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 SEPTEMBER 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
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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, EXCEPT PAR AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- --------------
(Unaudited) Note
ASSETS
Current assets:
Cash and cash equivalents $ 26,468 $ 24,117
Restricted and segregated cash -- 187,315
Accounts receivable, net 24,995 16,797
Prepaid expenses and other current assets 12,481 11,716
Due from Loral companies 2,000 181
--------------- --------------
Total current assets 65,944 240,126
Property and equipment, net 713,165 767,477
Costs in excess of net assets acquired 581,588 593,219
Deferred income taxes 46,865 49,223
Other assets, net 31,105 34,242
--------------- --------------
TOTAL ASSETS $ 1,438,667 $1,684,287
=============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt $ 2,366 $ 2,071
Accounts payable 4,262 3,098
Satellite purchase price payable -- 181,928
Accrued and other current liabilities 14,153 13,995
Customer deposits 6,466 9,069
Deferred revenue 17,889 2,624
Interest payable 10,385 22,842
Note payable to Loral SpaceCom 97,491 74,114
Due to Loral companies 4,124 51,538
--------------- --------------
Total current liabilities 157,136 361,279
Long-term debt 989,151 963,299
Deferred revenue -- 5,957
Customer deposits 4,642 --
Other long-term liabilities 125 448
Due to Space Systems/Loral 5,900 5,900
Commitments and contingencies
Stockholder's equity:
Common stock, $.01 par value -- --
Capital in excess of par value 588,198 544,176
Unearned compensation (204) (1,804)
Accumulated other comprehensive loss (1,981) (824)
Accumulated deficit (304,300) (194,144)
--------------- --------------
Total stockholder's equity 281,713 347,404
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $1,438,667 $1,684,287
=============== ==============
- ----------------------
Note: The December 31, 1999 balance sheet has been derived from
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 STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ------------- ------------- ----------
Revenues $ 43,517 $ 25,168 $ 126,819 $ 71,778
Operating expenses:
Direct 15,250 9,900 48,507 24,097
Sales and marketing 5,416 5,581 18,311 17,798
Engineering and technical services 2,663 2,436 7,755 6,817
General and administrative 5,771 3,482 16,617 10,793
Depreciation and amortization 27,108 17,741 80,953 51,644
----------- ------------- ------------- ----------
Total operating expenses 56,208 39,140 172,143 111,149
Loss from operations (12,691) (13,972) (45,324) (39,371)
Interest income 340 2,182 3,343 4,253
Interest expense (24,754) (19,434) (72,572) (50,853)
Other income 152 88 514 446
----------- ------------- ------------- ----------
Loss before income taxes (36,953) (31,136) (114,039) (85,525)
Income tax benefit (provision) 1,946 (486) 3,882 2,153
----------- ------------- ------------- ----------
Net loss $ (35,007) $ (31,622) $(110,157) $(83,372)
=========== ============= ============= ==========
See notes to condensed consolidated financial statements.
3
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2000 1999
--------------- --------------
OPERATING ACTIVITIES
Net loss $ (110,157) $ (83,372)
Non-cash items:
Deferred income tax provision 2,358 3,168
Depreciation and amortization 80,953 51,644
Provision for bad debts 4,117 1,969
Non-cash interest expense 27,552 25,088
Interest earned on restricted assets (3,518) (970)
Other 65 795
Changes in operating assets and liabilities:
Accounts receivable 15,147 (5,164)
Prepaid expenses and other current assets (765) (5,341)
Other assets 43 (5,028)
Accounts payable, accrued liabilities and other
current liabilities 118 (2.014)
Interest payable (12,457) (12,456)
Customer deposits 2,040 1,984
Deferred revenue (18,214) (142)
Due from Loral companies (2,000) --
Due to Loral companies (37,452) --
Due to Space Systems/Loral (9,750) --
--------------- --------------
Net cash used in operating activities (61,920) (29,839)
INVESTING ACTIVITIES
Increase in restricted and segregated cash (64) (1,920)
Uses of and transfers from restricted and
segregated cash 190,898 143,879
Property and equipment, net (190,269) (276,978)
--------------- --------------
Net cash provided by (used in) investing activities 565 (135,019)
FINANCING ACTIVITIES
Gain on sale of orbital slots 34,260 --
Equity contributed from Loral 10,750 51,561
Increase in note payable to Loral SpaceCom 23,081 96,247
Repayment of senior notes and notes payable (1,031) (902)
Payment of satellite incentive obligation (207) (181)
Other (3,147) (1,208)
--------------- --------------
Net cash provided by financing activities 63,706 145,517
Net increase (decrease) in cash and cash equivalents 2,351 (19,341)
Cash and cash equivalents at beginning of period 24,117 35,861
--------------- --------------
Cash and cash equivalents at end of period $ 26,468 $ 16,520
=============== ==============
See notes to condensed consolidated financial statements.
4
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,
Internet access and transmission, 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"), manages the Company's Fixed Satellite Services ("FSS")
assets.
Data Services: Providing managed communications networks and Internet and
intranet services, using transponder capacity primarily 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 for the periods
presented. 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
nine months ended September 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.
5
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):
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2000 1999
-------------- --------------
Net loss $ 110,157 $ 83,372
Cumulative translation adjustment 1,157 1,095
-------------- --------------
Comprehensive loss $ 111,314 $ 84,467
============== ==============
NOTE B. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- -------------
Senior notes (including premium of $54.0 million and
$58.7 million at September 30, 2000 and December 31,
1999 respectively) $ 497,005 $ 501,734
Senior discount notes (principal amount
at maturity $484 million and accreted principal amount
of $414 million and $378 million at September 30, 2000
and December 31, 1999, respectively) 480,690 448,408
Notes payable - TT&C Facility 2,699 3,729
Satellite incentive obligation 10,921 11,129
Other 202 370
--------------- -------------
Total debt 991,517 965,370
Less current portion (2,366) (2,071)
--------------- -------------
Long-term debt $ 989,151 $ 963,299
=============== =============
In connection with the Company's merger with a subsidiary of Loral, Loral did
not assume the Company's outstanding debt. Such debt remains outstanding and is
non-recourse to Loral.
6
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE C. NOTE PAYABLE 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 (6.72% at September 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 September 30, 2000, the outstanding amount under this note was
$97.5 million (including accrued interest of $10.1 million) and is reflected on
the balance sheet as a note payable to Loral SpaceCom.
NOTE D. DUE (TO) FROM LORAL COMPANIES
Due from Loral companies consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
Due from Space Systems/Loral $ 1,327 $ --
Due from Loral Space and Communications Corp. 608 --
Due from Loral Communications Services 65 --
Due from CyberStar L.P. -- 181
------------- ------------
$ 2,000 $ 181
============= ============
Due to Loral companies consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- --------------
Due to Space Systems/Loral $ -- $ 9,750
Due to Loral Skynet 4,052 41,788
Due to CyberStar L.P. 72 --
-------------- --------------
$ 4,124 $ 51,538
============== ==============
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 has a net receivable under this tax sharing agreement
of approximately $2.8 million and $6.4 million, and a deferred tax provision of
$0.8 million and $2.4 million, resulting in a net tax benefit of $1.9 million
and $3.9 million for the three and nine months ended September 30, 2000,
respectively. The Company's effective tax rate of 3.4 percent for the nine
months ended September 30, 2000 differs from the federal statutory rate of 35
percent 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 assets acquired. The deferred tax asset of $46.9 million
as of September 30, 2000 on the accompanying consolidated 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.
7
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 SEPTEMBER 30, 2000
(UNAUDITED)
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED
----------- ---------- ----------- ------------ ------------
Revenue from external customers $ 21.5 $ 22.6 $ 44.1 $ (0.6) $ 43.5
Intersegment revenue 7.6 0.6 8.2 (8.2) --
----------- ---------- ----------- ------------ ------------
Gross revenue $ 29.1 $ 23.2 $ 52.3 $ (8.8) $ 43.5
=========== ========== =========== ============ ============
EBITDA (1) $ 22.3 $ (7.3) $ 15.0 $ (0.6) $ 14.4
Depreciation and amortization 22.5 4.6 27.1 -- 27.1
----------- ---------- ----------- ------------ ------------
Loss from operations $ (0.2) $ (11.9) $ (12.1) $ (0.6) $ (12.7)
=========== ========== =========== ============ ============
Total assets $1,359.5 $ 79.2 $ 1,438.7 $ -- $ 1,438.7
=========== ========== =========== ============ ============
THREE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED
--------- --------- ---------- ------------ ------------
Revenue from external customers $ 8.1 $ 17.1 $ 25.2 $ -- $ 25.2
Intersegment revenue 1.8 -- 1.8 (1.8) --
--------- --------- ---------- ------------ ------------
Gross revenue $ 9.9 $ 17.1 $ 27.0 $ (1.8) $ 25.2
========= ========= ========== ============ ============
EBITDA (1) $ 6.1 $ (2.4) $ 3.7 $ -- $ 3.7
Depreciation and amortization 13.7 4.0 17.7 -- 17.7
--------- --------- ---------- ------------ ------------
Loss from operations $ (7.6) $ (6.4) $ (14.0) $ -- $ (14.0)
========= ========= ========== ============ ============
Total assets $ 1,608.5 $ 71.4 $1,679.9 $ -- $1,679.9
========= ========= ========== ============ ============
- -------------------------
(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.
8
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED
--------- -------- ---------- ------------ ------------
Revenue from external customers $ 57.2 $ 71.0 $ 128.2 $ (1.4) $ 126.8
Intersegment revenue 17.8 0.6 18.4 (18.4) --
--------- -------- ---------- ------------ ------------
Gross revenue $ 75.0 $ 71.6 $ 146.6 $ (19.8) $ 126.8
========= ======== ========== ============ ============
EBITDA(1) $ 53.2 $ (16.2) $ 37.0 $ (1.4) $ 35.6
Depreciation and amortization 67.4 13.5 80.9 -- 80.9
--------- -------- ---------- ------------ ------------
Loss from operations $ (14.2) $ (29.7) $ (43.9) $ (1.4) $ (45.3)
========= ======== ========== ============ ============
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
FIXED TOTAL
SATELLITE DATA REPORTABLE
SERVICES SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED
---------- --------- ---------- ------------ ------------
Revenue from external customers $ 22.9 $ 48.9 $ 71.8 $ -- $ 71.8
Intersegment revenue 5.3 -- 5.3 (5.3) --
---------- --------- ---------- ------------ ------------
Gross revenue $ 28.2 $ 48.9 $ 77.1 $ (5.3) $ 71.8
========== ========= ========== ============ ============
EBITDA(1) $ 17.4 $ (5.1) $ 12.3 $ -- $ 12.3
Depreciation and amortization 40.6 11.0 51.6 -- 51.6
---------- --------- ---------- ------------ ------------
Loss from operations $ (23.2) $ (16.1) $ (39.3) $ -- $ (39.3)
========== ========= ========== ============ ============
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 September 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.
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 from 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.
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
10
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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,
Internet access and transmission, 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"), manages the Company's Fixed Satellite Services ("FSS")
assets.
Data Services: Providing managed communications networks and Internet and
intranet services, using transponder capacity primarily 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 September 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.
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 from 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.
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 E to the unaudited condensed consolidated
financial statements for additional information on segment results.
OPERATING REVENUES (IN MILLIONS):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2000 1999 2000 1999
---------- ---------- --------- ---------
Fixed satellite services $ 29.1 $ 9.9 $ 75.0 $ 28.2
Data services 23.2 17.1 71.6 48.9
Eliminations (8.8) (1.8) (19.8) (5.3)
---------- ---------- --------- ---------
Operating revenues $ 43.5 $ 25.2 $ 126.8 $ 71.8
========== ========== ========= =========
EBITDA(1) (IN MILLIONS):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2000 1999 2000 1999
---------- ---------- --------- ---------
Fixed satellite services $ 22.3 $ 6.1 $ 53.2 $ 17.4
Data services (7.3) (2.4) (16.2) (5.1)
Eliminations (0.6) -- (1.4) --
---------- ---------- --------- ---------
EBITDA $ 14.4 $ 3.7 $ 35.6 $ 12.3
========== ========== ========= =========
- -----------------------------
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.
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 September 30,
2000 and September 30, 1999 were $43.5 million and $25.2 million, respectively.
Total revenues for the nine months ended September 30, 2000 and September 30,
1999 were $126.8 million and $71.8 million, respectively. These increases are
primarily attributable to improved results in the private communications network
services operations, which added 236 and 216 customer sites for the three and
nine months ended September 30, 2000, as compared to the same periods in 1999,
the service commencement of Telstar 12 and Telstar 10/Apstar IIR after the third
quarter of 1999; and an equipment sale of $3.3 million in the first quarter of
2000.
At September 30, 2000, the Company had backlog (representing future revenues
under contract) of approximately $1,069.8 million compared to $479.7 million at
September 30, 1999. Revenue from customer contract backlog is typically earned
over two to five years.
Direct Expenses. Direct expenses for the three months ended September 30, 2000
and September 30,1999 were $15.3 million and $9.9 million, respectively. Direct
expenses for the nine months ended September 30, 2000 and September 30, 1999
were $48.5 million and $24.1 million, respectively. These increases are
primarily attributable to Internet access, satellite transponder leasing and
terrestrial link charges that support the Worldcast Internet access product,
increased in-orbit satellite insurance associated with 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 for the three months
ended September 30, 2000 and September 30,1999 were $5.4 million and $5.6
million, respectively. Sales and marketing expenses for the nine months ended
September 30, 2000 and September 30, 1999 were $18.3 million and $17.8 million,
respectively.
Engineering and Technical Services Expenses. Engineering and technical services
expenses for the three months ended September 30, 2000 and September 30, 1999
were $2.7 million and $2.4 million, respectively. Engineering and technical
expenses for the nine months ended September 30, 2000 and September 30, 1999
were $7.8 million and $6.8 million, respectively. These increases relate to
additional headcount to support the Internet services product line.
General and Administrative Expenses. General and administrative expenses for the
three months ended September 30, 2000 and September 30,1999 were $5.8 and $3.5
million, respectively. General and administrative expenses for the nine months
ended September 30, 2000 and September 30, 1999 were $16.6 million and $10.8
million, respectively. These increases primarily relate to additional bad debt
costs for the FSS segment, expenses relating to streaming media services and
recruiting costs for the data services segment.
Depreciation and Amortization. Depreciation and amortization expense for the
three months ended September 30, 2000 and September 30, 1999 were $27.1 million
and $17.7 million, respectively. Depreciation and amortization expense for the
nine months ended September 30, 2000 and September 30, 1999 were $80.9 million
and $51.6 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 for the three months ended September 30, 2000 and
September 30, 1999 was $0.3 million and $2.2 million, respectively. Interest
income for the nine months ended September 30, 2000 and September 30, 1999 was
$3.3 million and $4.3 million, respectively. Interest expense was $24.8 million
for the three months ended September 30, 2000, and $19.4 million, net of
capitalized interest of $4.8 million, for the three months ended September 30,
1999. Interest expense was $72.6 million for the nine months ended September 30,
2000, and $50.9 million, net of capitalized interest of $15.9 million, for the
nine months ended September 30, 1999. 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 has a net receivable under this
tax sharing agreement of approximately $2.8 million and $6.4 million, and a
deferred tax provision of $0.8 million and $2.4 million, resulting in a net tax
benefit of $1.9 million and $3.9 million for the three and nine months ended
September 30, 2000, respectively. The Company's effective tax rate of 3.4
percent for the nine months ended September 30, 2000 differs from the federal
statutory rate of 35 percent 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 assets acquired. The
deferred tax asset of $46.9 million as of September 30, 2000 on the accompanying
consolidated 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 $35.0
million and $31.6 million for the three months ended September 30, 2000 and
1999, respectively. Net losses for the nine months ended September 30, 2000 and
1999 were $110.2 million and $83.4 million, respectively.
RESULTS BY OPERATING SEGMENT
Fixed Satellite Service
FSS revenue for the three months ended September 30, 2000 was $29.1 million
versus $9.9 million for the three months ended September 30, 1999. FSS revenue
for the nine months ended September 30, 2000 was $75.0 million versus $28.2
million for the nine months ended September 30, 1999. EBITDA for the three
months ended September 30, 2000 was $22.3 million, or 77 percent of revenues,
versus $6.1 million, or 62 percent of revenues, for the three months ended
September 30, 1999. EBITDA for the nine months ended September 30, 2000 was
$53.2 million, or 71 percent of revenues, versus $17.4 million or 62 percent of
revenues, for the nine months ended September 30, 1999. These increases were due
in part to the faster than expected loading of Telstar 12 and Telstar 10/Apstar
IIR after the third quarter of 1999 and the intercompany leasing charges to data
services for capacity.
Data Services
Revenues for the Data Services segment for the three months ended September 30,
2000 was $23.2 million versus $17.1 million for the three months ended September
30, 1999. Data Services revenues for the nine months ended September 30, 2000
and 1999 were $71.6 million and $48.9 million, respectively. These increases
were mainly due to the added customer sites in 2000, as compared to 1999. EBITDA
for the three months ended September 30, 2000 was a loss of $7.3 million versus
a loss of $2.4 million for the three months ended September 30, 1999. EBITDA for
the nine months ended September 30, 2000 was a loss of approximately $16.2
million versus a loss of $5.1 million for the nine months ended September 30,
1999. The increases in EBITDA losses in 2000 were primarily due to the increased
direct costs from both third party and intercompany leasing activities incurred
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
16
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
(CONTINUED))
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 completed
its review of the impact that the adoption of SFAS 133 will have, however, based
on its evaluation to date, the Company does not believe that it will have a
significant effect on its earnings or financial position. The Company is
required to adopt SFAS 133 on January 1, 2001.
17
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: November 13, 2000 /s/ RICHARD J. TOWNSEND
-------------------------------------
Richard J. Townsend
Senior Vice President and Chief Financial Officer
(Principal Financial Officer
and Registrant's Authorized Officer)
18