satellite purchase price payable -- 181,928
Accrued and other current liabilities 11,366 13,995
Customer deposits 7,062 9,069
Deferred revenue 5,691 2,624
Interest payable 22,846 22,842
Note payable to Loral SpaceCom 107,866 74,114
Due to Loral companies 4,495 51,538
----------------- ----------------
Total current liabilities 169,245 361,279
Long-term debt 997,991 963,299
Customer deposits 5,413 --
Deferred revenue 998 5,957
Other long-term liabilities 125 448
Due to Space Systems/Loral -- 5,900
Commitments and contingencies:
Stockholder's equity:
Common stock, $.01 par value; 1,000 shares authorized;
100 shares outstanding at December 31, 2000 and 1999 -- --
Capital in excess of par value 588,197 544,176
Accumulated deficit (331,562) (194,144)
Unearned compensation -- (1,804)
Accumulated other comprehensive loss (1,458) (824)
----------------- ----------------
Total stockholder's equity 255,177 347,404
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,428,949 $ 1,684,287
================= ================
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)
THREE MONTHS
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
--------------------------- ENDED MARCH 31, 1998
2000 1999 DECEMBER 31, 1998 PREDECESSOR COMPANY
--------- --------- ----------------- -------------------
Revenues $ 187,190 $ 104,882 $ 64,608 $ 18,790
Operating expenses:
Direct 64,887 40,752 19,906 6,406
Sales and marketing 25,824 24,955 19,365 5,790
Engineering and technical services 10,894 9,167 6,486 1,898
General and administrative 21,344 16,416 10,834 3,707
Depreciation and amortization 107,733 75,783 51,434 12,483
Merger costs -- -- 612 12,145
--------- --------- --------- ---------
Total operating expenses 230,682 167,073 108,637 42,429
--------- --------- --------- ---------
Loss from operations (43,492) (62,191) (44,029) (23,639)
Interest income 4,157 7,335 9,299 5,425
Interest expense (97,223) (69,776) (46,439) (21,190)
Other income (expense) 270 100 167 (287)
--------- --------- --------- ---------
Loss before income taxes (136,288) (124,532) (81,002) (39,691)
Income tax (expense) benefit (1,130) 10,357 1,033 --
--------- --------- --------- ---------
Net loss (137,418) (114,175) (79,969) (39,691)
Preferred stock dividend, net of forfeitures -- -- -- 1,387
--------- --------- --------- ---------
Net loss attributable to common stockholders $(137,418) $(114,175) $ (79,969) $ (38,304)
========= ========= ========= =========
See notes to consolidated financial statements.
19
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
COMMON STOCK
------------------
CAPITAL IN
NUMBER EXCESS OF ACCUMULATED TREASURY UNEARNED
OF SHARES AMOUNT PAR VALUE DEFICIT STOCK COMPENSATION
--------- ------ --------- ------- ----- ------------
Balance at January 1, 1998 (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
forfeiture -- -- -- 1,387 -- --
Recapitalization related to purchase by Loral (25,969) (260) 195,215 237,560 91 (4,512)
Increase purchase price -- -- 3,491 -- -- --
Net loss for the three months ended March 31, 1998 -- -- -- (39,691) -- --
Other comprehensive loss -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
------ ----- --------- --------- --------- ---------
Balance at March 31, 1998 -- -- 482,003 -- -- (4,512)
Amortization of unearned compensation -- -- -- -- -- 953
Stock option forfeitures -- -- (212) -- -- 212
Net loss for the nine months ended December 31, 1998 -- -- -- (79,969) -- --
Other comprehensive income -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
------ ----- --------- --------- --------- ---------
Balance at December 31, 1998 -- -- 481,791 (79,969) -- (3,347)
Amortization of unearned compensation -- -- -- -- -- 1,543
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) -- (1,804)
Amortization of unearned compensation -- -- -- -- -- 815
Stock option forfeitures -- -- (989) -- -- 989
Loral Space and Communications capital contribution -- -- 45,010 -- -- --
2000 net loss -- -- -- (137,418) -- --
Other comprehensive loss -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
------ ----- --------- --------- --------- ---------
Balance at December 31, 2000 -- $ -- $ 588,197 $(331,562) $ -- $ --
====== ===== ========= ========= ========= =========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDER'S
INCOME (LOSS) EQUITY (DEFICIT)
------------- ----------------
Balance at January 1, 1998 (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 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 at March 31, 1998 -- 477,491
Amortization of unearned compensation -- 953
Stock option forfeitures -- --
Net loss for the nine months ended December 31, 1998 -- --
Other comprehensive income 616 --
Comprehensive loss -- (79,353)
--------- ---------
Balance at December 31, 1998 616 399,091
Amortization of unearned compensation -- 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 (824) 347,404
Amortization of unearned compensation -- 815
Stock option forfeitures -- --
Loral Space and Communications capital contribution -- 45,010
2000 net loss -- --
Other comprehensive loss (634) --
Comprehensive loss -- (138,052)
--------- ---------
Balance at December 31, 2000 $ (1,458) $ 255,177
========= =========
See notes to consolidated financial statements.
20
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
THREE MONTHS
ENDED
NINE MONTHS MARCH 31,
YEAR ENDED DECEMBER 31, ENDED 1998
-------------------------- DECEMBER 31, PREDECESSOR
2000 1999 1998 COMPANY
--------- --------- --------- ---------
OPERATING ACTIVITIES
Net loss $(137,418) $(114,175) $ (79,969) $ (39,691)
Non-cash items:
Deferred income tax provision 4,241 4,692 3,771 --
Depreciation and amortization 107,733 75,783 51,434 13,092
Provision for bad debts 3,266 3,304 1,325 150
Non-cash interest expense 37,075 33,758 21,325 10,070
Interest earned on restricted cash (3,518) (2,292) (3,575) (1,431)
Other -- -- (291) 1,644
Loss on obsolescence of assets -- 1,758 -- --
Changes in operating assets and liabilities:
Accounts receivable (8,673) (4,809) (3,578) (1,408)
Prepaid expenses and other current assets 3,498 (7,417) (502) 693
Other assets 3,365 (15,619) (1,352) 201
Accounts payable, accrued liabilities and other
current liabilities 1,641 9,805 (1,367) (2,186)
Interest payable 4 -- 12,403 (12,510)
Customer deposits 3,406 1,172 5,071 23
Deferred revenue (1,892) 6,196 10,768 297
Due from Loral companies (9,364) (181) (3,619) --
Due to Loral companies (47,043) 6,205 -- --
Due to Space Systems/Loral (5,900) 9,750 -- --
--------- --------- --------- ---------
Net cash provided by (used in) operating activities (49,579) 7,930 11,844 (31,056)
INVESTING ACTIVITIES
Increase in restricted and segregated cash (64) (2,942) (15,321) (3,198)
Use and transfers from restricted and segregated cash 190,898 156,380 273,960 35,938
Property and equipment (206,468) (307,524) (284,096) (18,380)
--------- --------- --------- ---------
Net cash provided by (used in) investing activities (15,634) (154,086) (25,457) 14,360
FINANCING ACTIVITIES
Proceeds from sale of orbital slots to Loral, net 34,260 -- -- --
Equity contributed from Loral 10,750 62,385 -- --
Increase in note payable to Loral SpaceCom 35,752 77,733 -- --
Proceeds from issuance of common stock, net of
issuance costs -- -- -- 2,117
Repayment of notes payable (1,398) (1,223) (2,815) (254)
Payment of satellite incentive obligation (280) (246) (2,580) (324)
Other (819) (4,237) 1,068 (1,051)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities 78,265 134,412 (4,327) 488
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 13,052 (11,744) (17,940) (16,208)
Cash and cash equivalents at beginning of period 24,117 35,861 53,801 70,009
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 37,169 $ 24,117 $ 35,861 $ 53,801
========= ========= ========= =========
See notes to consolidated financial statements.
21
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Loral CyberStar is
organized into two distinct operating segments as follows (see Note 7):
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 a
subsidiary of Loral Space & Communications Corporation, which is in turn a
subsidiary of Loral Space and Communications Ltd. ("Loral"), manages the
Company's Fixed Satellite Services ("FSS") segment.
Data Services: Providing managed communications networks and Internet and
intranet services, using transponder capacity on the Loral Skynet 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, reflect the results of operations of the Predecessor Company. The
consolidated financial statements as of and for the years ended December 31,
2000 and 1999 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, which are non-recourse to Loral, and thus continues 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 sheets reflect
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 cost 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. 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, which were
amortized over the vesting period of the options.
22
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1. ORGANIZATION AND BUSINESS (CONTINUED)
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements for the years ended December 31, 2000
and 1999, the nine months ended December 31, 1998, and the three months ended
March 31, 1998, include the accounts of Loral CyberStar, its wholly-owned
subsidiaries and Orion Financial Partnership ("OFP"), in which Loral CyberStar
holds a 50 percent interest. All intercompany transactions have been eliminated.
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 include (in thousands):
DECEMBER 31,
-------------------
2000 1999
------- -------
Cash $11,049 $13,339
Money market funds 2,065 1,943
Commercial paper 24,055 8,835
------- -------
Total cash and cash equivalents $37,169 $24,117
======= =======
RESTRICTED AND SEGREGATED CASH
Restricted and segregated cash was classified as held to maturity, recorded
at cost and consisted of the following (in thousands):
DECEMBER 31,
-------------------
2000 1999
-------- --------
Commercial paper $ -- $162,005
U.S. treasury notes -- 25,310
-------- --------
Total restricted and segregated cash $ -- $187,315
======== ========
Of the balance at December 31, 1999, $49.8 million was restricted for use
for the January 2000 and July 2000 interest payments on the Senior Notes (see
Note 4) and $137.5 million was segregated for the final payment on Telstar
10/Apstar IIR.
23
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 cash and accounts receivable. The Company's cash and
cash equivalents and restricted and segregated cash are maintained with
high-credit-quality financial institutions and in U.S treasury notes. The
company does not require collateral against its receivables; however, 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.
As of December 31, 2000 and 1999, accounts receivable was reduced by an
allowance for doubtful accounts of $3.5 million and $2.3 million, respectively.
PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
DECEMBER 31,
---------------------------
2000 1999
--------- ----------
Land ......................................... $ 74 $ 74
Leasehold improvements ....................... 383 181
Satellites and related equipment ............. 783,859 781,905
Telecommunications equipment ................. 53,562 34,132
Furniture and computer equipment ............. 24,086 22,953
Construction in progress ..................... 14,219 16,781
--------- ----------
Property and equipment ....................... 876,183 856,026
Less accumulated depreciation ................ (173,872) (88,549)
--------- ----------
Total property and equipment, net ............ $ 702,311 $ 767,477
========= =========
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 for the years
ended December 31, 2000 and 1999 and the nine months ended December 31, 1998 was
$87.3 million, $54.9 million, and $36.9 million respectively. Depreciation
expense is calculated using the straight-line method over the estimated useful
lives as follows:
Leasehold improvements ........................... 5 - 10.5 years
Satellites 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 satellites and related equipment are capitalized. Such costs
include direct contract costs, allocated indirect costs, launch costs, launch
insurance, construction period interest and the present value of satellite
incentive payments. 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.
24
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and cannot be used for its intended purpose. The satellite and
launch were fully insured for approximately $266 million, which was received in
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 CyberStar purchased from
APT Satellite Company Limited ("APT"), for approximately $273 million, 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. Loral CyberStar has full use of the
transponders for the remaining life of Telstar 10/Apstar IIR. Under the purchase
agreement, Loral CyberStar will also have the option to lease from APT
replacement satellites upon the end of life of Telstar 10/Apstar IIR.
Satellites and related equipment are either leased by customers or held for
lease by the Company. 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, 2000 are as follows (in
thousands):
2001............................ $ 152,105
2002............................ 164,079
2003............................ 127,538
2004............................ 90,577
2005............................ 60,361
Thereafter...................... 335,504
------------
$ 930,164
============
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, 2000 and 1999 was $42.7 million and $27.1
million, respectively.
VALUATION OF LONG-LIVED ASSETS AND COST IN EXCESS OF NET ASSETS ACQUIRED
The carrying value of Loral CyberStar's long-lived assets and cost 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.
25
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS
Intangible assets associated with the Merger are primarily amortized over
the remaining useful life of Telstar 11, which was approximately 6.75 years at
the date of the Merger. Accumulated amortization relating to other assets at
December 31, 2000 and 1999 aggregated $10.4 million and $6.3 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 accumulated amortization as of December 31, 2000 and
1999, was as follows (in thousands):
DECEMBER 31,
-----------------------
2000 1999
------- -------
Note receivable ................................ $ 274 $ 1,842
FCC license application costs .................. 1,510 2,374
Prepaid satellite insurance .................... 4,885 11,132
Software license ............................... 3,327 3,750
Intangible assets .............................. 8,651 10,822
Deposits ....................................... 2,499 3,251
Long-term receivables .......................... 5,435 --
Other .......................................... 229 1,071
------- -------
Total other assets ............................. $26,810 $34,242
======= =======
FOREIGN CURRENCY TRANSLATION
Results of operations for foreign entities, primarily the Company's Loral
CyberStar-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).
REVENUE RECOGNITION
The Company provides satellite capacity under lease agreements that
generally provide for the use of satellite transponders and, in certain cases,
earth stations for periods generally ranging from one year to the end of life of
the satellite. Some of these agreements have certain obligations, including
providing spare or substitute capacity, if available, in the event of satellite
failure. If no spare or substitute capacity is available, the agreement may be
terminated. The Company also provides managed communications networks and
Internet and Intranet services under data services agreements. Revenue under
transponder lease and data services agreements is recognized as services are
performed, provided that a contract exists, the price is fixed or determinable
and collectability is reasonably assured. Revenues under contracts that include
fixed lease payment increases are recognized on a straight-line basis over the
life of the lease.
26
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue from equipment sales are primarily recognized upon acceptance by
the customer. Revenue from equipment sales under long-term fixed price contracts
is recognized using the cost-to-cost percentage-of-completion method. Losses on
contracts are recognized when determined and revisions in profit estimates are
reflected in the period in which the conditions that require the revision become
known and are estimable.
INCOME TAXES
The benefit (provision) for income taxes on the loss before income taxes
differs from the amount computed by applying the statutory U.S. Federal income
tax rate because of the effect of the following items (in thousands):
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------ DECEMBER 31,
2000 1999 1998
-------- -------- --------
Tax benefit at U.S. statutory ...................................................... $ 47,701 $ 43,586 $ 28,351
Federal income tax rate ......................................................... (35%) (35%) (35%)
Permanent adjustments which change statutory amount:
Non-deductible amortization of cost in excess of net assets required ............... (5,428) (5,411) (4,089)
Valuation allowance established for carryforward of current year tax loss .......... (43,403) (27,818) (23,229)
-------- -------- --------
Net income tax benefit (provision) ................................................. $ (1,130) $ 10,357 $ 1,033
======== ======== ========
In 2000, the Company is included in the U.S. federal income tax return for
Loral Space & Communications Corporation. Pursuant to a tax sharing agreement
for 2000 with Loral Space & Communications Corporation, the Company is entitled
to reimbursement for the use of its tax losses to the extent such losses are
utilized by Loral Space & Communications Corporation. For the year ended
December 31, 2000, the Company recorded a current income tax benefit of
approximately $3.1 million related to this tax sharing agreement and a deferred
tax provision of approximately $4.2 million, resulting in a net tax provision of
approximately $1.1 million.
In 1999, the Company was included in the U.S. federal income tax return for
Loral Space & Communications Corporation. Pursuant to a tax sharing agreement
for 1999 with Loral Space & Communications Corporation, the Company was entitled
to reimbursement for the use of its tax losses to the extent such losses were
utilized by Loral Space & Communications Corporation. For the year ended
December 31, 1999, the Company recorded a current income tax benefit of
approximately $15.1 million related to this tax sharing agreement and a deferred
tax provision of approximately $4.7 million, resulting in a net tax benefit of
approximately $10.4 million.
In 1998, the Company was included in the U.S. federal income tax return for
Loral Space & Communications Corporation. Pursuant to a tax sharing agreement
for 1998 with Loral Space & Communications Corporation, the Company was entitled
to reimbursement for the use of its tax losses to the extent such losses were
utilized by Loral Space & Communications Corporation. For the nine months ended
December 31, 1998, the Company recorded a current income tax benefit of
approximately $4.9 million related to this tax sharing agreement and a deferred
tax provision of approximately $3.8 million, resulting in a net tax benefit of
approximately $1.0 million.
27
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 in effect at the end of
the year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Following is a summary of the components of the net deferred income tax
asset at December 31, 2000 and 1999 (in thousands):
DECEMBER 31,
-------------------------
2000 1999
--------- ---------
Net operating loss carryforward ................ $ 161,429 $ 94,305
Amortization of premium and discount on Senior
Notes and Senior Discount Notes............... 111,528 98,086
Amortization of intangibles .................... (2,457) (3,713)
Depreciation ................................... (55,326) (11,636)
Other .......................................... 5,002 3,264
--------- ---------
Subtotal ....................................... 220,176 180,306
Less valuation allowance ....................... (175,194) (131,083)
--------- ---------
Net deferred income tax asset .................. $ 44,982 $ 49,223
========= =========
At December 31, 2000, the Company had approximately $486 million in net
operating loss carryforwards which expire at varying dates from 2003 through
2020. 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 against its net deferred tax assets of
$175 million at December 31, 2000, $131 million at December 31, 1999 and $94
million at December 31, 1998.
28
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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):
THREE MONTHS
ENDED
NINE MONTHS MARCH 31,
YEAR ENDED DECEMBER 31, ENDED 1998
------------------------- DECEMBER 31, PREDECESSOR
2000 1999 1998 COMPANY
--------- --------- --------- ---------
Preferred stock dividend, net of forfeitures ...................... $ -- $ -- $ -- $ (1,387)
Conversion of redeemable preferred stock to Common stock .......... -- -- -- 69,888
Conversion of subordinated debentures, accrued Interest
and deferred financing costs to Common stock ................... -- -- -- 50,000
Conversion of Company common stock to Loral Common stock
as the result of this Merger ................................... -- -- -- 469,000
Issuance of Series C preferred stock .............................. -- -- -- --
Issuance of common stock for preferred stock Dividends ............ -- -- -- 5,858
Issuance of common stock and warrants ............................. -- -- -- 4,757
Taxes paid ........................................................ 261 254 98 17
Interest paid, net of capitalized interest ........................ $ 51,879 $ 31,877 $ 9,151 $ 21,937
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and amounts of revenues and expenses
reported for the period. Significant estimates include the estimated useful
lives of the company's satellites and the amortization period of costs in excess
of net assets. 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.
29
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive loss at December 31, 2000 and 1999 is
comprised entirely of cumulative translation adjustments. Other comprehensive
loss is as follows (in thousands):
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, NINE MONTHS MARCH 31,
-------------------------- ENDED 1998
DECEMBER 31, PREDECESSOR
2000 1999 1998 COMPANY
-------- -------- -------- --------
Net loss ................................................ $137,418 $114,175 $ 79,969 $ 39,691
Foreign currency translation adjustment ................. 634 1,440 (616) --
-------- -------- -------- --------
Comprehensive loss ...................................... $138,052 $115,615 $ 79,353 $ 39,691
======== ======== ======== ========
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities ("SFAS 133"), 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 key criterion for hedge accounting is that the derivative must
be highly effective in achieving offsetting changes in fair value or cash flows
of the hedged items during the term of the hedge. The Company adopted SFAS No.
133, as amended, on January 1, 2001. There was no effect on the Company's
consolidated financial position due to adoption of this standard.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101, as amended, was effective for the Company in the
fourth quarter of 2000 and clarified the SEC's views on U.S. GAAP relating to
revenue recognition in financial statements. The requirements of SAB No. 101 did
not have a significant impact on the Company's consolidated financial position
or results of operations.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. It revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of SFAS
No. 125's provisions without reconsideration. The company has adopted the
applicable disclosure requirements of SFAS No. 140 in its consolidated financial
statements as of December 31, 2000. The Company is currently evaluating the
impact of adopting the remaining provisions of SFAS 140 which will be effective
for transactions entered into after March 31, 2000.
30
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
3. 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 31, 2000, 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 was launched 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 and has retained risk of loss. 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.
Based upon its current expectations for growth, Loral CyberStar anticipates
it will have additional funding requirements over the next three years to fund
the streaming media investment, the purchase of VSATs, Senior Note interest
payments, other capital expenditures and other operating needs. Loral CyberStar
will need to secure funding form Loral, or raise additional financing to fund
these requirements. Sources of additional capital may include public or private
debt, equity financings or strategic investments. To the extent that Loral
CyberStar seeks to raise additional debt financing, its indentures limit the
amount of such additional debt and prohibit Loral CyberStar from using Telstar
11, Telstar 10/Apstar IIR and Telstar 12 as collateral for indebtedness for
money borrowed. If Loral CyberStar requires additional financing and 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 Loral
CyberStar.
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.
The Company's Telstar 10/Apstar IIR satellite has experienced minor losses
of power from its solar arrays. Space Systems/Loral ("SS/L") is currently
investigating the cause of these failures. Although, to date, Telstar 10/Apstar
IIR has not experienced any degradation in performance, there can be no
assurance that it will not experience additional power loss that could result in
performance degradation, including loss of transponder capacity. In the event of
additional power loss, the extent of the performance degradation, if any, will
depend on numerous factors, including the amount of the additional power loss,
when in the life of Telstar 10/Apstar IIR the
31
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
loss occurred and the number and type of use being made of transponders then in
service. A complete or partial loss of Telstar 10/Apstar IIR would result in a
loss of revenue and customers to the Company. This investigation is in its very
early stages and not all relevant information is now known. Based upon
information currently available, the Company believes that this matter will not
have a material adverse effect on the consolidated financial position or results
of operations to the Company.
The Company has entered into operating leases, principally for office space
and transponder capacity from third parties. Rent expense was $20.5 million,
$7.9 million, $2.8 million and $0.3 million for the years ended December 31,
2000 and 1999, the nine months ended December 31, 1998 and the three months
ended March 31, 1998, respectively.
Future minimum lease payments are as follows (in thousands):
2001............................ $ 16,997
2002............................ 14,652
2003............................ 8,653
2004............................ 7,417
2005............................ 15,324
Thereafter...................... 690
------------
$ 63,733
============
4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
-----------------------------------
2000 1999
----------- -----------
11.25% Senior Notes (principal amount at maturity $443
million and premium of $52.4 and $58.7 million at
December 31, 2000 and 1999, respectively) ........................................ $ 495,377 $ 501,734
12.5% Senior Discount Notes (principal amount at maturity
$484 million and accreted principal amount of $427 and
$378 million at December 31, 2000 and 1999, respectively) ....................... 491,841 448,408
Note payable - TT&C Facility ....................................................... 2,331 3,729
Satellite incentive obligations .................................................... 10,848 11,129
Other .............................................................................. 145 370
----------- -----------
Total debt .................................................................... 1,000,542 965,370
Less current portion ............................................................... (2,551) (2,071)
----------- -----------
Long-term debt ................................................................ $ 997,991 $ 963,299
=========== ===========
32
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
Total interest (including commitment fees and amortization of deferred
financing costs, net of capitalized interest) incurred for the years ended
December 31, 2000 and 1999, the nine months ended December 31, 1998 and the
three months ended March 31, 1998 was $97.2 million, $90.1 million, $62.8
million and $24.5 million, respectively. Capitalized interest for the years
ended December 31, 2000 and 1999, the nine months ended December 31, 1998 and
the three months ended March 31, 1998, was $0 million, $20.3 million, $16.4
million and $3.3 million, respectively. Aggregate annual maturities of long-term
debt, including unamortized premium on Senior Notes and Senior Discount Notes,
consist of the following (in thousands):
2001............................ $ 2,551
2002............................ 2,748
2003............................ 1,728
2004............................ 1,738
2005............................ 1,958
Thereafter...................... 989,819
------------
$ 1,000,542
============
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. 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.
In connection with the acquisition by Loral (see Note 1), the carrying
value of the Senior Notes and Senior Discount Notes was increased to reflect a
fair value adjustment of $153.4 million based on quoted market prices at the
date of acquisition. Such adjustment resulted in effective interest rates of
8.69 percent and 9.69 percent on the Senior Notes and Senior Discount Notes,
respectively, through maturity. 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,
transactions with affiliates and related parties, and mergers and
consolidations. The Company believes it is in compliance with the requirements
of such indentures. There were 697,400 Warrants issued in connection with the
Notes for which the aggregate estimated fair value of $9.6 million was allocated
$5.2 million to the Senior Notes and $4.4 million to the Senior Discount Notes
as debt discount. The exercise price for the Warrants is $.01 per share of
common stock. These warrants were assumed by Loral as a result of the Merger and
were converted to warrants to acquire Loral common stock. 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.
33
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
All subsidiaries of Loral CyberStar ("Subsidiary Guarantors"), other than
inconsequential subsidiaries, have unconditionally guaranteed the Notes 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).
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 net book value of the assets that secure this note
payable totaled $4.7 million at December 31, 2000 and are classified as property
and equipment on the Consolidated Balance Sheet. The TT&C financing agreement
contains customary representations, warranties and covenants regarding certain
activities of the Company. The Company believes it 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 12 percent,
the Company's estimated incremental borrowing rate for unsecured financing) of
the required payments through 2007.
5. EMPLOYEE BENEFITS
The Company's employees participate in the Loral Space & Communications
Ltd. Savings Plan which provides that the Company match contributions of
participating employees up to a designated level. Under this plan, matching
contributions incurred by the Company totaled $0.5 million, $0.4 million and
$0.8 million for the years ended December 31, 2000 and 1999 and for the nine
months ended December 31, 1998.
Certain employees of Loral CyberStar participate in Loral's 1996 and 2000
stock option plans. 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 three to
five years, and generally expire no more than 10 years from the date of grant.
For the year ended December 31, 2000, Loral granted certain key employees of
Loral CyberStar 504,985 options to purchase Loral common stock at a weighted
average exercise price of $2.97 per share (weighted average fair value of $.95
per share - see below.) For the year ended December 31, 1999, Loral granted
519,000 options at a weighted average exercise price of $17.22 per share
(weighted average fair value of $5.72 per share - see below). For the nine
months ended December 31, 1998, Loral granted options at a weighted average
exercise price of $24.55 per share (weighted average fair value of $5.88 per
share - see below). During 2000, 660 options were exercised and 248,160 were
cancelled and at December 31, 2000, options to purchase 1,062,545 shares were
outstanding, 154,500 of which were exercisable. During 1999, 620 options were
exercised and 179,860 were cancelled and at December 31, 1999, options to
purchase 806,380 shares were outstanding, 63,836 of which were exercisable and
at December 31, 1998, no options were exercised, and options to purchase 513,420
shares were outstanding, 1,200 of which were exercisable.
Loral CyberStar accounts for its stock-based awards to employees 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 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. If
the
34
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
5. EMPLOYEE BENEFITS (CONTINUED)
computed fair values of the awards had been amortized to expense over the
vesting period of the awards, pro forma net loss applicable to common
stockholders would have been $137.8 million, $115.0 million and $81.9 million,
for the years ended December 31, 2000 and 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, 45% in 2000, 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.
6. 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, 2000 and 1999. The fair value of the Company's Senior Notes and
Senior Discount Notes was estimated based on quoted market prices, and at
December 31, 2000 was approximately $155 million and $116 million, and at
December 31, 1999 was approximately $328 million and $213 million, respectively.
7. SEGMENTS
The Company's two operating segments are Fixed Satellite Services and Data
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. Intersegment revenues consist primarily
of sales by Fixed Satellite Services to Data Services for the lease of
transponder capacity. The accounting policies of the reportable segments are the
same as those described in Note 2, however for segment reporting purposes,
revenues recognized under long-term leases entered into after December 31, 1999,
which have been prepaid include the value of the implicit interest discount
provided to the customer. Summarized financial information concerning the
Company's operating segments is as follows (in millions):
YEAR ENDED DECEMBER 31, 2000
FIXED SATELLITE TOTAL REPORTABLE
SERVICES DATA SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED
--------------- -------------- ----------------- -------------- --------------
Revenue from external customers ... $ 84.1 $ 106.0 $ 190.1 $ (2.9) $ 187.2
Intersegment revenue .............. 25.3 0.7 26.0 (26.0) --
-------------- -------------- -------------- ------------- -------------
Gross revenue...................... $ 109.4 $ 106.7 $ 216.1 $ (28.9) $ 187.2
============== ============== ============== ============= =============
EBITDA(1) ......................... $ 81.9 $ (14.8) $ 67.1 $ (2.9) $ 64.2
Depreciation and amortization...... 90.0 17.7 107.7 -- 107.7
-------------- -------------- -------------- ------------- -------------
Loss from operations............... $ (8.1) $ (32.5) $ (40.6) $ (2.9) $ (43.5)
============== ============== ============== ============= =============
Total assets ...................... $ 1,333.6 $ 418.0 $ 1,751.6 $ (322.7) $ 1,428.9
============== ============== ============== ============= =============
Capital expenditures .............. $ 182.1 $ 24.4 $ 206.5 $ -- $ 206.5
============== ============== ============== ============= =============
35
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. SEGMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
FIXED SATELLITE TOTAL REPORTABLE
SERVICES DATA SERVICES 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
============== ============== ============== =============== =============
EBITDA(1) ......................... $ 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 $ 595.5 $ 2,194.5 $ (510.2) $ 1,684.3
============== ============== ============== =============== =============
Capital expenditures .............. $ 292.9 $ 14.6 $ 307.5 $ -- $ 307.5
============== ============== ============== =============== =============
NINE MONTHS ENDED DECEMBER 31, 1998
FIXED SATELLITE TOTAL REPORTABLE
SERVICES DATA 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
--------------- ---------------- --------------- ---------------
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
=============== ================ =============== ===============
36
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
7. SEGMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998
PREDECESSOR COMPANY
FIXED SATELLITE TOTAL REPORTABLE
SERVICES DATA 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
--------------- ---------------- --------------- ---------------
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
=============== ================ =============== ===============
- ------------------
(1) EBITDA (which is equivalent to operating income (loss) before
depreciation and amortization, including amortization of unearned compensation)
is provided 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 the Company's
operating results. However, EBITDA should not be construed as 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.
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, 2000 and 1999, amounted to approximately
$89.7 million and $65.0 million, $1.7 million and $2.1 million, and $4.2 million
and $10.1 million, respectively.
The Company had one customer in 2000 that accounted for greater than 10
percent of its total revenue. The revenue associated with this customer, which
is included in the Data Services segment, amounted to $19.8 million for the year
ended December 31, 2000.
The following summarizes the Company's domestic and foreign revenues (in
thousands):
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, NINE MONTHS MARCH 31,
----------------------- ENDED 1998
DECEMBER 31, PREDECESSOR
2000 1999 1998 COMPANY
-------- -------- -------- --------
Revenues from unaffiliated customers:
United States ........................................ $ 87,801 $ 46,801 $ 24,001 $ 6,895
Germany .............................................. 15,756 15,573 14,617 4,517
China ................................................ 13,558 536 -- --
United Kingdom ....................................... 10,518 7,021 7,245 2,444
Other foreign ........................................ 59,557 34,951 18,745 4,934
-------- -------- -------- --------
Total revenue .......................................... $187,190 $104,882 $ 64,608 $ 18,790
======== ======== ======== ========
37
8. RELATED PARTY TRANSACTIONS
Due from Loral companies consist of the following (in thousands):
DECEMBER 31,
-----------------
2000 1999
------ ------
Due from Space Systems/Loral .................... $ 353 $ --
Due from Loral Space and Communications Corp .... 1,165 --
Due from Loral Communications Services .......... 67 --
Due from CyberStar L.P. ......................... 7,960 181
------ ------
$9,545 $ 181
====== ======
Due to Loral companies consist of the following (in thousands):
DECEMBER 31,
-------------------
2000 1999
------- -------
Due to Space Systems/Loral .................... $ 1 $ 9,750
Due to Loral Skynet ........................... 4,038 41,788
Due to Loral Space and Communications Ltd. .... 456 --
------- -------
$ 4,495 $51,538
======= =======
Loral CyberStar has obtained additional financing (via an intercompany note
from Loral SpaceCom) 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 (6.71 percent at
December 31, 2000) plus 275 basis points. The note can be prepaid at any time
without penalty and is payable on demand. All borrowings under this note are
subject to Loral's approval. At December 31, 2000, $107.9 million (including
accrued interest of $12.4 million) was outstanding, which is reflected on the
balance sheet as a note payable to Loral SpaceCom. Such borrowings and accrued
interest totaled $74.1 million at December 31, 1999.
Loral CyberStar and Loral Skynet 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, which amounted to $21.4 million for 2000
and $18.7 million for 1999.
Loral CyberStar Data Services began leasing transponder capacity from Loral
Skynet in 2000. Amounts incurred for transponder capacity leased from Loral
Skynet totaled $4.5 million in 2000.
Loral CyberStar and CyberStar L.P., a subsidiary of Loral, entered into an
agreement whereby Loral CyberStar provides to CyberStar L.P. marketing and
general and administrative services. These services totaled $3.8 million and
$0.4 million in 2000 and 1999, respectively.
.Space Systems/Loral ("SS/L"), a subsidiary of Loral SpaceCom, built the
Company's Telstar 12 satellite that was launched in October 1999. The Company
made payments to SS/L during 2000, 1999 and 1998 totaling approximately $9.8
million, $98.3 million and $128.4 million, respectively.
In December 1999, in connection with a contractual arrangement between SS/L
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 its
life. Under this arrangement, Loral Cyberstar recorded revenue of $4.4 million
in 2000.
38
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
8. RELATED PARTY TRANSACTIONS (CONTINUED)
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 N.L., 81 degrees W.L.,
78 degrees E.L. and 47 degrees W.L. In connection 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 was
applied by Loral CyberStar toward the last installment payment on Telstar
10/Apstar IIR In connection with the sale, the Company recorded a gain of
approximately $34 million. Since the sale was to a subsidiary of Loral, the gain
was credited directly to equity. This assignment was approved by the Federal
Communications Commission on December 11, 2000.
9. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 2000 and 1999 (in thousands):
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,(1)
--------- -------- ------------- ---------------
2000
Revenues ......................................... $ 42,182 $ 41,120 $ 43,517 $ 60,371
Loss (income) from Operations .................... 14,913 17,720 12,691 (1,832)
Loss before income taxes ......................... 36,086 41,000 36,953 22,249
Net loss ......................................... 37,048 38,102 35,007 27,261
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
(1) The fourth quarter of 2000 includes a $12.0 million settlement resulting from a contract termination with a customer.
39
ITEM 9. CHANGES IN AND DISAREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURES.
None
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.
40
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, 2000 and 1999
Consolidated Statements of Operations - Years ended December 31,
2000 and 1999, the nine months ended December 31, 1998 and for the
Predecessor Company the three months ended March 31, 1998.
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 2000 and 1999, the nine months ended December 31,
1998, and for the Predecessor Company the three months ended March
31, 1998.
Consolidated Statements of Cash Flows - Year ended December 31,
2000, year ended December 31, 1999, the nine months ended December
31, 1998, and for the Predecessor Company the three months ended
March 31, 1998.
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 2000
None
(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).
41
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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.)
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).
42
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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).
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).
43
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
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).
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.
44
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.
45
Signature Title Date
----------------------------- --------------------------------- ------------------
/s/ Bernard L. Schwartz Chairman of the Board March 29, 2001
------------------------------ and Chief Executive Officer
Bernard L. Schwartz
/s/ George Baker Director March 29, 2001
------------------------------
George Baker
/s/ Eric J. Zahler Executive Vice President March 29, 2001
------------------------------ and Director
Eric J. Zahler
/s/ Michael P. DeBlasio First Senior Vice President March 29, 2001
------------------------------ and Director
Michael P. DeBlasio
/s/ Daniel Hirsch Director March 29, 2001
------------------------------
Daniel Hirsch
/s/ W. Neil Bauer President and Director March 29, 2001
------------------------------
W. Neil Bauer
/s/ Richard J. Townsend Senior Vice President March 29, 2001
------------------------------ and Chief Financial Officer
Richard J. Townsend (Principal Financial Officer)
/s/ Harvey B. Rein Vice President and March 29, 2001
------------------------------ Controller
Harvey B. Rein (Principal Accounting Officer)
46