SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
Commission file number 0-22085
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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) (Zip Code)
301-258-8101
- --------------------------------------------------------------------------------
(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)
JUNE 30, DECEMBER 31,
2000 1999
---------------- ----------------
(Unaudited) Note
ASSETS
Current assets:
Cash and cash equivalents $ 13,670 $ 24,117
Restricted and segregated cash 25,063 187,315
Accounts receivable (less allowance for doubtful accounts of $5,812
and $2,257 at June 30, 2000 and December 31, 1999, respectively) 54,026 16,797
Prepaid expenses and other current assets 15,127 11,716
Due from CyberStar L.P. 9,282 181
Due from Space Systems/Loral 2,360 --
Due from Loral Space and Communications Corp. 346 --
Due from Loral Communication Services 18 --
---------------- ----------------
Total current assets 119,892 240,126
Property and equipment at cost:
Land 74 74
Satellite and related equipment 786,126 784,344
Telecommunications equipment 52,124 44,747
Furniture and computer equipment 10,365 9,910
---------------- ----------------
848,689 839,075
Less accumulated depreciation (130,980) (88,549)
Construction in progress 13,240 16,951
---------------- ----------------
Net property and equipment 730,949 767,477
Costs in excess of net assets acquired 585,464 593,219
Deferred income taxes 47,673 49,223
Other assets, net 31,809 34,242
---------------- ----------------
TOTAL ASSETS $ 1,515,787 $ 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)
JUNE 30, DECEMBER 31,
2000 1999
------------------ -----------------
(Unaudited) Note
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,231 $ 2,071
Accounts payable 2,728 3,098
Satellite purchase price payable -- 181,928
Accrued and other current liabilities 13,261 13,995
Customer deposits 5,361 9,069
Deferred revenue 5,696 2,624
Interest payable 22,842 22,842
Note payable to Loral SpaceCom 97,477 74,114
Due to Skynet Delaware 27,606 41,788
Due to Space Systems/Loral -- 9,750
------------------ -----------------
Total current liabilities 177,202 361,279
Long-term debt 980,303 963,299
Deferred revenue 31,033 5,957
Customer deposits 4,140 --
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 589,211 544,176
Unearned compensation (1,397) (1,804)
Accumulated other comprehensive loss (1,460) (824)
Accumulated deficit (269,295) (194,144)
------------------ -----------------
Total stockholders' equity 317,059 347,404
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,515,787 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
--------------- -------------- -------------- --------------
Revenues $ 41,120 $ 24,072 $ 83,302 $ 46,610
Operating expenses:
Direct 16,458 7,566 33,257 14,197
Sales and marketing 6,996 6,315 12,895 12,217
Engineering and technical services 2,660 2,184 5,092 4,381
General and administrative 5,850 3,573 10,846 7,311
Depreciation and amortization 26,876 16,362 53,845 33,903
--------------- -------------- -------------- --------------
Total operating expenses 58,840 36,000 115,935 72,009
Loss from operations (17,720) (11,928) (32,633) (25,399)
Interest income 622 897 3,003 2,071
Interest expense (24,052) (17,523) (47,818) (31,419)
Other income 150 234 362 358
--------------- -------------- -------------- --------------
Loss before income taxes (41,000) (28,320) (77,086) (54,389)
Income tax benefit 2,898 805 1,936 2,639
--------------- -------------- -------------- --------------
Net loss $ (38,102) $ (27,515) $ (75,150) $ (51,750)
=============== =============== ============== ==============
See notes to condensed consolidated financial statements.
4
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
----------------------------------
2000 1999
---------------- ---------------
OPERATING ACTIVITIES
Net loss $ (75,150) $ (51,750)
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Deferred income tax provision 1,550 1,853
Depreciation and amortization 53,845 33,903
Provision for bad debts 2,654 1,353
Non-cash interest expense 18,103 16,483
Interest earned on restricted assets (3,308) --
Other -- 795
Changes in operating assets and liabilities:
Accounts receivable (39,941) (2,342)
Prepaid expenses and other current assets (3,411) 1,458
Other assets 197 (2,942)
Accounts payable, accrued liabilities and other
current liabilities (2,308) 44,188
Due to Skynet Delaware (14,151) --
Customer deposits 767 800
Deferred revenue 28,147 (73)
Due from Loral Communications Services (18) --
Due from Space Systems/Loral (2,360) --
Due to Space Systems/Loral (9,750) --
Due from Loral Space & Communications Corp. (346) --
Due from CyberStar L.P. (9,101) --
---------------- ---------------
Net cash (used in) provided by operating activities (54,481) 43,726
INVESTING ACTIVITIES
Increase in restricted and segregated cash (64) (1,491)
Uses of and transfers from restricted and segregated cash 165,625 24,919
Construction in progress (11,071) (152,377)
Capital expenditures, net (175,586) (2,857)
---------------- ---------------
Net cash used in investing activities (21,096) (131,806)
FINANCING ACTIVITIES
Gain on sale of orbital slots 34,260 --
Equity contributed from Loral 10,750 13,033
Increase in note payable to Loral SpaceCom 23,067 59,655
Repayment of senior notes and notes payable (676) (590)
Payment of satellite incentive obligation (136) (120)
Other (2,035) (3,744)
---------------- ---------------
Net cash provided by financing activities 65,230 68,234
Net decrease in cash and cash equivalents (10,447) (19,846)
Cash and cash equivalents at beginning of period 24,117 35,861
---------------- ---------------
Cash and cash equivalents at end of period $ 13,670 $ 16,015
================ ================
Non-cash activities:
Insurance proceeds receivable for Orion 3 $ -- $ 265,606
================ ================
See notes to condensed consolidated financial statements.
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 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 & Communications Ltd. ("Loral"), began
managing the Company's Fixed Satellite Services ("FSS") assets
effective January 1, 1999.
Data 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 and six months ended June
30, 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):
SIX MONTHS ENDED JUNE 30,
-----------------------------
2000 1999
------------ -----------
Net loss $ 75,150 $ 51,750
Cumulative translation adjustment 636 1,385
------------ -----------
Comprehensive loss $ 75,786 $ 53,135
============ ===========
NOTE B. RESTRICTED AND SEGREGATED CASH
As of June 30, 2000, the Company had approximately $25 million of restricted
cash for an interest payment on its senior notes due July 15, 2000.
NOTE C. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
JUNE 30, DECEMBER 31,
2000 1999
--------------- ---------------
Senior notes (including premium of $55.6 million and $58.7 million
at June 30, 2000 and December 31, 1999, respectively) $ 498,623 $ 501,734
Senior discount notes (principal amount at maturity $484 million and
accreted principal amount of $401 million and $378 million at
June 30, 2000 and December 31, 1999, respectively 469,623 448,408
Notes payable - TT&C Facility 3,054 3,729
Satellite incentive obligation 10,992 11,129
Other 242 370
--------------- ---------------
Total debt 982,534 965,370
Less current portion (2,231) (2,071)
--------------- ---------------
Long-term debt $ 980,303 $ 963,299
=============== ===============
In connection with the merger with Loral, 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 (6.22% at June 30, 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 June 30, 2000, the outstanding amount under this note was $97.5
million (including accrued interest of $7.7 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 receivable under this tax sharing
agreement of approximately $3.8 million and $3.6 million, and a deferred tax
provision of $0.9 million and $1.7 million, resulting in a net tax benefit of
$2.9 million and $1.9 million for the three and six months ended June 30, 2000,
respectively. The Company's effective tax rate of 2.5% for the six months ended
June 30, 2000 differs from the federal statutory rate of 35% primarily due to
the valuation allowance established for the carryforward of the current year tax
loss and the non-deductible amortization of costs in excess of net asset
acquired. The deferred tax asset of $47.7 million as of June 30, 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
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 JUNE 30, 2000
(UNAUDITED)
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------
Revenue from external customers $ 18.3 $ 23.6 $ 41.9 $ (0.8) $ 41.1
Intersegment revenue 5.6 -- 5.6 (5.6) --
------------- ------------ ------------ ------------- ------------
Gross revenue $ 23.9 $ 23.6 $ 47.5 $ (6.4) $ 41.1
============= ============ ============ ============= ============
EBITDA (1) $ 16.0 $ (6.0) $ 10.0 $ (0.8) $ 9.2
Depreciation and amortization 22.6 4.3 26.9 -- 26.9
------------- ------------ ------------ ------------- ------------
Loss from operations $ (6.6) $ (10.3) $ (16.9) $ (0.8) $ (17.7)
============= ============ ============ ============= ============
Total assets $ 1,401.8 $ 114.0 $ 1,515.8 $ -- $ 1,515.8
============= ============ ============ ============= ============
THREE MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------ ------------
Revenue from external customers $ 7.5 $ 16.6 $ 24.1 $ -- $ 24.1
Intersegment revenue 1.7 -- 1.7 (1.7) --
------------- ------------ ------------ ------------- ------------
Gross revenue $ 9.2 $ 16.6 $ 25.8 $ (1.7) $ 24.1
============= ============ ============ ============= ============
EBITDA (1) $ 4.9 $ (0.5) $ 4.4 $ -- $ 4.4
Depreciation and amortization 12.7 3.7 16.4 -- 16.4
------------- ------------ ------------ ------------- ------------
Loss from operations $ (7.7) $ (4.2) $ (11.9) $ -- $ (11.9)
============= ============ ============ ============= ============
Total assets $ 1,419.9 $ 68.7 $ 1,488.6 $ -- $ 1,488.6
============= ============ ============ ============= ============
<FN>
- -------------------------
(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.
</FN>
9
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
SIX MONTHS ENDED JUNE 30, 2000
(UNAUDITED)
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------
Revenue from external customers $ 35.7 $ 48.4 $ 84.1 $ (0.8) $ 83.3
Intersegment revenue 10.2 -- 10.2 (10.2) --
------------- ------------ ------------ ------------- ------------
Gross revenue $ 45.9 $ 48.4 $ 94.3 $ (11.0) $ 83.3
============= ============ ============ ============= ============
EBITDA (1) $ 30.9 $ (8.9) $ 22.0 $ (0.8) $ 21.2
Depreciation and amortization 44.9 8.9 53.8 -- 53.8
------------- ------------ ------------ ------------- ------------
Loss from operations $ (14.0) $ (17.8) $ (31.8) $ (0.8) $ (32.6)
============= ============ ============ ============= ============
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED
------------- ------------ ------------ ------------- ------------
Revenue from external customers $ 14.8 $ 31.8 $ 46.6 $ -- $ 46.6
Intersegment revenue 3.5 -- 3.5 (3.5) --
------------- ------------ ------------ ------------- ------------
Gross revenue $ 18.3 $ 31.8 $ 50.1 $ (3.5) $ 46.6
============= ============ ============ ============= ============
EBITDA (1) $ 11.3 $ (2.8) $ 8.5 $ -- $ 8.5
Depreciation and amortization 26.9 7.0 33.9 -- 33.9
------------- ------------ ------------ ------------- ------------
Loss from operations $ (15.6) $ (9.8) $ (25.4) $ -- $ (25.4)
============= ============ ============ ============= ============
10
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 June 30, 2000 and would seek to
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 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.
Agreements with Loral Skynet -- 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.
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 and applied by Loral CyberStar towards the
last installment payment on Telstar 10/Apstar IIR. The remaining $2.0 million
was received in the second quarter of 2000. 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.
11
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 ("SEC"), 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 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 & Communications Ltd. ("Loral"), began
managing the Company's Fixed Satellite Services ("FSS") assets
effective January 1, 1999.
Data 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 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 and applied by Loral CyberStar towards the
last installment payment on Telstar 10/Apstar IIR. The remaining $2.0 million
was received in the second quarter of 2000.
12
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
(CONTINUED)
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 June 30, 2000 and would seek to
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 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.
Agreements with Loral Skynet -- 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.
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.
13
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------ ------------ ------------
Fixed satellite services $ 23.9 $ 9.2 $ 45.9 $ 18.3
Data services 23.6 16.6 48.4 31.8
Eliminations (6.4) (1.7) (11.0) (3.5)
------------- ------------ ------------ ------------
Operating revenues $ 41.1 $ 24.1 $ 83.3 $ 46.6
============= ============ ============ ============
EBITDA (1) (IN MILLIONS):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------ ------------ ------------
Fixed satellite services $ 16.0 $ 4.9 $ 30.9 $ 11.3
Data services (6.0) (0.5) (8.9) (2.8)
Eliminations (0.8) -- (0.8) --
------------- ------------ ------------ ------------
EBITDA $ 9.2 $ 4.4 $ 21.2 $ 8.5
============= ============ ============ ============
<FN>
- --------
(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.
</FN>
14
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 June 30, 2000 and
June 30, 1999 were $41.1 million and $24.1 million, respectively. Total revenues
for the six months ended June 30, 2000 and June 30, 1999 were $83.3 million and
$46.6 million, respectively. These increases are primarily attributable to
improved results in the private communications network services operations,
which added 221 and 244 customer sites for the three and six months ended June
30, 2000, as compared to the same periods in 1999, the service commencement of
Telstar 12 and Telstar 10/Apstar IIR after the second quarter of 1999; and an
equipment sale of $3.3 million in the first quarter of 2000.
At June 30, 2000, the Company had backlog (representing future revenues under
contract) of approximately $891.8 million compared to $261.7 million at June 30,
1999. Revenue from customer contract backlog is typically earned over two to
five years.
Direct Expenses. Direct expenses for the three months ended June 30, 2000 were
$16.5 million compared to $7.6 million for the same period in 1999. Direct
expenses for the six months ended June 30, 2000 and June 30, 1999 were $33.3
million and $14.2 million, respectively. These increases are primarily
attributable to Internet access, satellite transponder leasing and terrestrial
link charges that support the Worldcast Internet access product , increase in
in-orbit satellite insurance for Telstar 12 and Telstar 10/Apstar IIR and the
cost of equipment related to an equipment sale in the first quarter of 2000.
Sales and Marketing Expenses. Sales and marketing expenses were $7.0 million for
the three months ended June 30, 2000, as compared to $6.3 million for the same
period in 1999. Sales and marketing expenses for the six months ended June 30,
2000 and June 30, 1999 were $12.9 million and $12.2 million, respectively. These
increases are related to travel expenses associated with sales and marketing
initiatives.
Engineering and Technical Services Expenses. Engineering and technical services
expenses for the three months ended June 30, 2000 were $2.7 million compared to
$2.2 million for the same period in 1999. Engineering and technical expenses for
the six months ended June 30, 2000 and June 30, 1999 were $5.1 million and $4.4
million, respectively.
General and Administrative Expenses. General and administrative expenses were
$5.9 million for the three months ended June 30, 2000 compared to $3.6 million
for the same period in 1999. General and administrative expenses for the six
months ended June 30, 2000 and June 30, 1999 were $10.8 million and $7.3
million, respectively. These increases are associated with additional bad debt
costs for the FSS business and recruiting costs for the Data Services business.
Depreciation and Amortization. Depreciation and amortization expense for the
three months ended June 30, 2000 was $26.9 million compared to $16.4 million for
the same period in 1999. Depreciation and amortization expense for the six
months ended June 30, 2000 and June 30, 1999 was $53.8 million and $33.9
million, respectively. These increases were 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 $0.6 million for the three months ended June 30,
2000, compared to $0.9 million for the three months ended June 30, 1999.
Interest income for the six months ended June 30, 2000 and June 30, 1999 was
$3.0 million and $2.1 million, respectively. Interest expense was $24.1 million
for the three months ended June 30, 2000, and $17.5 million, net of capitalized
interest of $3.8 million, for the three months ended June 30, 1999. Interest
expense for the six months ended June 30, 2000 was $47.8 million and for the six
months ended June 30, 1999 was $31.4 million, net of capitalized interest of
$11.1 million. The increase in interest expense is primarily due to the interest
expense on the intercompany debt from Loral SpaceCom and the decrease in
capitalized interest in 2000.
15
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
(CONTINUED))
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 receivable under
this tax sharing agreement of approximately $3.8 million and $3.6 million, and a
deferred tax provision of $0.9 million and $1.7 million, resulting in a net tax
benefit of $2.9 million and $1.9 million for the three and six months ended June
30, 2000, respectively. The Company's effective tax rate of 2.5% for the six
months ended June 30, 2000 differs from the federal statutory rate of 35%
primarily due to the valuation allowance established for the carryforward of the
current year tax loss and the non-deductible amortization of costs in excess of
net asset acquired. The deferred tax asset of $47.7 million as of June 30, 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.
Net Loss. As a result of the above, the Company incurred net losses of $38.1
million and $27.5 million for the three months ended June 30, 2000 and 1999,
respectively. Net losses for the six months ended June 30, 2000 and 1999 were
$75.2 million and $51.8 million, respectively.
RESULTS BY OPERATING SEGMENT
Fixed Satellite Service
FSS revenue for the three months ended June 30, 2000 was $23.9 million versus
$9.2 million for the three months ended June 30, 1999. FSS revenue for the six
months ended June 30, 2000 was $45.9 million versus $18.3 million for the six
months ended June 30, 1999. EBITDA for the three months ended June 30, 2000 was
$16.0 million, or 67 percent of revenues, versus $4.9 million, or 53 percent of
revenues, for the three months ended June 30, 1999. EBITDA for the six months
ended June 30, 2000 was $30.9 million, or 67 percent of revenues, versus $11.3
million or 62 percent of revenues, for the six months ended June 30, 1999. These
increases were due in part to the service commencement of Telstar 12 and Telstar
10/Apstar IIR after the second quarter of 1999.
Data Services
Revenues for the Data Services segment for the three months ended June 30, 2000
was $23.6 million versus $16.6 million for the three months ended June 30, 1999.
Data Services revenues for the six months ended June 30, 2000 and 1999 were
$48.4 million and $31.8 million, respectively. These increases were mainly due
to the added customer sites in 2000, as compared to 1999. EBITDA for the six
months ended June 30, 2000 was a loss of $8.9 million versus a loss of $2.8
million for the six months ended June 30, 1999. EBITDA for the three months
ended June 30, 2000 was a loss of approximately $6.0 million versus a loss of
$0.5 million for the three months ended June 30, 1999. The increases in EBITDA
losses in 2000 were due in part to the increased costs in connection with the
expansion of the business.
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.
16
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.
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: August 14, 2000 /s/ Richard J. Townsend
--------------------------------------
Richard J. Townsend
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer
and Registrant's Authorized Officer)
17