SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
Commission file number 0-22085
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LORAL CYBERSTAR, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 52-2008654
- ----------------------------------------- --------------------
(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) (Zip Code)
301-258-8101
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(Registrant's telephone number including area code)
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 __
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING WITH THE REDUCED DISCLOSURE FORMAT
PURSUANT TO GENERAL INSTRUCTION H (2) OF FORM 10-Q.
1
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2000 1999
---- ----
(Unaudited) Note
ASSETS
Current assets:
Cash and cash equivalents $ 15,965 $ 24,117
Restricted and segregated assets 25,206 187,315
Accounts receivable (less allowance for doubtful accounts of $3,279
and $2,257 at March 31, 2000 and December 31, 1999, respectively) 27,650 16,797
Prepaid expenses and other current assets 11,793 11,716
Due from CyberStar L.P. 8,256 181
Due from Space Systems/Loral 650 --
---------------- -----------------
Total current assets 89,520 240,126
Property and equipment at cost:
Land 74 74
Satellite and related equipment 784,362 784,344
Telecommunications equipment 49,018 44,747
Furniture and computer equipment 10,198 9,910
---------------- -----------------
843,652 839,075
Less accumulated depreciation (109,824) (88,549)
Satellite construction in progress 17,031 16,951
---------------- -----------------
Net property and equipment 750,859 767,477
Costs in excess of net assets acquired 589,342 593,219
Deferred income taxes 48,451 49,223
Other assets, net 31,161 34,242
---------------- -----------------
TOTAL ASSETS $ 1,509,333 $ 1,684,287
================ =================
- ----------
Note: The December 31, 1999 balance sheet has been derived from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
2
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PAR AMOUNTS)
(CONTINUED)
MARCH 31, DECEMBER 31,
2000 1999
---- ----
(Unaudited) Note
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,155 $ 2,071
Accounts payable 4,428 3,098
Satellite purchase price payable -- 181,928
Accrued and other current liabilities 13,114 13,995
Customer deposits 4,393 9,069
Deferred revenue 3,420 2,624
Interest payable 10,385 22,842
Note payable to Loral SpaceCom 83,937 74,114
Due to Skynet Delaware 45,232 41,788
Due to Space Systems/Loral 13 9,750
------------------ -----------------
Total current liabilities 167,077 361,279
Long-term debt 971,821 963,299
Deferred revenue 6,352 5,957
Customer deposits 3,723 --
Other long-term liabilities 150 448
Due to Space Systems/Loral 5,900 5,900
Commitments and contingencies:
Stockholders' equity:
Common stock, $.01 par value, 1,000 shares authorized; 100 shares outstanding -- --
Capital in excess of par value 588,186 544,176
Unearned compensation (1,542) (1,804)
Accumulated other comprehensive loss (1,142) (824)
Accumulated deficit (231,192) (194,144)
------------------ -----------------
Total stockholders' equity 354,310 347,404
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,509,333 $ 1,684,287
================ =================
- ----------
Note: The December 31, 1999 balance sheet has been derived from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
3
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
Service revenue $ 42,182 $ 22,538
Operating expenses:
Direct 16,799 6,631
Sales and marketing 5,899 5,902
Engineering and technical services 2,432 2,197
General and administrative 4,996 3,738
Depreciation and amortization 26,969 17,541
--------------- --------------
Total operating expenses 57,095 36,009
Loss from operations (14,913) (13,471)
Interest income 2,381 1,174
Interest expense (23,766) (13,896)
Other income 212 124
--------------- --------------
Loss before income taxes (36,086) (26,069)
Income tax (provision) benefit (962) 1,834
--------------- --------------
Net loss $ (37,048) $ (24,235)
=============== ===============
4
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
OPERATING ACTIVITIES
Net loss $ (37,048) $ (24,235)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Deferred income tax provision 772 412
Depreciation and amortization 26,969 17,541
Provision for bad debts 1,078 406
Non-cash interest expense 9,017 8,210
Interest earned on restricted assets (3,000) --
Changes in operating assets and liabilities:
Accounts receivable (15,682) (3,475)
Prepaid expenses and other current assets (77) 564
Other assets 1,988 (3,086)
Accounts payable, accrued liabilities and other
current liabilities (755) 439
Interest payable (12,457) (12,459)
Due to Skynet Delaware 3,475 --
Customer deposits (953) 2,504
Deferred revenue 2,491 (3)
Due to Loral SpaceCom 9,528 --
Due from Space System/Loral (10,387) --
Due from CyberStar L.P. (8,075) --
---------------- ---------------
Net cash used in operating activities (33,116) (13,182)
INVESTING ACTIVITIES
Increase in restricted and segregated assets (64) (762)
Uses of and transfers from restricted and
segregated cash 165,174 24,919
Satellite construction costs (80) (62,819)
Capital expenditures, net (185,331) (354)
---------------- ---------------
Net cash used in investing activities (20,301) (39,016)
FINANCING ACTIVITIES
Gain on sale of orbital slots to Loral 34,260 --
Equity contributed from Loral 9,750 --
Due to Loral -- 37,710
Repayment of senior notes and notes payable (332) (290)
Deferred revenue 2,450 --
Payment of satellite incentive obligations (67) (59)
Other (796) (2,176)
---------------- ---------------
Net cash provided by financing activities 45,265 35,185
Net decrease in cash and cash equivalents (8,152) (17,013)
Cash and cash equivalents at beginning of period 24,117 35,861
---------------- ---------------
Cash and cash equivalents at end of period $ 15,965 $ 18,848
================ ================
5
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BASIS OF PRESENTATION
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:
Fixed Satellite Services: Leasing transponder capacity and providing
value-added services to customers for a wide variety of applications,
including the distribution of broadcast programming, news gathering,
business television, distance learning and direct-to-home ("DTH") services.
Loral Skynet, a division of Loral Spacecom Corporation, which is in turn a
subsidiary of Loral Space & Communications Ltd. ("Loral"), began managing
the Company's Fixed Satellite Services ("FSS") assets effective January 1,
1999.
Data Network Services: Providing managed communications networks and
Internet and intranet services, using transponder capacity on the Loral
Skynet and Loral CyberStar fleets.
GENERAL
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules of the Securities and Exchange
Commission ("SEC") and, in the opinion of the Company, include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the results of operations, financial position and cash flows. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to SEC rules. The Company believes that the
disclosures made are adequate to keep the information presented from being
misleading. The results of operations for the three months ended March 31, 2000
are not necessarily indicative of the results to be expected for the full year.
It is suggested that these financial statements be read in conjunction with the
Company's latest Annual Report on Form 10-K.
6
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
COMPREHENSIVE LOSS
Comprehensive loss is as follows (in thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
Net loss $ 37,048 $ 24,235
Cumulative translation adjustment 318 913
---------------- ----------------
Comprehensive loss $ 37,366 $ 25,148
================ ================
EARNINGS PER SHARE
Earnings per share is not presented since it is not considered meaningful due to
the merger with Loral and recapitalization of the Company.
NOTE B. RESTRICTED AND SEGREGATED CASH
As of March 31, 2000, the Company had approximately $25 million of restricted
cash for an interest payment on its senior notes on July 15, 2000.
NOTE C. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
MARCH 31, DECEMBER 31,
2000 1999
---- ----
Senior notes (including premium of $57.2 million and $58.7 million
at March 31, 2000 and December 31, 1999, respectively) $ 500,184 $ 501,734
Senior discount notes (principal amount at maturity $484 million and
accreted principal amount of $390 million and $378 million at
March 31, 2000 and December 31, 1999, respectively) 458,976 448,408
Notes payable - TT&C Facility 3,398 3,729
Satellite incentive obligations 11,061 11,129
Other 357 370
--------------- ---------------
Total long-term debt 973,976 965,370
Less: current portion (2,155) (2,071)
--------------- ---------------
Long-term debt, less current portion $ 971,821 $ 963,299
=============== ===============
In connection with the merger, Loral did not assume the Company's outstanding
debt. Such debt remains outstanding and is non-recourse to Loral.
7
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE D. NOTE DUE TO LORAL
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 (6.06% at March 31, 2000) plus
275 basis points. The intercompany note can be prepaid at any time without
penalty and is payable on demand. At March 31, 2000, the outstanding borrowing
amount under this intercompany note was $83.9 million (including accrued
interest of $5.8 million) and is reflected on the balance sheet as a note
payable to Loral SpaceCom.
NOTE E. INCOME TAXES
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 the current year with Loral Space & Communications Corporation, the Company
is entitled to reimbursement for the use of its tax losses, when such losses are
utilized by the consolidated group; otherwise, the Company is required to pay
its separate company income tax liability to Loral Space & Communications
Corporation. The Company recorded a net payable under this tax sharing agreement
of approximately $0.2 million and a deferred tax provision of $0.8 million,
resulting in a total tax provision of $1 million for the three months ended
March 31, 2000. The Company's effective tax rate of 2.7% for the three months
ended March 31, 2000 differs from the federal statutory benefit rate of 35%
primarily due to the tax gain recognized upon transfer of four orbital slots to
Loral Space & Communications Corporation and the non-deductible amortization of
costs in excess of net asset acquired. The deferred tax asset of $48.5 million
as of March 31, 2000 on the accompanying balance sheet arises primarily from the
tax effect of the temporary differences between the carrying amount of the
senior notes and the senior discount notes payable for financial and income tax
purposes.
8
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE F. SEGMENTS
The Company's two operating segments are Fixed Satellite Services and Data
Network Services (see Note A).
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.
Summarized financial information concerning the Company's operating segments is
as follows (in millions):
THREE MONTHS ENDED MARCH 31, 2000
(UNAUDITED)
FIXED TOTAL
SATELLITE DATA REPORTABLE INTERSEGMENT
SERVICES SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED
-------- -------- -------- ------------ ------------
Revenue from external customers ...... $ 17.4 $ 24.8 $ 42.2 $ -- $ 42.2
Intersegment revenue ................. 4.6 -- 4.6 (4.6) --
------------- ------------ ------------ ------------- ------------
Gross revenue ........................ $ 22.0 $ 24.8 $ 46.8 $ (4.6) $ 42.2
============= ============ ============ ============= ============
EBITDA (1)............................ $ 14.8 $ (2.8) $ 12.0 $ -- $ 12.0
Depreciation and amortization ........ 22.5 4.5 27.0 -- 27.0
------------- ------------ ------------ ------------- ------------
Loss from operations ................. $ (7.7) $ (7.3) $ (15.0) $ -- $ (15.0)
============= ============ ============ =========== ============
Total assets ........................ $ 1,429.0 $ 80.3 $ 1,509.3 $ -- $ 1,509.3
============= ============ ============ ============= ============
THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
FIXED TOTAL
SATELLITE DATA REPORTABLE INTERSEGMENT
SERVICES SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED
-------- -------- -------- ------------ ------------
Revenue from external customers ...... $ 7.3 $ 15.2 $ 22.5 $ -- $ 22.5
Intersegment revenue ................. 1.8 -- 1.8 (1.8) --
------------- ------------ ------------ ------------- ------------
Gross revenue ........................ $ 9.1 $ 15.2 $ 24.3 $ (1.8) $ 22.5
============= ============ ============ ============= ============
EBITDA(1)............................. $ 6.3 $ (2.3) $ 4.0 $ -- $ 4.0
Depreciation and amortization ........ 14.2 3.3 17.5 -- 17.5
------------- ------------ ------------ ------------- ------------
Loss from operations ................. $ (7.9) $ (5.6) $ (13.5) $ -- $ (13.5)
============= ============ ============ ============= ============
Total assets ........................ $ 1,349.4 $ 72.7 $ 1,422.1 $ -- $ 1,422.1
============= ============ ============ ============= ============
(1) EBITDA (which is equivalent to operating income (loss) before depreciation
and amortization) 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.
9
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE G. 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 useable
capacity. In such event, while the Company would be entitled to insurance
proceeds of approximately $195 million as of March 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 (formerly Orion 2) - Telstar 12, a high power satellite with 38
Ku-band transponders, expands Loral CyberStar's European coverage and extends
coverage to portions of the former Soviet Union, Latin America, the Middle East
and South Africa. Telstar 12 was launched aboard an Ariane launch vehicle in
October 1999 into 15 degrees W.L., and commenced operations in January 2000.
Although Telstar 12 was originally intended to operate at 12 degrees W.L., Loral
Cyberstar reached an agreement with Eutelsat to operate Telstar 12 at 15 degrees
W.L. while Eutelsat continued to develop its services at 12.5 degrees W.L.
Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to
assert its priority rights at such location on Loral CyberStar's behalf. As part
of this coordination effort, Loral CyberStar agreed to provide to Eutelsat four
transponders on Telstar 12 for the life of the satellite. Eutelsat also has the
right to acquire, at cost, four transponders on the next replacement satellite
for Telstar 12. As part of the international coordination process, the Company
continues to conduct discussions with various administrations regarding Telstar
12's operations at 15 degrees W.L. If these discussions are not successful,
Telstar 12's useable capacity may be reduced.
Agreements with Loral Skynet -- Loral CyberStar and Loral Skynet, a division of
Loral SpaceCom, which in turn is a wholly-owned subsidiary of Loral, have
entered into agreements (the "Loral Skynet Agreements") effective January 1,
1999, whereby Loral Skynet provides to Loral CyberStar (i) marketing and sales
of satellite capacity services on the Loral CyberStar satellite network and
related billing and administration of customer contracts for those services (the
"Sales Services") and (ii) telemetry, tracking and control services for the
Loral CyberStar satellite network (the "Technical Services", and together with
the Sales Services, the "Services"). Loral CyberStar is charged Loral Skynet's
costs for providing these services plus a 5 percent administrative fee.
Litigation -- 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.
NOTE H. SALE OF Ka-BAND SLOTS
On March 24, 2000, Loral CyberStar entered into an agreement with a subsidiary
of Loral to assign to the Loral subsidiary, pending regulatory approval, its
Ka-band orbital slots located at 89 degrees W.L., 81 degrees W.L., 78 degrees
E.L. and 47 degrees W.L. In connection with this transaction, Loral CyberStar
also agreed to transfer to the Loral subsidiary all agreements, including
satellite construction contracts, related to such slots. The total sale price
for the slots and these agreements was $36.5 million, (of which $34.5 million
was received in the first quarter of 2000), which was applied by Loral CyberStar
towards 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.
NOTE I. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current
period presentation.
10
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters discussed in
this Management's Narrative Analysis of Results of Operations are not historical
facts, but are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. In addition, from time to time, Loral
CyberStar, Loral or their representatives have made or may make forward-looking
statements, orally or in writing. Such forward-looking statements may be
included in, but are not limited to, various filings made by Loral CyberStar or
Loral with the Securities and Exchange Commission, press releases or oral
statements made by or with the approval of an authorized executive officer of
Loral CyberStar or Loral. They can be identified by the use of forward-looking
words such as "believes", "expects", "plans", "may", "will", "should" or
"anticipates" or their negatives or other variations of these words or other
comparable words, or by discussions of strategy that involve risks and
uncertainties. The forward-looking statements are only predictions, and actual
events or results could differ materially from those projected or suggested in
any forward-looking statements as a result of a wide variety of factors or
conditions, many of which are beyond the Company's control. Some of these
factors and conditions include: (i) the Company has substantial debt; (ii) the
Company's debt imposes restrictions and otherwise affects the Company's ability
to undertake certain actions; (iii) the Company has funding requirements; (iv)
the Company's satellites may fail prematurely; (v) the Company cannot guarantee
successful coordination for its satellites; and (vi) the Company faces severe
competition. For a detailed discussion of these factors and conditions, please
refer to the Company's most recent Annual Report on Form 10-K filed with the
SEC.
GENERAL
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 subsidiaries 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:
Fixed Satellite Services: Leasing transponder capacity and providing
value-added services to customers for a wide variety of applications,
including the distribution of broadcast programming, news gathering,
business television, distance learning and direct-to-home ("DTH") services.
Loral Skynet, a division of Loral Spacecom Corporation, which is in turn a
subsidiary of Loral Space & Communications Ltd. ("Loral"), began managing
the Company's Fixed Satellite Services ("FSS") assets effective January 1,
1999.
Data Network Services: Providing managed communications networks and
Internet and intranet services, using transponder capacity on the Loral
Skynet and Loral CyberStar fleets.
Ka-BAND SLOTS
On March 24, 2000, Loral CyberStar entered into an agreement with a subsidiary
of Loral to assign to the Loral subsidiary, pending regulatory approval, its
Ka-band orbital slots located at 89 degrees W.L., 81 degrees W.L., 78 degrees
E.L. and 47 degrees W.L. In connection with this transaction, Loral CyberStar
also agreed to transfer to the Loral subsidiary all agreements, including
satellite construction contracts, related to such slots. The total sale price
for the slots and these agreements was $36.5 million, (of which $34.5 million
was received in the first quarter of 2000), which was applied by Loral CyberStar
towards the last installment payment on Telstar 10/Apstar IIR.
11
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
(CONTINUED)
TELSTAR 12
Telstar 12 (formerly known as Orion 2), a high power satellite with 38 Ku-band
transponders, expands Loral Cyberstar's European coverage and extends coverage
to portions of the former Soviet Union, Latin America, the Middle East and South
Africa. Telstar 12 was launched in October 1999 into 15 degrees W.L. and
commenced revenue generating operations in January 2000. Although Telstar 12 was
originally intended to operate at 12 degrees W.L., Loral CyberStar reached an
agreement with Eutelsat to operate Telstar 12 at 15 degrees W.L. while Eutelsat
continued to develop its services at 12.5 degrees W.L. Eutelsat has in turn
agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority
rights at such location on Loral CyberStar's behalf. As part of this
coordination effort, Loral CyberStar agreed to provide to Eutelsat four
transponders on Telstar 12 for the life of the satellite. Eutelsat also has the
right to acquire, at cost, four transponders on the next replacement satellite
for Telstar 12. As part of the international coordination process, Loral
CyberStar continues to conduct discussions with various administrations
regarding Telstar 12's operations at 15 degrees W.L. If these discussions are
not successful, Telstar 12's useable capacity may be reduced.
TELSTAR 10
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. In March 2000, the Company made
the final payment to APT.
12
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
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. See Note F to the unaudited condensed consolidated
financial statements for additional information on segment results.
OPERATING REVENUES (IN MILLIONS):
THREE MONTHS ENDED
MARCH 31,
------------------
1999 2000
---- ----
Fixed satellite services .......... $ 22.0 $ 9.1
Data services ..................... 24.8 15.2
Intersegment elimination ........... (4.6) (1.8)
------------- ------------
Operating revenues ................. $ 42.2 $ 22.5
============= ============
EBITDA(1) (IN MILLIONS):
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
---- ----
Fixed satellite services .......... $ 14.8 $ 6.3
Data services ..................... (2.8) (2.3)
------------- ------------
EBITDA ............................. $ 12.0 $ 4.0
============= ============
- --------
(1) EBITDA (which is equivalent to operating income (loss) before depreciation
and amortization) 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.
13
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
(CONTINUED)
Revenue and Backlog. Total revenues for the three months ended March 31, 2000
and 1999 were $42.2 million and $22.5 million, respectively, an increase of
$19.7 million or 88 percent. This increase is primarily attributable to the
private communications network services operations, which included the addition
of 221 customer sites in service compared to the same period in 1999, the
service commencement of Telstar 12 and Telstar 10/Apstar IIR and a one-time
equipment sale of $3.3 million.
At March 31, 2000, the Company had backlog (representing future revenues under
contract) of approximately $834.8 million compared to $360.1 million at March
31, 1999. Revenue from customer contract backlog is typically earned over two to
five years.
Direct Expenses. Direct expenses for the three months ended March 13, 2000, were
$16.8 million compared to $6.6 million for the same period in 1999, an increase
of $10.2 million or 155 percent. These increases are primarily attributable to
Internet access, satellite transponder leasing and terrestrial link charges that
support the Worldcast Internet access product ("Worldcast").
Sales and Marketing Expenses. Sales and marketing expenses were $5.9 million for
the three months ended March 31, 2000 and 1999.
Engineering and Technical Services Expenses. Engineering and technical services
expenses for the three months ended March 31, 2000 were $2.4 million compared to
$2.2 million for the same period in 1999.
General and Administrative Expenses. General and administrative expenses were
$5.0 million for the three months ended March 31, 2000 compared to $3.7 million
for the same period in 1999, an increase of $1.3 million or 35 percent. The
increase is associated with additional bad debt costs for the FSS business and
recruiting costs for the Data Network Services business.
Depreciation and Amortization. Depreciation and amortization expense for the
three months ended March 31, 2000 was $27.0 million compared to $17.5 million
for the same period in 1999, an increase of $9.5 million or 54 percent. The
increase was primarily due to the acquisition of Telstar 10/Apstar IIR on
September 28, 1999 and from Telstar 12 being placed in service in December 1999.
Interest. Interest income was $2.4 million for the three months ended March 31,
2000, compared to $1.2 million for the three months ended March 31, 1999. The
increase was primarily due to the interest earned on the increased segregated
cash balance in 2000. Interest expense, net of capitalized interest of $0 and
$7.3 million, respectively, was $23.8 million for the three months ended March
31, 2000, and $13.9 million for the three months ended March 31, 1999. The
increase in interest expense is due to the interest expense on the intercompany
debt from Loral SpaceCom and the decrease in capitalized interest in 2000.
Income Taxes. 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 the current year with Loral Space & Communications
Corporation, the Company is entitled to reimbursement for the use of its tax
losses, when such losses are utilized by the consolidated group; otherwise, the
Company is required to pay its separate company income tax liability to Loral
Space & Communications Corporation. The Company recorded a net payable under
this tax sharing agreement of approximately $0.2 million and a deferred tax
provision of $0.8 million, resulting in a total tax provision of $1 million for
the three months ended March 31, 2000. The Company's effective tax rate of 2.7%
for the three months ended March 31, 2000 differs from the federal statutory
benefit rate of 35% primarily due to the tax gain recognized upon transfer of
four orbital slots to Loral Space & Communications Corporation and the
non-deductible amortization of costs in excess of net asset acquired. The
deferred tax asset of $48.5 million as of March 31, 2000 on the accompanying
balance sheet arises primarily from the tax effect of the temporary differences
between the carrying amount of the senior notes and the senior discount notes
payable for financial and income tax purposes.
14
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
(CONTINUED)
Net Loss. As a result of the above, the Company incurred net losses of $37.0
million and $24.2 million for the three months ended March 2000 and 1999,
respectively.
RESULTS BY OPERATING SEGMENT
Fixed Satellite Service
FSS revenue for the three months ended March 31, 2000 was $22.0 million versus
$9.1 million for three months ended March 31, 1999. EBITDA for the three months
ended March 31, 2000 was $14.8 million, or 67 percent of revenues, versus $6.3
million, or 69 percent of revenues, for the three months ended March 31, 1999.
Data Services
Revenues for the Data Network Services segment for the three months ended March
31, 2000 was $24.8 million versus $15.2 million for the three months ended March
31, 1999. EBITDA for the three months ended March 31, 2000 was a loss of
approximately $2.8 million versus a loss of $2.3 million for the three months
ended March 31, 1999.
OTHER MATTERS
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), which
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings or financial position. The
Company is required to adopt SFAS 133 on January 1, 2001.
15
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
16
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LORAL CYBERSTAR, INC.
Registrant
Date: May 15, 2000 /s / RICHARD J. TOWNSEND
----------------------------------------
Richard J. Townsend
Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Registrant's Authorized Officer)
17