-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ml1y5zjq/3RYOR3mjPJ5JmYFpGtEWSbthLyn8Mexw6XzR789F8Z6pucxlDQZWslm D4twr4u+IR++20Ahaqf+PA== 0001005150-01-500471.txt : 20010813 0001005150-01-500471.hdr.sgml : 20010813 ACCESSION NUMBER: 0001005150-01-500471 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LORAL CYBERSTAR INC CENTRAL INDEX KEY: 0001029850 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 522008654 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22085 FILM NUMBER: 1703113 BUSINESS ADDRESS: STREET 1: 2440 RESEARCH BLVD STE 400 CITY: ROCKVILLE STATE: MD ZIP: 20850 BUSINESS PHONE: 3012588101 MAIL ADDRESS: STREET 1: 2440 RESEARCH BLVD STREET 2: SUITE 400 CITY: ROCKVILLE STATE: MD ZIP: 20850 FORMER COMPANY: FORMER CONFORMED NAME: LORAL ORION INC DATE OF NAME CHANGE: 19990809 FORMER COMPANY: FORMER CONFORMED NAME: ORION NETWORK SYSTEMS INC/NEW/ DATE OF NAME CHANGE: 19970404 FORMER COMPANY: FORMER CONFORMED NAME: ORION NEWCO SERVICES INC DATE OF NAME CHANGE: 19961231 10-Q 1 form10q.txt FORM 10-Q 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, 2001 Commission file number 0-22085 ------- LORAL CYBERSTAR, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 52-1564318 - --------------------------------------- -------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2440 Research Boulevard, Suite 400, Rockville, Maryland 20850 - ------------------------------------------------------- ---------------- (Address of principal executive offices) (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. 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) JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (Unaudited) Note ASSETS Current assets: Cash and cash equivalents $ 47,847 $ 37,169 Accounts receivable, net 22,944 22,204 Prepaid expenses and other current assets 5,530 8,218 Due from Loral companies 11,271 9,545 ----------- ----------- Total current assets 87,592 77,136 Property and equipment, net 660,236 702,311 Costs in excess of net assets acquired 569,956 577,710 Deferred income taxes 42,413 44,982 Other assets, net 25,609 26,810 ----------- ----------- TOTAL ASSETS $ 1,385,806 $ 1,428,949 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Current portion of long-term debt $ 2,895 $ 2,551 Accounts payable 6,415 7,368 Accrued and other current liabilities 14,921 11,366 Customer deposits 4,234 7,062 Deferred revenue 7,012 5,691 Interest payable 22,843 22,846 Note payable to Loral SpaceCom 104,669 107,866 Due to Loral companies 8,348 4,495 ----------- ----------- Total current liabilities 171,337 169,245 Long-term debt 1,016,366 997,991 Deferred revenue 859 998 Customer deposits 4,518 5,413 Other long-term liabilities -- 125 Commitments and contingencies (Note G) Stockholder's equity: Common stock, $.01 par value -- -- Capital in excess of par value 588,197 588,197 Accumulated deficit (393,124) (331,562) Accumulated other comprehensive loss (2,347) (1,458) ----------- ----------- Total stockholder's equity 192,726 255,177 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,385,806 $ 1,428,949 =========== ===========
- -------------------- Note: The December 31, 2000 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 STATEMENTS OF OPERATIONS (IN THOUSANDS) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Revenues $ 49,239 $ 41,120 $ 99,458 $ 83,302 Operating expenses: Direct 15,066 16,458 30,921 33,257 Sales and marketing 5,371 6,996 11,580 12,895 Engineering and technical services 2,355 2,660 6,435 5,092 General and administrative 4,174 5,850 8,565 10,846 Depreciation and amortization 27,709 26,876 54,973 53,845 --------- --------- --------- --------- Total operating expenses 54,675 58,840 112,474 115,935 --------- --------- --------- --------- Loss from operations (5,436) (17,720) (13,016) (32,633) Interest income 403 622 617 3,003 Interest expense (24,843) (24,052) (50,082) (47,818) Other income 71 150 179 362 --------- --------- --------- --------- Loss before income taxes (29,805) (41,000) (62,302) (77,086) Income tax benefit 502 2,898 738 1,936 --------- --------- --------- --------- Net loss $ (29,303) $ (38,102) $ (61,564) $ (75,150) ========= ========= ========= =========
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) SIX MONTHS ENDED JUNE 30, --------------------------------- 2001 2000 --------- --------- OPERATING ACTIVITIES Net loss $ (61,564) $ (75,150) Non-cash items: Deferred taxes 2,569 1,550 Depreciation and amortization 54,973 53,845 Provision for bad debts 1,174 2,654 Non-cash interest expense 19,882 18,103 Interest earned on restricted cash -- (3,308) Changes in operating assets and liabilities: Accounts receivable (1,914) (39,941) Prepaid expenses and other current assets 2,688 (3,411) Due from Loral companies (1,726) (11,825) Other assets (1,259) 197 Accounts payable and accrued and other current liabilities 2,602 (2,308) Customer deposits (3,723) 767 Deferred revenue 1,182 28,147 Interest payable (3) -- Due to Loral companies 3,853 (23,901) --------- --------- Net cash provided by (used in) operating activities 18,734 (54,481) --------- --------- INVESTING ACTIVITIES Property and equipment (2,876) (186,657) Increase in restricted and segregated cash -- (64) Use and transfers from restricted and segregated cash -- 165,625 --------- --------- Net cash used in investing activities (2,876) (21,096) --------- --------- FINANCING ACTIVITIES (Decrease) increase in note payable to Loral SpaceCom (3,197) 23,067 Repayment of notes payable (772) (676) Payment of satellite incentive obligation (288) (136) Proceeds from sale of orbital slots to Loral, net -- 34,260 Equity contributed from Loral -- 10,750 Other (923) (2,135) --------- --------- Net cash (used in) provided by financing activities (5,180) 65,130 --------- --------- Net increase (decrease) in cash and cash equivalents 10,678 (10,447) Cash and cash equivalents at beginning of period 37,169 24,117 --------- --------- Cash and cash equivalents at end of period $ 47,847 $ 13,670 ========= =========
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 (See Note F): 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 ("Loral SpaceCom"), 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") segment. Data Services: Providing managed communications networks and Internet and intranet services, using transponder capacity primarily on the Loral Skynet and Loral CyberStar fleets. On March 20, 1998, Orion was acquired by Loral, through the merger with a wholly owned subsidiary of Loral (the "Merger"). 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 accounting principles generally accepted in the U. S. 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, 2001 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. COMPREHENSIVE LOSS Comprehensive loss is as follows (in thousands): SIX MONTHS ENDED JUNE 30, ------------------------- 2001 2000 --------- --------- Net loss................................. $ 61,564 $ 75,150 Foreign currency translation adjustment.. 889 636 -------- --------- Comprehensive loss........................ $ 62,453 $ 75,786 ======== ========= EARNINGS PER SHARE Earnings per share is not presented since it is not considered meaningful due to the Merger and the subsequent recapitalization of the Company. 5 LORAL CYBERSTAR, INC. (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE B. LONG-TERM DEBT Long-term debt consists of the following (in thousands): JUNE 30, DECEMBER 31, 2001 2000 ----------- ----------- 11.25% Senior Notes (principal amount at maturity $443 million and premium of $49.0 million and $52.4 million at June 30, 2001 and December 31, 2000, respectively)............................... $ 491,989 $ 495,377 12.5% Senior Discount Notes (principal amount at maturity $484 million and accreted principal amount of $453 million and $427 million at June 30, 2001 and December 31, 2000, respectively) 515,110 491,841 Note payable - TT&C Facility...................................... 1,559 2,331 Satellite incentive obligations................................... 10,560 10,848 Other............................................................. 43 145 ----------- ----------- Total debt..................................................... 1,019,261 1,000,542 Less current portion.............................................. (2,895) (2,551) ----------- ----------- Long-term debt................................................. $ 1,016,366 $ 997,991 =========== ===========
In connection with the Merger, Loral did not assume the Company's outstanding debt. Such debt remains outstanding and is non-recourse to Loral. NOTE C. NOTE PAYABLE TO LORAL Loral CyberStar 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 (4.73 percent at June 30, 2001) 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 SpaceCom's approval. At June 30, 2001, the outstanding amount under this note was $104.7 million (including accrued interest of $12.4 million) and is reflected on the balance sheet as a note payable to Loral SpaceCom. Such borrowings and accrued interest totaled $107.9 million at December 31, 2000. NOTE D. RELATED PARTY TRANSACTIONS Due from Loral companies consist of the following (in thousands): June 30, December 31, 2001 2000 -------- ------- Due from CyberStar L.P................................ $ 7,913 $ 7,960 Due from Loral Space and Communications Corp.......... 1,164 1,165 Due from Loral Communications Services................ 83 67 Due from Space Systems/Loral.......................... 2,111 353 -------- ------- $ 11,271 $ 9,545 ======== =======
6 LORAL CYBERSTAR, INC. (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE D. RELATED PARTY TRANSACTIONS (CONTINUED) Due to Loral companies consist of the following (in thousands): JUNE 30, DECEMBER 31, 2001 2000 ------- ------- Due to Loral Skynet ............. $ 7,892 $ 4,038 Due to Loral .................... 456 456 Due to Space Systems/Loral....... -- 1 ------- ------- $ 8,348 $ 4,495 ======= ======= 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 $1.9 million and $3.4 million and a deferred tax provision of $1.4 million and $2.6 million resulting in a net tax benefit of $0.5 million and $0.7 million for the three and six months ended June 30, 2001. 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): 7 LORAL CYBERSTAR, INC. (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE F. SEGMENTS (CONTINUED) THREE MONTHS ENDED JUNE 30, 2001 (UNAUDITED) FIXED TOTAL SATELLITE DATA REPORTABLE SERVICES SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED ---------- -------- ---------- ------------ ------------ Revenue from external customers......... $ 27.6 $ 21.7 $ 49.3 $ (0.1) $ 49.2 Intersegment revenue.................... 5.5 -- 5.5 (5.5) -- ---------- -------- ---------- ------- ---------- Gross revenue........................... $ 33.1 $ 21.7 $ 54.8 $ (5.6) $ 49.2 ========== ======== ========== ======= ========== EBITDA(1)............................... $ 27.6 $ (5.2) $ 22.4 $ (0.1) $ 22.3 Depreciation and amortization........... 22.3 5.4 27.7 -- 27.7 ---------- -------- ---------- ------- ---------- Income (loss) from operations........... $ 5.3 $ (10.6) $ (5.3) $ (0.1) $ (5.4) ---------- -------- ---------- ------- ---------- Total assets............................ $ 1,273.6 $ 112.2 $ 1,385.8 $ -- $ 1,385.8 ========== ======== ========== ======= ========== 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............................. $ 1,398.2 $ 117.6 $ 1,515.8 $ -- $ 1,515.8 ========== ======== ========== ======= ========== SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED) FIXED TOTAL SATELLITE DATA REPORTABLE SERVICES SERVICES SEGMENTS ELIMINATIONS CONSOLIDATED ---------- -------- ---------- ------------ ------------ Revenue from external customers.......... $ 54.0 $ 45.6 $ 99.6 $ (0.1) $ 99.5 Intersegment revenue..................... 11.9 -- 11.9 (11.9) -- ---------- -------- ---------- --------- ----------- Gross revenue............................ $ 65.9 $ 45.6 $ 111.5 $ (12.0) $ 99.5 ========== ======== ========== ======= ========== EBITDA(1)................................ $ 54.0 $ (11.9) $ 42.1 $ (0.1) $ 42.0 Depreciation and amortization............ 44.8 10.2 55.0 -- 55.0 ---------- -------- ---------- --------- ----------- Income (loss) from operations............ $ 9.2 $ (22.1) $ (12.9) $ (0.1) $ (13.0) ========== ======== ========== ======= ==========
8 LORAL CYBERSTAR, INC. (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE F. SEGMENTS (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) ======= ======= ======= ======= =======
- ---------------- (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. NOTE G. COMMITMENTS AND CONTINGENCIES In November 1995, a component on Telstar 11 (formerly Orion 1) 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, the Company would be entitled to a pro rata portion of the insurance coverage of approximately $195 million for the satellite. In light of the insurance coverage and the available capacity on other Company satellites, the Company believes that this loss of capacity will not have a material adverse effect on the consolidated financial position or results of operations of the Company. Telstar 12 (formerly Orion 2) was launched in October 1999 into 15 degrees W.L., and commenced operations in January 2000. Although Telstar 12 was originally intended to operate at 12 degrees W.L., Loral CyberStar reached an agreement with Eutelsat to operate Telstar 12 at 15 degrees W.L. while Eutelsat continued to develop its services at 12.5 degrees W.L. Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to assert its priority rights at such location on Loral CyberStar's behalf. As part of this coordination effort, Loral CyberStar agreed to provide to Eutelsat four transponders on Telstar 12 for the life of the satellite and 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. 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 (CONTINUED) The Company's Telstar 10/Apstar IIR satellite has experienced minor losses of power from its solar arrays. Space Systems/Loral, Inc. ("SS/L") is currently investigating the cause of these failures. Although to date Telstar 10/Apstar IIR has not experienced any degradation in performance, there can be no assurance that it will not experience additional power loss that could result in performance degradation, including loss of transponder capacity. In the event of additional power loss, the extent of the performance degradation, if any, will depend on numerous factors, including the amount of the additional power loss, when in the life of Telstar 10/Apstar IIR the loss occurred and the number and type of use being made of transponders then in service. A complete or partial loss of Telstar 10/Apstar IIR (which is fully insured) would result in a loss of revenues and profits to the Company. Based upon information currently available, the Company believes that this matter will not have a material adverse effect on the consolidated financial position or results of operations to the Company. Loral CyberStar anticipates it will have additional requirements over the next three years to fund the growth in the business, the purchase of VSATs and other capital expenditures, senior note interest payments, the replacement of Telstar 11 which is expected to reach its end of life in 2005, 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 10/Apstar IIR, Telstar 11 and Telstar 12 as collateral for indebtedness. If Loral CyberStar requires additional financing and is unable to obtain such financing from Loral or from outside sources in the amounts and at the times needed, there would be a material adverse effect on Loral CyberStar. The Company is party to various litigation arising in the normal course of its operations. In the opinion of management, the ultimate liability for these matters, if any, will not have a material adverse effect on the Company's financial position or results of operations. NOTE H. ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The key criterion for hedge accounting is that the derivative must be highly effective in achieving offsetting changes in fair value or cash flows of the hedged items during the term of the hedge. The Company adopted SFAS No. 133, as amended, on January 1, 2001. The adoption of this standard did not have an effect on the Company's financial position, results of operations or cash flows, as the Company had no stand-alone or embedded derivatives at December 31, 2000 and had not historically entered into any derivative transactions to hedge currency or other exposures. As a matter of policy, the Company does not currently enter into transactions involving derivative financial instruments. In the event the Company does enter into such transactions in the future, such items will be accounted for in accordance with SFAS No. 133, in which case the Company will formally document all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking such hedge transactions. 10 LORAL CYBERSTAR, INC. (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE H. ACCOUNTING PRONOUNCEMENTS (CONTINUED) In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carriers over most of SFAS No. 125's provisions without reconsideration. The Company has adopted the applicable disclosure requirements of SFAS No. 140 in its consolidated financial statements. The Company has determined that there was no impact relating to the adoption of the other provisions of SFAS No. 140. In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized but will rather be tested at least annually for impairment. The Company will adopt SFAS No. 142 on January 1, 2002. Upon adoption of SFAS 142, the Company will stop the amortization of goodwill with an expected net carrying value of approximately $562 million at the date of adoption and annual amortization of approximately $16 million that resulted from business combinations completed prior to the adoption of SFAS 141. The Company will evaluate goodwill under the new transitional impairment test in SFAS 142 and accordingly, has not yet determined whether or not there will be an impairment loss. Any transitional impairment loss will be recognized as a change in accounting principle. 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 Space & Communications Ltd. ("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. The Company undertakes no obligation to update any forward looking statements. 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 guarantors is providing satellite-based communications services for private communications networks and video distribution and other satellite transmission services. Loral CyberStar is organized into two distinct operating segments as follows (see Note F to the unaudited condensed consolidated financial statements): Fixed Satellite Services: Leasing transponder capacity and providing value-added services to customers for a wide variety of applications, including the distribution of broadcast programming, news gathering, business television, distance learning and direct-to-home services. 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, manages the Company's Fixed Satellite Services ("FSS") segment. Data Services: Providing managed communications networks and Internet and intranet services, using transponder capacity primarily on the Loral Skynet and Loral CyberStar fleets. COMMITMENTS AND CONTINGENCIES In November 1995, a component on Telstar 11 (formerly Orion 1) 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, the Company would be entitled to a pro rata portion of the insurance coverage of approximately $195 million for the satellite. In light of the insurance coverage and the available capacity on other Company satellites, the Company believes that this loss of capacity will not have a material adverse effect on the consolidated financial position or results of operations of the Company. 12 LORAL CYBERSTAR, INC. (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED) Telstar 12 (formerly Orion 2) was launched 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. The Company's Telstar 10/Apstar IIR satellite has experienced minor losses of power from its solar arrays. Space Systems/Loral, Inc. ("SS/L") is currently investigating the cause of these failures. Although to date Telstar 10/Apstar IIR has not experienced any degradation in performance, there can be no assurance that it will not experience additional power loss that could result in performance degradation, including loss of transponder capacity. In the event of additional power loss, the extent of the performance degradation, if any, will depend on numerous factors, including the amount of the additional power loss, when in the life of Telstar 10/Apstar IIR the loss occurred and the number and type of use being made of transponders then in service. A complete or partial loss of Telstar 10/Apstar IIR (which is fully insured) would result in a loss of revenues and profits to the Company. Based upon information currently available, the Company believes that this matter will not have a material adverse effect on the consolidated financial position or results of operations to the Company. Loral CyberStar anticipates it will have additional requirements over the next three years to fund the growth in the business, the purchase of VSATs and other capital expenditures, senior note interest payments, the replacement of Telstar 11 which is expected to reach its end of life in 2005, 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 10/Apstar IIR, Telstar 11 and Telstar 12 as collateral for indebtedness. If Loral CyberStar requires additional financing and is unable to obtain such financing from Loral or from outside sources in the amounts and at the times needed, there would be a material adverse effect on Loral CyberStar. The Company is party to various litigation arising in the normal course of its operations. In the opinion of management, the ultimate liability for these matters, if any, will not have a material adverse effect on the Company's financial position or results of operations. 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.) 13 LORAL CYBERSTAR, INC. (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED) REVENUES (IN MILLIONS): THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------------- 2001 2000 2001 2000 ------- ------- ------- -------- Fixed Satellite Services......... $ 33.1 $ 23.9 $ 65.9 $ 45.9 Data Services.................... 21.7 23.6 45.6 48.4 Eliminations .................... (5.6) (6.4) (12.0) (11.0) ------- ------- ------- -------- Revenues ........................ $ 49.2 $ 41.1 $ 99.5 $ 83.3 ======= ======= ======= ======== EBITDA(1) (IN MILLIONS): THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------------- 2001 2000 2001 2000 ------- ------- ------- -------- Fixed Satellite Services......... $ 27.6 $ 16.0 $ 54.0 $ 30.9 Data Services.................... (5.2) (6.0) (11.9) (8.9) Eliminations .................... (0.1) (0.8) (0.1) (0.8) ------- ------- ------- -------- EBITDA(1)........................ $ 22.3 $ 9.2 $ 42.0 $ 21.2 ======= ======= ======= ========
- -------------------- (1) EBITDA (which is equivalent to operating income (loss) before depreciation and amortization, including amortization of unearned compensation) is provided because it is a measure commonly used in the communications industry to analyze companies on the basis of operating performance, leverage and liquidity and is presented to enhance the understanding of the Company's operating results. However, EBITDA should not be construed as an alternative to net income as an indicator of a company's operating performance, or cash flow from operations as a measure of a company's liquidity. EBITDA may be calculated differently and, therefore, may not be comparable to similarly titled measures reported by other companies. Revenues for the three months ended June 30, 2001 and 2000 were $49.2 million and $41.1 million, respectively. Revenues for the six months ended June 30, 2001 and 2000 were $99.5 million and $83.3 million, respectively. These increases are primarily related to the increased number of transponders leased in 2001 as compared to 2000, which primarily resulted from the increased utilization of the Company's Telstar 12 satellite, which was placed into service in January 2000 and the Company's Telstar 10/Apstar IIR satellite, which was purchased in September 1999. Direct expenses for the three months ended June 30, 2001 and 2000 were $15.1 million and $16.5 million, respectively. Direct expenses for the six months ended June 30, 2001 and 2000 were $30.9 million and $33.3 million, respectively. These decreases were primarily attributable to cost savings realized from streamlining operations. Sales and marketing expenses were $5.4 million and $7.0 million for the three months ended June 30, 2001 and 2000, respectively. Sales and marketing expenses for the six months ended June 30, 2001 and 2000 were $11.6 million and $12.9 million, respectively. These decreases were primarily attributable to cost savings realized from streamlining operations. 14 LORAL CYBERSTAR, INC. (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED) Engineering and technical services expenses were $2.4 million and $2.7 million for the three months ended June 30, 2001 and 2000, respectively. Engineering and technical expenses for the six months ended June 30, 2001 and 2000 were $6.4 million and $5.1 million, respectively. The increase for the six months ended June 30, 2001 was primarily due to $0.5 million of charges recorded in 2001 associated with closing the Company's German operation, including involuntary terminations and other exit costs (of which $.1 million remains unpaid as of June 30, 2001), and increased salaries supporting data services operations. General and administrative expenses were $4.2 million and $5.9 million for the three months ended June 30, 2001 and 2000, respectively. General and administrative expenses for the six months ended June 30, 2001 and 2000 were $8.6 million and $10.8 million, respectively. These decreases were primarily attributable to cost savings realized from streamlining operations. Depreciation and amortization were $27.7 million and $26.9 million for the three months ended June 30, 2001 and 2000, respectively. Depreciation and amortization expense for the six months ended June 30, 2001 and 2000 were $55.0 million and $53.8 million, respectively. In 2002, amortization expense is expected to decrease by approximately $3.9 million per quarter, as a result of the Company's adoption of SFAS No. 142 (see Accounting Pronouncements). Interest income was $0.4 million and $0.6 million for the three months ended June 30, 2001 and 2000, respectively. Interest income for the six months ended June 30, 2001 and 2000 was $0.6 million and $3.0 million, respectively. The decrease for the six months ended June 30, 2001, is due to a reduction in the balances held in the Company's restricted and segregated funds, which was used for satellite acquisition and for interest payments on the Company's senior notes. Interest expense was $24.8 million and $24.1 million for the three months ended June 30, 2001 and 2000, respectively. Interest expense for the six months ended June 30, 2001 and 2000 was $50.1 million and $47.8 million, respectively. These increases are primarily due to the amortization of the discount on the Senior Discount Notes. The Company recorded an income tax benefit of $0.5 million and $2.9 million on a loss before income taxes of $30 million and $41 million for three months ended June 30, 2001 and 2000, respectively, and an income tax benefit of $0.7 million and $1.9 million on a loss before income taxes of $62 million and $77 million for the six months ended June 30, 2001, and 2000, respectively. When comparing 2001 to 2000, the reduction in the current year benefit is primarily attributable to a lower amount received from Loral Space & Communications Corporation under the tax sharing agreement. As a result of the above, the Company incurred net losses of $29.3 million and $38.1 million for the three months ended June 30, 2001 and 2000, respectively. Net losses for the six months ended June 30, 2001 and 2000 were $61.6 million and $75.2 million, respectively. RESULTS BY OPERATING SEGMENT Fixed Satellite Service FSS revenues for the three months ended June 30, 2001 were $33.1 million as compared to $23.9 million for the three months ended June 30, 2000. Revenues for the six months ended June 30, 2001 were $65.9 million as compared to $45.9 million for the six months ended June 30, 2000. EBITDA for the three months ended June 30, 2001 was $27.6 million, or 83 percent of revenues, as compared to $16.0 million, or 67 percent of revenues, for the three months ended June 30, 2000. EBITDA for the six months ended June 30, 2001 was $54.0 million, or 82 percent of revenues, as compared to $30.9 million, or 67 percent of revenues, for the six months ended June 30, 2000. These increases are due to the increased number of transponders leased in 2001 as compared to 2000 and the intercompany leasing revenues from data services for capacity. At June 30, 2001, FSS had contracted backlog of approximately $735.0 million, as compared to $739.4 million at December 31, 2000. 15 LORAL CYBERSTAR, INC. (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS (CONTINUED) Data Services Data services revenues for the three months ended June 30, 2001 were $21.7 million as compared to $23.6 million for the three months ended June 30, 2000. Revenues for the six months ended June 30, 2001 were $45.6 million as compared to $48.4 million for the six months ended June 30, 2000. Revenues decreased in part due to the slowdown of worldwide demand for telecommunications and Internet services. EBITDA for the three months ended June 30, 2001 was a loss of $5.2 million as compared to a loss of $6.0 million for the three months ended June 30, 2000. This decrease primarily resulted from cost savings realized from streamlining operations. EBITDA for the six months ended June 30, 2001 was a loss of $11.9 million as compared to a loss of $8.9 million for the six months ended June 30, 2000. The increase in EBITDA loss for the six months ended June 30, 2001, is primarily due to lower revenues, offset in part by cost savings realized from streamlining operations. At June 30, 2001, data services had contracted backlog of approximately $150.1 million, as compared to $190.8 million at December 31, 2000. The decrease in backlog resulted from de-bookings, due to the continued softness in the Internet business globally. ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"), requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The key criterion for hedge accounting is that the derivative must be highly effective in achieving offsetting changes in fair value or cash flows, of the hedged items during the term of the hedge. The Company adopted SFAS No. 133, as amended, on January 1, 2001. The adoption of this standard did not have an effect on the Company's financial position, results of operations or cash flows, as the Company had no stand-alone or embedded derivatives at December 31, 2000 and had not historically any derivative transactions to hedge currency or other exposures. In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 140 replaces SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carriers over most of SFAS No. 125's provisions without reconsideration. The Company has adopted the applicable disclosure requirements of SFAS No. 140 in its consolidated financial statements. The Company has determined that there was no impact relating to the adoption of the other provisions of SFAS No. 140. In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized but will rather be tested at least annually for impairment. The Company will adopt SFAS No. 142 on January 1, 2002. Upon adoption of SFAS 142, the Company will stop the amortization of goodwill with an expected carrying value of approximately $562 million at the date of adoption and annual amortization of approximately $16 million that resulted from business combinations completed prior to the adoption of SFAS 141. The Company will evaluate goodwill under the new transitional impairment test in SFAS 142 and accordingly, has not yet determined whether or not there will be an impairment loss. Any transitional impairment loss will be recognized as a change in accounting principle. 16 LORAL CYBERSTAR, INC. (A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION) Part II. OTHER INFORMATION ITEM 6. REPORTS ON FORM 8-K (a) 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 8, 2001 /S/ RICHARD J. TOWNSEND ---------------------------------------------------------------- Richard J. Townsend Senior Vice President and Chief Financial Officer (Principal Financial Officer and Registrant's Authorized Officer)
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