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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 Commission file number 0-22085
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LORAL CYBERSTAR, INC.
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(Exact name of registrant as specified in its charter)
Delaware 52-1564318
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2440 Research Boulevard, Suite 400, Rockville, Maryland 20850
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(Address of principal executive offices )
301-258-8101
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
11 1/4% Senior Notes Due 2007
12 1/2% Senior Discount Notes Due 2007
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No_
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [Not Applicable]
The number of shares of common stock, par value $.01 per share of the registrant
outstanding as of March 15, 2000 was 100, all of which were owned, directly or
indirectly, by Loral Space & Communications Ltd.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1)(a)
AND (b) OF FORM 10-K AND IS THEREFORE FILING WITH THE REDUCED DISCLOSURE FORMAT
PURSUANT TO GENERAL INSTRUCTION I (2) OF FORM 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
ITEM 1. BUSINESS.
GENERAL
Loral CyberStar, Inc. ("Loral CyberStar" or the "Company"), formerly known
as Orion Network Systems, Inc. ("Orion") prior to its acquisition on March 20,
1998 by Loral Space & Communications Ltd. ("Loral"), is a rapidly growing
provider of satellite-based communications services, providing Fixed Satellite
Services, including video distribution and other satellite transmission services
and Data Network Services, including managed data network services and Internet
services. Loral CyberStar believes that demand for satellite-based
communications services will continue to grow due to accelerating demand for
high speed data services, growing demand for Internet and intranet services,
especially outside the United States, worldwide deregulation and continuing
technological advancement.
BUSINESS SEGMENTS
Loral CyberStar operates in the following two segments:
Fixed Satellite Services
Loral CyberStar, through its agreements with Loral Skynet, a division of
Loral SpaceCom Corporation, provides transmission capacity to cable and
television programmers, news and information networks, telecommunications
companies, Internet service providers ("ISPs") and other carriers for a variety
of applications. Customers include PSINet, HBO, Disney, Cable & Wireless and
United Pan Europe Communications. A majority of the Company's transmission
capacity services consist of video services. The Company generally offers
transmission capacity services under long term contracts and also offers
occasional use services for periods of up to a few hundred hours.
Telstar 11 (formerly known as Orion 1), a high power satellite with 34
Ku-band transponders, commenced operations in January 1995, and provides
coverage to 34 European countries, much of the United States and parts of
Canada, Mexico and North Africa. As of December 31, 1999, Telstar 11 was
operating at approximately 90% utilization.
Telstar 12 (formerly known as Orion 2), a high power satellite with 38
Ku-band transponders, expands Loral Cyberstar's European coverage and extends
coverage to portions of the former Soviet Union, Latin America, the Middle East
and South Africa. Telstar 12 was launched in October 1999 into 15 degrees W.L.
and commenced revenue generating operations in January 2000. Although Telstar 12
was originally intended to operate at 12 degrees W.L., Loral CyberStar reached
an agreement with Eutelsat to operate Telstar 12 at 15 degrees W.L. while
Eutelsat continued to develop its services at 12.5 degrees W.L. Eutelsat has in
turn agreed not to use its 14.8 degrees W.L. orbital slot and to assert its
priority rights at such location on Loral CyberStar's behalf. As part of this
coordination effort, Loral CyberStar agreed to provide to Eutelsat four
transponders on Telstar 12 for the life of the satellite. Eutelsat also has the
right to acquire, at cost, four transponders on the next replacement satellite
for Telstar 12. As part of the international coordination process, Loral
CyberStar continues to conduct discussions with various administrations
regarding Telstar 12's operations at 15 degrees W.L. If these discussions are
not successful, Telstar 12's useable capacity may be reduced.
On May 4, 1999, the Company's Orion 3 satellite was placed into a
lower-than-expected orbit after its launch on a Delta III rocket. According to
Boeing, the Delta III's second stage apparently failed to complete its second
stage burn, and, as a result, the satellite, manufactured by Hughes Space and
Communications Corporation, achieved an orbit well below the planned final
altitude. As a result, the satellite cannot be used for its intended purpose.
The satellite and launch were fully insured for approximately $266 million,
which was received in the third quarter of 1999. DACOM Corporation, a Korean
communications company which had purchased eight transponders on Orion 3 for a
total of $89 million, had made prepayments of approximately $34 million to the
Company. Under Loral CyberStar's agreement with DACOM, the amount prepaid was
refunded in July 1999.
To replace Orion 3, on September 28, 1999, Loral CyberStar purchased from
APT Satellite Company Limited ("APT") all transponder capacity (except for one
C-band transponder retained by APT) and existing customer leases on the Apstar
IIR satellite for approximately $273 million. Insurance proceeds from the May 4,
1999 launch failure of the Orion 3 satellite were used to fund the initial
payments and a significant portion of the final payment of approximately $182
million in March 2000.
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Apstar IIR, which was manufactured by SS/L, was launched in October 1997
and as of September 28, 1999 had an estimated remaining useful life of
approximately 13 years. Loral CyberStar has full use of 27 C-band and 16 Ku-band
transponders aboard Apstar IIR for the remaining life of the satellite. Located
at 76.5 degrees E.L., Apstar IIR covers a region that includes Asia, Europe,
Africa and Australia, which represents over 75% of the world's population. Under
the purchase agreement, Loral CyberStar will also have the option to lease
replacement satellites from APT upon the end of life of Apstar IIR. In November
1999, the satellite was renamed Telstar 10/Apstar IIR. As of December 31, 1999,
Telstar 10/Apstar IIR was operating at approximately 44% utilization.
In March 2000, Loral CyberStar entered into an agreement with a
subsidiary of Loral to assign to the Loral subsidiary, pending regulatory
approval, its Ka-band orbital slots located at 89 degrees W.L., 81 degrees W.L.,
78 degrees E.L. and 47 degrees W.L. In connection with this transaction, Loral
CyberStar also agreed to transfer to the Loral subsidiary all agreements,
including satellite construction contracts, related to such slots. The total
purchase price for the slots and these agreements was $36.5 million, which
purchase price was applied by Loral CyberStar towards the last installment
payment on Telstar 10/Apstar IIR.
Data Network Services
Loral CyberStar provides multinational corporations with managed
communications networks designed to carry high-speed data, fax, video
teleconferencing, voice and other specialized services. The Loral CyberStar
network delivers high-speed data to customers in emerging markets and remote
locations which would otherwise lack the necessary infrastructure to support
these services. Loral CyberStar also offers intranet services and provides high
speed Internet access and transmission services to companies outside the United
States seeking to avoid "last mile" terrestrial connections and to bypass
congested regional Internet network routes. Loral CyberStar provides its
services directly to customer premises using very small aperture terminals.
As a result of a transaction completed in December 1998, Loral CyberStar
has access to technology licensed from The Fantastic Corporation that will
enable it to provide broadband infrastructure for multicast delivery of
multimedia products and services to corporations, content developers,
broadcasters, ISPs and other enterprises that have time sensitive and complex
data requirements. Loral CyberStar continues to introduce new products that
capitalize on the strengths its satellites bring to the global Internet access
market. For example, during the fourth quarter of 1998, Loral CyberStar
introduced its WorldCast Business Edition, which supplies high-bandwidth
satellite capacity to improve businesses' access to the U.S. Internet backbone
from foreign locations. Loral CyberStar has also introduced a new multicast
service, called WorldCast Newsfeed, that will enable ISPs to receive news from
the Internet using Loral satellites, thereby minimizing terrestrial network
costs. More recently, Loral CyberStar has agreed to work together with Real
Networks, a leader in media delivery on the Internet, to deliver streaming
multimedia service to customers of European ISPs, and has entered into a joint
marketing agreement with Akamai to improve delivery of web content to ISPs
worldwide. Loral CyberStar also has an agreement with PSINet to provide a high
speed, satellite-based Internet link into South America.
Based on Internet standards, Loral CyberStar's multicast solution enables
content providers, businesses and ISP to package, manage, and broadcast content
- - including text, audio, video, graphics, pictures, animation software - to end
users around the world. By using the Loral satellites, Loral CyberStar can
achieve efficiencies for its customers by transmitting data once to multiple
locations within a satellite's coverage area rather than to each location
individually as is necessary with terrestrial connections.
In December 1999, the Brazilian government awarded Loral CyberStar a
license to deliver domestic and international data communications services in
Brazil. Under this license -- one of the first to be awarded to a foreign
company under the country's recent market-opening regulations -- Loral CyberStar
can provide the Brazilian and the international business community with
broadband data services capable of delivering content directly to the user's
desktop, as well as a network infrastructure for advanced telecommunications
services.
ACQUISITION OF ORION BY LORAL
On March 20, 1998, Orion was acquired by Loral, through the merger (the
"Merger") of Loral Satellite Corporation, a wholly owned subsidiary of Loral,
with and into Orion. Loral consummated the acquisition by issuing 18 million
shares of its common stock and assuming existing Orion vested options and
warrants to purchase 1.4 million shares of Loral common stock representing an
aggregate purchase price of $472.5 million. Orion was the surviving corporation
of the Merger and thereby became a subsidiary of Loral. At the effective date of
the Merger, Loral contributed its investment in Orion to Loral Space &
Communications Corporation, a wholly owned subsidiary of Loral, and Orion
changed its name to "Loral Orion Network Systems, Inc." The name was
subsequently further changed to "Loral CyberStar, Inc." On December 31, 1999,
Loral
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CyberStar, Inc. merged with and into Loral Orion Services, Inc. and on the same
date Loral Orion Services, Inc. changed its name to Loral CyberStar, Inc.
Following the Merger, the capital stock of Orion ceased to be publicly
traded. However, the Company continues to have registered bonds outstanding and
will continue to have filing requirements with the Securities and Exchange
Commission.
The foregoing description of the Merger does not purport to be complete and
is qualified in its entirety by the terms and conditions of the Merger
Agreement, filed as Exhibits 2.1 and 2.2 to Registration Statement No. 333-46407
on Form S-4.
AGREEMENTS WITH LORAL SKYNET
During the fourth quarter of 1998, Loral completed its integration plan for
Loral CyberStar and transferred management of Loral CyberStar's satellite
capacity leasing and satellite operations to Loral Skynet, effective January 1,
1999. Loral CyberStar and Loral Skynet, a division of Loral SpaceCom
Corporation, which in turn is a wholly-owned subsidiary of Loral, have entered
into agreements (the "Loral Skynet Agreements") effective January 1, 1999,
whereby Loral Skynet provides to Loral CyberStar (i) marketing and sales of
satellite capacity services on the Loral CyberStar satellite network and related
billing and administration of customer contracts for those services (the "Sales
Services") and (ii) telemetry, tracking and control services for the Loral
CyberStar satellite network (the "Technical Services", and together with the
Sales Services, the "Services"). The Company is charged Loral Skynet's costs for
providing these services plus a 5 percent administrative fee.
SUMMARY SATELLITE DATA
The following table presents a brief description of the Company's satellite
network. The Company is subject to regulation and licensing by the U.S. Federal
Communications Commission and other national telecommunications regulatory
bodies, and to the frequency coordination process of the International
Telecommunications Union, or ITU.
All satellite systems are subject to ITU frequency coordination
requirements and must obtain appropriate authority to provide service in a given
territory. The result of the required international coordination process may
limit the extent to which all or some portion of a particular authorized orbital
slot may be used for commercial operations. In addition, the result of the
process by which satellite systems must seek authorization to provide service in
a given territory may limit the extent to which such service may be provided
from a given orbital location.
The Company's ability to provide satellite service in the geographic
regions noted below will be subject to technical constraints, international
coordination, local regulatory approval and any limitations on the scope of the
approval so obtained.
TELSTAR 10/APSTAR IIR TELSTAR 11 TELSTAR 12
--------------------- ---------- ----------
Region Covered ............... China, Japan, Korea, India, Europe, Southeastern Eastern U.S., Southeastern
Hawaii, Southeast Asia, Canada, U.S., East of Canada, Europe, Commonwealth
Australia, New Zealand, the Rockies and parts of Independent States, Middle
Eastern Russia and Oceania of Mexico East, North Africa, Latin
America and South Africa
Satellite Manufacturer ........ Space Systems/Loral MMS Space Systems Space Systems/Loral
(subsidiary of Matra
Marconi Space)
Ku-Band Transponders (1)(2).... 14@54 MHz 28@54 MHz 38@54 MHz
2@36 MHz 6@36 MHz
C-Band Transponders (1)(3)..... 25@36 MHz -- --
2@30 MHz
Usable Bandwidth(4)............ 1788 MHz 1728 MHz 2052 MHz
EIRP(5)........................ 44 - 52Dbw 47 to 52 Dbw 47 to 50 Dbw
30 - 37Dbw
for C-band returns
Total Prime Power(6) .......... 8500 Watts 4500 Watts 7000 Watts
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TELSTAR 10/APSTAR IIR TELSTAR 11 TELSTAR 12
--------------------- ---------- ----------
Expected End of Useful Life(7). 2012 2005 2015
Approximate Percentage of World
Population Covered by
Satellite(8)................... 75% 17.9% 27%
(1) Satellite transponders receive signals up from earth stations and then
convert, amplify and transmit the signals back down to other earth
stations.
(2) Ku-band frequencies are higher than C-band frequencies and are used
worldwide for commercial satellite communications.
(3) C-band frequencies minimize interference from atmospheric conditions such
as rain. C-band satellites share frequencies with terrestrial based
microwave systems and therefore require more on-ground coordination to
avoid interference problems and generally are lower power, requiring the
use of large earth stations to receive signals. A portion of Telstar
10/Apstar IIR is designed to transmit over C-band frequencies, since
Telstar 10/Apstar IIR covers areas of Asia where satellite signals
experience significant interference from rain during several months of the
year.
(4) Bandwidth is a measure of the transponder resource which determines the
information carrying capacity. The actual information carrying capacity of
a transponder is determined by a combination of the transponder's
bandwidth and radio-frequency ("RF") power.
(5) Equivalent isotropic radiated power ("EIRP") is a measure of the RF power
of each transponder. Smaller and less expensive earth terminal antennas
can be used with higher EIRP transponders.
(6) Total prime power is the total amount of power that is required to support
all of the communications and electronics functions of the satellite.
(7) The expected end of a satellite's in-orbit useful life is based on the
period during which the satellite's on board fuel permits proper station
keeping maneuvers for the satellite.
(8) The approximate percentages of world population covered or to be covered
by the Loral CyberStar satellites are not additive. In the aggregate, the
footprints of the Loral CyberStar satellites cover over approximately 85
percent of the world's population.
INSURANCE
Loral CyberStar has obtained satellite in-orbit insurance for Telstar 11
covering the period from August 1998 to August 2003 in an amount of
approximately $195 million providing protection against partial or total loss of
the satellite's communications capability, including loss of transponders,
power, fuel, or ability to control the positioning of the satellite.
Loral CyberStar has obtained launch and in-orbit life insurance for Telstar
12 covering the period from launch to five years after launch in an amount of
approximately $261 million. This coverage provides protection against partial or
total loss of the satellite's communications capability, including loss of
transponders, power, fuel or ability to control the positioning of the
satellite.
5
Loral Cyberstar has obtained satellite in-orbit insurance for Telstar
10/Apstar IIR in an amount of approximately $272 million covering the period
from October 1999 to October 2001. The coverage is provided in a main policy at
an insured value of $163 million and a supplemental policy at an insured value
of $109 million. Both policies provide protection against partial or total loss
of the satellite's communications capacity, including loss of transponders,
power, fuel or ability to control the positioning of the satellite.
In-orbit insurance for its satellites will not protect the Company against
business interruption, loss or delay of revenues and similar losses and may not
fully reimburse the Company for its expenditures.
EMPLOYEES
As of December 31, 1999, Loral CyberStar and its subsidiaries had 232 full
time employees, none of whom are subject to collective bargaining agreements.
CERTAIN FACTORS THAT MAY EFFECT FUTURE RESULTS
This annual report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition,
from time to time, the Company, Loral or their representatives have made or may
make forward-looking statements, orally or in writing. They can be identified by
the use of forward-looking words such as "believes", "expects", "plans", "may",
"will", "should", or "anticipates" or their negatives or other variations of
these words or other comparable words, or by discussions of strategy that
involve risks and uncertainties. Such forward-looking statements may be included
in, but are not limited to, various filings made by the Company or Loral with
the Securities and Exchange Commission, press releases or oral statements made
by or with the approval of an authorized executive officer of the Company or
Loral. Forward-looking statements are only predictions. Actual events or results
could differ materially from those projected or suggested in any forward-looking
statements as a result of a wide variety of factors and conditions, including,
but not limited to, the factors summarized below.
THE COMPANY HAS SUBSTANTIAL DEBT.
As of December 31, 1999, the Company had approximately $1.04 billion of
debt, including $74.1 million of a note payable to Loral SpaceCom. The
Company's senior notes and senior discount notes, which both mature in 2007,
are non-recourse to Loral.
The Company has sufficient funds in its restricted cash account to make
interest payments on the senior notes through 2000. Thereafter, the Company's
ability to meet its debt service obligations will be dependent upon the future
performance of the Company, including its ability to increase revenues, which
will be subject to financial, business, competitive and other factors, including
factors beyond the Company's control. The Company will also be required to begin
making cash interest payments on the senior discount notes starting in 2002. The
Company expects to continue to incur net losses and have negative cash flow
(after payments for capital expenditures and interest) for the immediate future.
There can be no assurance that the Company will be able to achieve the revenue
increases, or otherwise generate sufficient cash flow to meet its debt service
obligations with respect to all of its outstanding indebtedness.
THE COMPANY'S DEBT IMPOSES RESTRICTIONS AND OTHERWISE AFFECTS THE COMPANY'S
ABILITY TO UNDERTAKE CERTAIN ACTIONS.
The indentures relating to the Company's senior notes contain restrictions,
which among other things, limit the Company's ability to incur other
indebtedness, create liens, make investments, sell assets and engage in mergers
and consolidations. In addition, the level of the Company's indebtedness
adversely affects:
o the Company's ability to generate cash flow to pay expenses and fund
its expenditures, which will be affected by the Company's need to use a
substantial amount of its cash flow to service existing indebtedness.
o the Company's ability to raise additional debt or equity financing in
the future.
o the Company's flexibility in planning for, or reacting to, changes to
its business and market conditions, especially in the rapidly evolving
data business.
6
THE COMPANY HAS FUNDING REQUIREMENTS.
The Company currently anticipates that it will have additional funding
requirements over the next three years to fund the purchase of very small
aperture terminals, other capital expenditures, interest payments on the senior
notes and the senior discount notes and other operating needs. The Company does
not have a revolving credit facility. Accordingly, the Company will need to
secure funding from Loral or raise additional financing. Sources of additional
capital may include public or private debt, equity financings or strategic
investments. To the extent that the Company seeks to raise additional debt
financing, the indentures relating to the senior notes and the senior discount
notes limit the amount of such additional debt and prohibit the Company from
using Telstar 10/Apstar IIR, Telstar 11 and Telstar 12 as collateral for
indebtedness for money borrowed. If the Company is unable to obtain such
financing from Loral or from outside sources in the amounts and at the times
needed, there would be a material adverse effect on the Company.
AFTER LAUNCH, THE COMPANY'S SATELLITES REMAIN VULNERABLE TO IN-ORBIT FAILURE,
WHICH MAY RESULT IN UNINSURED LOSSES.
Random failure of satellite components may result in damage to or loss of a
satellite before the end of its expected life. Satellites are carefully built
and tested and have certain redundant systems in case of failure. However,
in-orbit failure may result from the various causes, including:
o component failure;
o loss of power or fuel;
o inability to control positioning of the satellite;
o solar and other astronomical events; and
o space debris.
Repair of satellites in space is not feasible. Many factors affect the
useful lives of satellites. These factors include fuel consumption, the quality
of construction, gradual degradation of solar panels and the durability of
components. Although some failures may be covered in part by insurance, they may
result in uninsured losses as well.
In November 1995, a component on Telstar 11 malfunctioned, resulting in a
2-hour service interruption. The malfunctioning component supported nine
transponders serving the European portion of Telstar 11's footprint. Full
service was restored using a back-up component. If that back-up component fails,
Telstar 11 would lose a significant amount of usable capacity.
OUR BUSINESS IS REGULATED, CAUSING UNCERTAINTY AND ADDITIONAL COSTS.
Our business is regulated by authorities in many jurisdictions, including
the Federal Communications Commission, the International Telecommunications
Union and the European Union. As a result, some of the activities which are
important to the Company's strategy are beyond its control. The Company's
international service offerings are strategically important activities which are
regulated by various government and quasi-government authorities and
organizations.
Regulatory authorities in the various jurisdictions in which the Company
operates can modify, withdraw or impose charges or conditions upon the licenses
which we need, and so increase the Company's cost of doing business. The
regulatory process also requires potentially costly negotiations with third
parties operating or intending to operate satellites at or near orbital
locations where the Company places its satellites so that the frequencies of the
satellites do not interfere. For example, as part of the Company's coordination
effort on Telstar 12, the Company agreed to provide four transponders on Telstar
12 to Eutelsat for the life of the satellite. The Company also granted Eutelsat
the right to acquire, at cost, four transponders on the next replacement
satellite for Telstar 12. Moreover, the Company, as part of this international
coordination process, continues to conduct discussions with various
administrations regarding Telstar 12's operations at 15 degrees W.L. If these
discussions are not successful, Telstar 12's useable capacity may be reduced.
The Company cannot guarantee successful frequency coordination for its
satellites.
Failure to successfully coordinate the Company's satellites' frequencies or
to receive other required regulatory approvals could have a material adverse
effect on the Company's financial condition and results of operations.
7
THE COMPANY HAS MANY COMPETITORS.
The Company competes for customers and market share. In its fixed satellite
services business, the Company faces competition from companies such as PanAmSat
Corporation, GE Americom, SES Astra and quasi-governmental organizations such as
Intelstat and Eutelsat. Competition in this market may cause downward price
pressures, which may adversely affect the Company's profit.
The Company's data business also faces competition from providers of
land-based data communications services, such as cable operators, digital
subscriber line, or DSL, providers, wireless local loop providers and
traditional telephone service providers. In addition, the Company may face
competition in the future from proposed satellite systems, including Teledesic
Corporation's proposed system and Hughes' Spaceway system.
The services provided by the Company have been subject to decreasing prices
over recent years due to increased competition. This pricing pressure is
expected to continue (and may accelerate) for the foreseeable future,
particularly if, as expected, capacity continues to increase. The Company will
need to increase its volume of sales in order to compensate for such price
reductions.
As land-based telecommunications services expand, demand for some
satellite-based services may be reduced. New technology could render
satellite-based services less competitive by satisfying consumer demand in other
ways or through the use of incompatible standards.
LAUNCH FAILURES MAY DELAY SOME OF OUR OPERATIONS IN THE FUTURE.
Satellite launches are risky and launch attempts have ended in failure. The
Company ordinarily insures against launch failures, but at considerable cost.
The cost and the availability of insurance vary depending on market conditions
and the launch vehicle used. The Company's insurance typically does not cover
business interruption, and so both launch failures and in-orbit satellite
failures result in uninsured losses. Replacement of a lost satellite typically
requires up to 18 months from the time a contract is executed until the launch
date of the replacement satellite.
On May 4, 1999, the Orion 3 broadcast communications satellite was
placed into a lower-than-expected orbit after its launch on a Boeing Delta III
rocket. According to Boeing, the Delta III rocket apparently failed to complete
its second stage burn, and, as a result, the satellite, manufactured by Hughes
Space and Communications Corporation, achieved an orbit well below the planned
final altitude. As a result, the satellite cannot be used for its intended
purpose. This loss resulted in Loral CyberStar having to refund approximately
$34 million to DACOM Corporation, representing the amount of the prepayments
made by DACOM towards its purchase of eight transponders on Orion 3.
THERE ARE RISKS IN CONDUCTING BUSINESS INTERNATIONALLY.
Much of the Company's business is conducted outside the United States,
which imposes more risks. The Company could be harmed financially and
operationally by changes in foreign regulations and telecommunications
standards, tariffs or taxes and other trade barriers. Customers outside of the
developed world could have difficulty in obtaining the U.S. dollars they owe the
Company, including as a result of exchange controls. Additionally, exchange rate
fluctuations may adversely affect the ability of the Company's customers to pay
in U.S. dollars. Moreover, if the Company were ever to need to pursue legal
remedies against its foreign customers and business partners, it may have to sue
them abroad, where it could be hard for the Company to enforce its rights.
EFFECT OF YEAR 2000
The Company's computer systems and software programs are functioning
properly. However, there is still a possibility that some computer systems and
software programs may not function properly later in the year 2000 and beyond
because of a once common programming standard which used two digits instead of
four to signify a year. This problem is often referred to as the "Year 2000"
issue.
If the Company is unable to fix a serious Year 2000 problem, there could be
an interruption or failure of the Company's operations. Likewise, if the
Company's suppliers or customers are unable to fix a material Year 2000 problem,
a resulting interruption or failure of their business could hurt Loral
CyberStar.
ITEM 2. PROPERTIES.
Loral CyberStar owns seven acres of land in Mt. Jackson, Virginia and
leases approximately 78,000 square feet for office space worldwide. Management
believes that the facilities are sufficient for its current operations.
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ITEM 3. LEGAL PROCEEDINGS.
While the Company is party to legal and regulatory proceedings incident to
its business, there are no material legal proceedings pending or, to the
knowledge of management, threatened against the Company or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Omitted pursuant to General Instruction I of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
All of the Company's outstanding common stock is owned, directly or
indirectly, by Loral Space & Communications Corporation, a wholly owned
subsidiary of Loral. Therefore, there is no public trading market for the
Company's common stock. The Company has never paid dividends on its common
stock. The Company's indentures relating to its senior notes and senior discount
notes include certain restrictions on the Company's ability to pay dividends or
make loans to its parent.
ITEM 6. SELECTED FINANCIAL DATA.
Omitted pursuant to General Instruction I of Form 10-K.
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS.
Except for the historical information contained herein, the matters discussed
in this Management's Narrative Analysis of Results of Operations are not
historical facts, but are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. In addition, from time to time,
Loral CyberStar, Loral or their representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but are not limited to, various filings made by
Loral CyberStar or Loral with the Securities and Exchange Commission, press
releases or oral statements made by or with the approval of an authorized
executive officer of Loral CyberStar or Loral. They can be identified by the use
of forward-looking words such as "believes", "expects", "plans", "may", "will",
"should" or "anticipates" or their negatives or other variations of these words
or other comparable words, or by discussions of strategy that involve risks and
uncertainties. The forward-looking statements are only predictions, and actual
events or results could differ materially from those projected or suggested in
any forward-looking statements as a result of a wide variety of factors or
conditions, many of which are beyond the Company's control. Some of these
factors and conditions include: (i) the Company has substantial debt; (ii) the
Company's debt imposes restrictions and otherwise affects the Company's ability
to undertake certain actions; (iii) the Company has funding requirements; (iv)
the Company's satellites may fail prematurely; (v) the Company cannot guarantee
successful coordination for its satellites; and (vi) the Company faces severe
competition.
GENERAL
The principal business of Loral CyberStar, Inc. (the "Company" or "Loral
CyberStar"), formerly known as Orion Network Systems, Inc., ("Orion" or
"Predecessor Company") and its subsidiary guarantors is providing
satellite-based communications services for private communications networks and
video distribution and other satellite transmission services. In 1998, Loral
CyberStar organized its business into two distinct operating segments as follows
(see Note 8 to the consolidated financial statements):
Fixed Satellite Services: Leasing transponder capacity and providing
value-added services to customers for a wide variety of applications,
including the distribution of broadcast programming, news gathering,
business television, distance learning and direct-to-home ("DTH") services.
Loral Skynet began managing the Company's Fixed Satellite Services ("FSS")
assets effective January 1, 1999.
Data Network Services: Business in development, providing managed
communications networks and Internet and intranet services, using
transponder capacity on the Loral Skynet Telstar and Loral CyberStar
fleets.
9
No restrictions exist on the ability of any of the subsidiaries of Loral
CyberStar ("Subsidiary Guarantors") other than inconsequential subsidiaries, to
pay dividends or make other distributions to the Company, except to the extent
provided by law generally (e.g., adequate capital to pay dividends under state
corporate laws).
The Company's revenues are principally generated from two to five year
contracts for delivery of communications services derived principally from
recurring monthly fees from its customers. The revenues from each contract vary,
depending upon the type of service, amount of capacity, data handling ability of
the network, the number of very small aperture terminals ("VSATs") (which
generally are owned by the Company), value-added services and other factors.
Substantially all of the Company's contracts are denominated in U.S. dollars.
The Company begins to record revenues under its contracts upon service
commencement to customers.
The Company believes that customers will increase the data speed in their
communications networks to support new applications, and that such upgrading of
customer networks will lead to increased revenues that will mitigate the effect
of price reductions. However, there can be no assurance that this will occur.
The Company expects to continue to incur net losses and have negative cash flow
(after payments for capital expenditures and interest) for the immediate future.
The Company's direct cost of services includes principally (i) costs
relating to the installation, maintenance and licensing of VSAT earth stations
at its customers' premises; (ii) satellite lease payments for transponder
capacity (generally for services outside of the Loral CyberStar satellite
network footprint); (iii) in-orbit insurance premiums; and (iv) personnel costs
and travel related to telemetry, tracking and control facility ("TT&C"), network
monitoring, network design and similar activities. Regarding TT&C costs, the
Company and Loral Skynet, a division of Loral SpaceCom Corporation, which is in
turn a wholly-owned subsidiary of Loral, have entered into agreements (the
"Loral Skynet Agreements") effective on January 1, 1999, whereby Loral Skynet
provides to Loral CyberStar (i) marketing and sales of satellite capacity
services on the Loral CyberStar satellite network and related billing and
administration of customer contracts for those services (the "Sales Services")
and (ii) telemetry, tracking and control services for the Loral CyberStar
satellite network (the "Technical Services", and together with the Sales
Services, the "Services"). Loral CyberStar is charged Loral Skynet's costs for
providing these services plus a 5 percent administrative fee. Loral Skynet
currently provides the Services for its own Telstar satellite network and
Technical Services for other third parties. Loral CyberStar believes that it
will achieve cost savings as a result of the consolidation of the Services with
Loral Skynet pursuant to the Loral Skynet Agreements and allow Loral CyberStar
to place greater resources and focus on the business of providing Data Network
Services, which will increase as the Company's business grows. Sales and
marketing expenses consist of salaries, sales commissions (including commissions
to third party sales representatives), travel and promotional expenses.
SATELLITE NETWORK
Telstar 11 (formerly Orion 1) Telstar 11, a high power satellite with 34
Ku-band transponders, commenced operations in January 1995, and provides
coverage to 34 European countries, much of the United States and parts of
Canada, Mexico and North Africa.
Telstar 12 (formerly Orion 2). Telstar 12 , a high power satellite with 38
Ku-band transponders, expands Loral CyberStar's European coverage and extends
coverage to portions of the former Soviet Union, Latin America, the Middle East
and South Africa. Telstar 12 was launched aboard an Ariane launch vehicle in
October 1999 into 15 degrees W.L., and commenced operations in January 2000.
Although Telstar 12 was originally intended to operate at 12 degrees W.L., Loral
Cyberstar reached an agreement with Eutelsat to operate Telstar 12 at 15 degrees
W.L. while Eutelsat continued to develop its services at 12.5 degrees W.L.
Eutelsat has in turn agreed not to use its 14.8 degrees W.L. orbital slot and to
assert its priority rights at such location on Loral CyberStar's behalf. As part
of this coordination effort, Loral CyberStar agreed to provide to Eutelsat four
transponders on Telstar 12 for the life of the satellite. Eutelsat also has the
right to acquire, at cost, four transponders on the next replacement satellite
for Telstar 12. As part of the international coordination process, the Company
continues to conduct discussions with various administrations regarding Telstar
12's operations at 15 degrees W.L. If these discussions are not successful,
Telstar 12's useable capacity may be reduced.
10
Orion 3. On May 4, 1999, the Orion 3 satellite was placed into a
lower-than-expected orbit after its launch on a Delta III rocket. According to
Boeing, the Delta III rocket apparently failed to complete its second stage
burn, and, as a result, the satellite, manufactured by Hughes, achieved an orbit
well below the planned final altitude. The satellite cannot be used for the
company's intended purpose as a result. The satellite and launch were fully
insured for approximately $266 million, which was received in the third quarter
of 1999. DACOM Corporation, a Korean communications company which had purchased
eight transponders on Orion 3 for a total of $89 million, had made prepayments
of approximately $34 million to the Company. Under the agreement with DACOM, the
amount prepaid was refunded in July 1999.
Telstar 10/Apstar IIR. To replace Orion 3, on September 28, 1999, Loral
Asia Pacific Satellite (HK) Limited ("Loral CyberStar HK"), a subsidiary of
Loral CyberStar, purchased from APT Satellite Company Limited ("APT") the rights
to all transponder capacity (except for one C-band transponder retained by APT)
and existing customer leases on the Apstar IIR satellite, and renamed the
satellite Telstar 10/Apstar IIR, for approximately $273 million. Telstar
10/Apstar IIR, which was manufactured by SS/L, was launched in October 1997 and
as of September 28, 1999, had an expected remaining useful life of 13 years.
Loral CyberStar HK has full use of the transponders for the remaining life of
Telstar 10/Apstar IIR. Located at 76.5 degrees E.L., Apstar IIR covers a region
that includes Asia, Europe, Africa and Australia, which represents over 75% of
the world's population. Under the purchase agreement, Loral CyberStar HK will
also have the option to lease from APT replacement satellites upon the end of
life of Telstar 10/Apstar IIR.
As of December 31, 1999, Loral CyberStar had made initial payments of
approximately $91 million to APT and paid approximately $182 million in March
2000. Insurance proceeds from the Orion 3 failure were used to fund the initial
payments and a significant portion of the final payment.
RESULTS OF OPERATIONS
On March 20, 1998, Orion was acquired by Loral Space & Communications Ltd.,
through the merger (the "Merger") of Loral Satellite Corporation, a wholly owned
subsidiary of Loral, with and into Orion. Loral consummated the acquisition by
issuing 18 million shares of its common stock and assuming existing Orion vested
options and warrants to purchase 1.4 million shares of Loral common stock
representing an aggregate purchase price of $472.5 million. Orion was the
surviving corporation of the Merger and thereby became a subsidiary of Loral. At
the effective date of the Merger, Loral contributed its investment in Orion to
Loral Space & Communications Corporation, a wholly owned subsidiary of Loral,
and Orion changed its name to "Loral Orion Network Systems, Inc." The name was
subsequently further changed to "Loral CyberStar, Inc." On December 31, 1999,
Loral CyberStar, Inc. merged with and into Loral Orion Services, Inc. and on the
same date Loral Orion Services, Inc. changed its name to Loral CyberStar, Inc.
Following the Merger, the capital stock of Orion ceased to be publicly
traded. However, the Company continues to have registered bonds outstanding and
will continue to have filing requirements with the Securities and Exchange
Commission.
For accounting purposes, the Merger was accounted for as of March 31, 1998
using the purchase method. Accordingly, the consolidated balance sheet at
December 31, 1999 and 1998 reflects the push-down of the purchase price
allocations. The purchase price represented $447.7 million in excess of the
Company's net book value, which was primarily allocated to costs in excess of
net assets acquired of $620.4 million and a fair value adjustment of $153.4
million to increase the carrying value of the Company's senior notes and senior
discount notes.
11
In evaluating financial performance, management uses revenues and
earnings before interest, taxes, depreciation and amortization and merger costs
("EBITDA") as a measure of a segment's profit or loss. In order to provide an
understanding of the Company, the results of operations discusses the results
for the year ended December 31, 1999 and on a pro forma basis for the year ended
December 31, 1998. The pro forma results of operations for 1998, include the
results of the Company for the nine months ended December 31, 1998 and the
Predecessor Company for the three months ended March 31, 1998. In addition, the
pro forma results of operations for 1998 has been presented to give the effects
as of January 1, 1998, of the Merger with Loral as described in Note 1 to the
Company's financial statements. The pro forma results of operations does not
purport to present the actual results of operations of the Company had the
Merger with Loral in fact occurred on January 1, 1998, nor is it indicative of
the results of operations that may be achieved in the future.
As a result of the Merger, the pro forma adjustments resulted in an
increase in depreciation and amortization expenses of approximately $4.4 million
for 1998. This increase primarily relates to the step up in the book value of
Telstar 11 and increased amortization expenses for cost in excess of net assets
acquired associated with the Merger. The pro forma results for 1998 include a
$12.8 million adjustment to eliminate merger costs. Pro forma interest expense
for 1998 was $64.5 million, a decrease of $3.1 million from the historical
amount. The decrease in interest expense is primarily attributable to the
elimination of the debentures, as a result of the Merger.
OPERATING REVENUES (IN MILLIONS):
Pro forma
Year ended year ended
December 31, December 31,
1999 1998
--------------- -----------------
Fixed satellite services ................ $ 35.7 $ 33.1
Data network services ................... 69.2 50.3
------------- -----------
Operating revenues ....................... $ 104.9 $ 83.4
============= ===========
EBITDA (1) (IN MILLIONS):
Pro forma
Year ended year ended
December 31, December 31,
1999 1998
--------------- -----------------
Fixed satellite services.................. $ 21.9 $ 21.4
Data network services ................... (8.3) (12.4)
----------- -----------
EBITDA ................................... $ 13.6 $ 9.0
=========== ===========
Revenue and Backlog. Revenues for the year ended December 31, 1999 and 1998
were $104.9 million and $83.4 million, respectively, an increase of $21.5
million or 26 percent. This increase was primarily attributable to the Company's
Data Network Services operations, which grew from an Internet service provider
customer base of 77 in 1998 to 133 in 1999.
- ------------------------
(1) EBITDA (which is equivalent to operating income (loss) before depreciation
and amortization, including amortization of deferred compensation and merger
costs) is provided because it is used as the measure of segment profit or loss
and 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 Loral CyberStar's operating
results. However, EBITDA is not 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.
12
At December 31, 1999, the Company had a contracted backlog (representing
future revenues under customer contracts) of approximately $628.5 million
compared to $308.5 million at December 31, 1998, an increase of 104 percent.
Revenue from contracted backlog is typically earned over two to five years.
Direct Expenses. Direct expenses for 1999 were $40.8 million, or 39 percent
of sales compared to $26.3 million, or 32 percent of sales for the same period
in 1998. This increase was primarily attributable to lease costs of third party
space segment capacity, Internet access, and terrestrial link charges incurred
to support the Data Network Services segment. The Company also recorded a charge
of $1.8 million in the fourth quarter of 1999, reflecting obsolescence in some
of its private communications network equipment.
Sales and Marketing Expenses. Sales and Marketing expenses were $25.0
million for the year ended December 31, 1999, as compared to $25.2 million for
the same period in 1998.
Engineering and Technical Services Expenses. Engineering and technical
services expenses for the year ended December 31, 1999 were $9.2 million
compared to $8.4 million for the same period in 1998, an increase of $0.8
million or 10 percent. This increase is primarily due to additional salaries
associated with support of the Data Network Services operations.
General and Administrative Expenses. General and administrative expenses
were $16.4 million for the year ended December 31, 1999, compared to $14.5
million for the same period in 1998, an increase of $1.9 million or 13 percent.
The increase was attributable to increased bad debt expense during the period
for the fixed satellite services segment.
Depreciation and Amortization. Depreciation and amortization was $75.8
million for the year ended December 31, 1999 compared to $68.3 million for the
same period in 1998, an increase of $7.5 million or 11 percent. The increase was
primarily due to the acquisition of the Telstar 10/Apstar IIR satellite in
September 1999. The Company also placed into service the Telstar 12 satellite in
December 1999 and recognized additional depreciation expense in conjunction with
the build-out of its infrastructure to support the Data Network Services
segment.
Interest. Interest income was $7.3 million for the year ended December
31, 1999, compared to $14.7 million for the same period in 1998. The decrease in
interest income was due to a reduction in the balances held in the Company's
segregated and restricted funds, which was used for satellite spending and for
interest payments on the Company's senior notes. Interest expense for the years
ended December 31, 1999 and 1998 was $69.8 million and $64.5 million,
respectively, net of capitalized interest of $20.3 million and $19.7 million,
respectively. The increase was primarily due to interest incurred on loans from
Loral.
Income Taxes. The Company is included in the consolidated U.S. federal
income tax return of Loral. Pursuant to a tax sharing agreement for 1999 with
Loral, the Company is entitled to reimbursement for the use of its tax losses
when such losses are utilized by Loral. For the year ended December 31, 1999,
the Company recorded a receivable under this tax sharing agreement of
approximately $15.1 million and a deferred tax provision of $4.7 million. The
deferred tax asset of $49.2 million on the accompanying balance sheet arises
primarily from the tax effect of the temporary differences between the carrying
amount of the senior notes and the senior discount notes payable for financial
and income tax purposes.
RESULTS BY OPERATING SEGMENT
Fixed Satellite Service
Fixed satellite services revenue for 1999 was $35.7 million versus $33.1
million in 1998. EBITDA on the same basis was $21.9 million in 1999, or 61
percent of revenues, versus EBITDA of $21.4 million, or 65 percent of revenues
in 1998.
During the fourth quarter of 1998, Loral completed its integration plan for
the Company and transferred management of the Company's satellite capacity
leasing and satellite operations to Loral Skynet, effective January 1, 1999. In
addition to increasing operational efficiency, the realignment permits Loral
CyberStar to focus on and leverage its experience in the global data services
market.
Data Network Services
Revenues for the data network services segment in 1999 were $69.2 million
versus $50.3 million in 1998, primarily from Loral CyberStar's corporate data
networking and Internet and Intranet services businesses. EBITDA for 1999 was a
loss of approximately $8.3 million versus a loss of $12.4 million in 1998.
13
Also see Note 8 to the consolidated financial statements for additional
information on segment results.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"),
which requires that all derivative instruments be recorded on the balance sheet
at their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings or financial position. The
Company is required to adopt SFAS 133 on January 1, 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest
As of December 31, 1999 and 1998, the fair value of the Company's long-term
debt was estimated to be $556.0 million and $761 million, respectively, using
quoted market prices, for the Company's Senior Notes and Senior Discount Notes.
As of December 31, 1999 and 1998, the long-term debt carrying value exceeded
fair value by $409 million and $173 million, respectively. Market risk on debt
is estimated as the potential increase in annual interest expense resulting from
a hypothetical one percent increase in the interest rates and amounted to $8
million and $9 million, for 1999 and 1998, respectively.
14
ITEM 8.
INDEPENDENT AUDITORS' REPORT
To the Shareholder of Loral Cyberstar, Inc.:
We have audited the accompanying consolidated balance sheets of Loral Cyberstar,
Inc. (formerly Loral Orion, Inc.) and its subsidiaries (collectively, the
Successor Company), a wholly owned subsidiary of Loral Space & Communications
Corporation, as of December 31, 1999 and 1998 and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
year ended December 31, 1999 and the nine months ended December 31, 1998. We
have also audited the consolidated statements of operations, changes in
stockholders' equity and cash flows of Orion Network Systems, Inc. and its
subsidiaries (collectively, the Predecessor Company) for the three months ended
March 31, 1998. These financial statements are the responsibility of the
Successor and Predecessor Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Loral
Cyberstar, Inc. and its subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the year ended December 31,
1999 and the nine months ended December 31, 1998 in conformity with generally
accepted accounting principles. Further, in our opinion, the Predecessor
Company's consolidated financial statements referred to above present fairly, in
all material respects, the results of their operations and their cash flows for
the three months ended March 31, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Successor
Company adopted a new accounting basis effective March 31, 1998 in connection
with a change of ownership and recorded net assets as of that date at the new
owner's acquisition cost. Accordingly, depreciation, amortization and interest
charges in the accompanying consolidated statement of operations for the year
ended December 31, 1999 and the nine months ended December 31, 1998, are not
comparable to those of earlier periods presented.
DELOITTE & TOUCHE LLP
McLean, VA
February 22, 2000, except for note 11 as to which the date is March 24, 2000
15
ITEM 8 (CONTINUED).
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors of Loral CyberStar, Inc. (formerly Orion Network
Systems, Inc.):
We have audited the consolidated statements of operations, changes in
stockholders' equity (deficit), and cash flows of Loral CyberStar, Inc.
(formerly Orion Network Systems, Inc.) for the year ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Loral CyberStar, Inc. (formerly Orion Network Systems, Inc.) for the year
ended December 31, 1997, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Washington, DC
February 20, 1998
16
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
----------------- ----------------
1999 1998
----------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 24,117 $ 35,861
Restricted and segregated assets 187,315 50,180
Accounts receivable (less allowance for doubtful accounts
of $2,257 and $1,019 at December 31, 1999 and 1998, respectively) 16,797 15,292
Prepaid expenses and other current assets 11,716 4,299
Due from CyberStar L.P. 181 --
--------------- ---------------
Total current assets 240,126 105,632
Restricted and segregated assets -- 22,675
Property and equipment, at cost:
Land 74 74
Satellite and related equipment 784,344 263,188
Telecommunications equipment 44,747 35,630
Furniture and computer equipment 9,910 8,693
--------------- ---------------
839,075 307,585
Less accumulated depreciation (88,549) (38,706)
Satellite construction in progress, including capitalized
interest of $20,198 at December 31, 1998 16, 951 331,861
--------------- ---------------
Net property and equipment 767,477 600,740
Due from Loral Space and Communications -- 3,619
Cost in excess of net assets acquired associated
with the Loral merger, net 593,219 608,015
Deferred income taxes 49,223 53,915
Other assets, net 34,242 22,908
--------------- ---------------
Total assets $ 1,684,287 $ 1,417,504
=============== ===============
See notes to consolidated financial statements.
17
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par amounts)
(continued)
December 31,
----------------
1999 1998
---------------- ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,071 $ 1,826
Accounts payable 3,098 2,035
Satellite purchase price payable 181,928 --
Accrued and other current liabilities 55,478 16,162
Customer deposits 9,069 7,897
Deferred revenue 2,624 35,841
Interest payable 22,842 22,842
Note payable to Loral SpaceCom 74,114 --
Due to Skynet Delaware 305 --
Due to Space Systems/Loral 9,750 --
--------------- -----------------
Total current liabilities 361,279 86,603
Long-term debt 963,299 931,669
Deferred revenue 5,957 --
Other long-term liabilities 448 141
Due to Space Systems/Loral 5,900 --
Commitments and contingencies:
Stockholders' equity:
Common stock, $.01 par value; 1,000 shares authorized; 100
shares outstanding at December 31, 1999 and 1998 -- --
Capital in excess of par value 544,176 481,791
Unearned compensation (1,804) (3,347)
Accumulated other comprehensive income (loss) (824) 616
Accumulated deficit (194,144) (79,969)
---------------- -----------------
Total stockholders' equity 347,404 399,091
---------------- -----------------
Total liabilities and stockholders' equity $ 1,684,287 $ 1,417,504
================ =================
See notes to consolidated financial statements.
18
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Predecessor Company
Nine months Three months
Year ended ended ended Year ended
December 31, 1999 December 31, 1998 March 31, 1998 December 31, 1997
----------------- ----------------- -------------- ----------------
Service revenue $ 104,882 $ 64,608 $ 18,790 $ 72,741
Operating expenses:
Direct 40,752 19,906 6,406 26,531
Sales and marketing 24,955 19,365 5,790 19,424
Engineering and technical services 9,167 6,486 1,898 7,750
General and administrative 16,416 10,834 3,707 13,956
Depreciation and amortization 75,783 51,434 12,483 48,161
Merger costs -- 612 12,145 --
---------------- -------------- ---------------- ---------------
Total operating expenses 167,073 108,637 42,429 115,822
---------------- -------------- ---------------- ---------------
Loss from operations (62,191) (44,029) (23,639) (43,081)
Interest income 7,335 9,299 5,425 24,711
Interest expense (69,776) (46,439) (21,190) (83,769)
Other income (expense) 100 167 (287) (507)
---------------- -------------- ---------------- ---------------
Loss before income taxes, extraordinary loss
on extinguishment of debt, minority interest
and preacquisition loss of acquired subsidiary (124,532) (81,002) (39,691) (102,646)
Income tax benefit 10,357 1,033 -- --
Extraordinary loss on extinguishment of debt -- -- -- (15,763)
Limited Partners' interest in the net loss of
Orion Atlantic -- -- -- 12,043
Preacquisition loss of acquired subsidiary -- -- -- 626
---------------- -------------- ---------------- ---------------
Net loss (114,175) (79,969) (39,691) (105,740)
Preferred stock dividend, net of forfeitures -- -- 1,387 (6,034)
---------------- -------------- ---------------- ---------------
Net loss attributable to common stockholders $ (114,175) $ (79,969) $ (38,304) $ (111,774)
================ ============== ================ ===============
See notes to consolidated financial statements.
19
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
Common Stock
-----------------------------
Capital in
Number Excess of Accumulated Treasury
of Shares Amount Par Value Deficit Stock 1
--------------- ------------ -------------- ---------------- ------------
Balance December 31, 1996
(Predecessor Company) 11,245 $ 112 $ 86,932 $ (87,482) $ --
Issuance of common stock 11 -- 142 -- --
Conversion of preferred stock 3,352 34 38,812 -- --
Conversion of debentures 735 7 10,285 -- --
Issuance of common stock for the purchase of APSC 86 1 1,199 -- --
Issuance of common stock for interest payments 205 2 2,623 -- --
Issuance of common stock for preferred stock
dividend payments 121 1 2,069 -- --
Issuance of warrants relating to Senior Notes and
Senior Discount Notes, net -- -- 9,224 -- --
Exercise of stock options and warrants 176 2 1,764 -- --
Employee stock purchase plan 28 1 244 -- --
Preferred stock dividend and accretion, net of
forfeitures -- -- -- (6,034) --
Purchase of treasury stock -- -- -- -- (91)
1997 net loss -- -- -- (105,740) --
Other comprehensive loss -- -- -- -- --
Comprehensive loss -- -- -- -- --
--------------- ------------- -------------- ---------------- ------------
Balance December 31, 1997 15,959 $ 160 $ 153,294 $ (199,256) $ (91)
=============== ============= ============== ================ ============
Accumulated
Other Total
Unearned Comprehensive Stockholders'
Compensation Income (Loss) Equity (Deficit)
------------ ------------- ----------------
Balance December 31, 1996
(Predecessor Company) $ -- $ -- $ (438)
Issuance of common stock -- -- 142
Conversion of preferred stock -- -- 38,846
Conversion of debentures -- -- 10,292
Issuance of common stock for the purchase of APSC -- -- 1,200
Issuance of common stock for interest payments -- -- 2,625
Issuance of common stock for preferred stock
dividend payments -- -- 2,070
Issuance of warrants relating to Senior Notes and
Senior Discount Notes, net -- -- 9,224
Exercise of stock options and warrants -- -- 1,766
Employee stock purchase plan -- -- 245
Preferred stock dividend and accretion, net of
forfeitures -- -- (6,034)
Purchase of treasury stock -- -- (91)
1997 net loss -- --
Other comprehensive loss -- (956)
Comprehensive loss -- -- (106,696)
------------- ------------- ----------------
Balance December 31, 1997 $ -- $ (956) $ (46,849)
============= ============= ================
See notes to consolidated financial statements. (continued on next page)
20
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
(IN THOUSANDS)
COMMON STOCK
Common Stock
----------------------------
Capital in
Number Excess of Accumulated Treasury
of Shares Amount Par Value Deficit Stock 1
------------- ----------- ------------ ---------------- ------------
Balance December 31, 1997
(Predecessor Company) 15,959 $ 160 $ 153,294 $ (199,256) $ (91)
Issuance of common stock 14 -- 246 -- --
Conversion of preferred stock 5,739 57 69,831 -- --
Conversion of debentures 3,572 36 49,964 -- --
Issuance of common stock for interest payments 184 2 2,577 -- --
Issuance of common stock for preferred stock
dividend payments 316 3 5,455 -- --
Exercise of stock options and warrants 165 2 1,638 -- --
Employee stock purchase plan 20 -- 292 -- --
Preferred stock dividends and accretion, net
of forfeitures -- -- -- 1,387 --
Recapitalization related to purchase by Loral (25,969) (260) 195,215 237,560 91
Increase purchase price -- -- 3,491 -- --
Net loss for the three months ended March 31, 1998 -- -- -- (39,691) --
Other comprehensive loss -- -- -- -- --
Comprehensive Loss -- -- -- -- --
------ ---------- ---------- ----------- --------
Balance March 31, 1998 -- $ -- $ 482,003 $ -- $ --
Amortization of unearned compensation -- -- -- -- --
Stock option forfeitures -- -- (212) -- --
Net loss for the nine months ended December 31, 1998 -- -- -- (79,969) --
Other comprehensive income -- -- -- -- --
Comprehensive loss -- -- -- -- --
------ ---------- ---------- ----------- --------
Balance December 31, 1998 -- $ -- $ 481,791 $ (79,969) $ --
Amortization of unearned compensation -- -- -- -- --
Loral Space and Communications capital contribution -- -- 62,385 -- --
1999 net loss -- -- -- (114,175) --
Other comprehensive loss -- -- -- -- --
Comprehensive loss -- -- -- -- --
------ ---------- ---------- ----------- --------
Balance at December 31, 1999 -- $ -- $ 544,176 $ (194,144) $ --
Accumulated
Other Total
Unearned Comprehensive Stockholders'
Compensation Income (Loss) Equity (Deficit)
------------ ------------- ----------------
Balance December 31, 1997
(Predecessor Company) $ -- $ (956) $ (46,849)
Issuance of common stock -- -- 246
Conversion of preferred stock -- -- 69,888
Conversion of debentures -- -- 50,000
Issuance of common stock for interest payments -- -- 2,579
Issuance of common stock for preferred stock
dividend payments -- -- 5,458
Exercise of stock options and warrants -- -- 1,640
Employee stock purchase plan -- -- 292
Preferred stock dividends and accretion, net
of forfeitures -- -- 1,387
Recapitalization related to purchase by Loral (4,512) 1,473 429,567
Increase purchase price -- -- 3,491
Net loss for the three months ended March 31, 1998 -- -- --
Other comprehensive loss -- (517) --
Comprehensive Loss -- -- (40,208)
------ ---------- --------------
Balance March 31, 1998 (4,512) $ -- $ 477,491
Amortization of unearned compensation 953 -- 953
Stock option forfeitures 212 -- --
Net loss for the nine months ended December 31, 1998 -- -- --
Other comprehensive income -- 616
Comprehensive loss -- -- (79,353)
------ ---------- --------------
Balance December 31, 1998 (3,347) $ 616 $ 399,091
Amortization of unearned compensation 1,543 -- 1,543
Loral Space and Communications capital contribution -- -- 62,385
1999 net loss -- -- --
Other comprehensive loss -- (1,440) --
Comprehensive loss -- -- (115,615)
------ ---------- --------------
Balance at December 31, 1999 $(1,804) $ (824) $ 347,404
See notes to consolidated financial statements.
1 Includes 269,274 treasury shares of which 255,515 were carried at no cost
through March 31, 1998.
21
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PREDECESSOR COMPANY
-----------------------------------
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31,
1999 1998 1998 1997
--------------- ------------ -------------- ------------------
OPERATING ACTIVITIES:
Net loss $ (114,175) $ (79,969) $ (39,691) $ (105,740)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Extraordinary loss on extinguishment of debt -- -- -- 15,763
Deferred income tax provision 4,692 3,771
Depreciation and amortization 75,783 51,434 12,483 48,161
Amortization of deferred financing costs -- 609 2,410
Provision for bad debts 3,304 1,325 150 1,022
Non-cash interest expense 33,758 21,325 10,070 34,347
Interest earned on restricted assets (2,292) (3,575) (1,431) (18,203)
Other -- (291) 1,644 --
Limited Partners' interest in net loss of Orion Atlantic -- -- -- (12,043)
Loss on obsolescence of assets 1,758 -- -- --
Changes in operating assets and liabilities:
Accounts receivable (4,809) (3,578) (1,408) (2,393)
Prepaid expenses and other current assets (7,417) (502) 693 (2,277)
Other assets (15,619) (1,352) 201 (3,640)
Accounts payable, accrued liabilities and other
current liailities 9,805 (1,367) (2,186) (2,393)
Interest payable -- 12,403 (12,510) 16,180
Customer deposits 1,172 5,071 23 1,612
Due to Space Systems/Loral 5,900 -- -- --
Due to Skynet Delaware 305 -- -- --
Deferred revenue 6,196 10,768 297 11,935
Due from CyberStar, L.P. (181)
Due from Loral Space and Communications -- (3,619) -- --
--------------- ------------ -------------- ------------------
Net cash provided by (used in) operating activities (1,820) 11,844 (31,056) (15,789)
Investing activities:
Increase in restricted and segregated assets (2,942) (15,321) (3,198) (419,187)
Uses of and transfers from restricted and segregated 156,380 273,960 35,938 90,500
assets
Satellite construction costs, including capitalized interest (202,170) (270,429) (14,575) (102,282)
Capital expenditures (See Note 2) (105,354) (13,667) (3,805) (11,062)
Purchase of Teleport Europe GmbH, net of cash acquired -- -- -- (8,375)
--------------- ------------ -------------- ------------------
Net cash provided by (used in) investing activities (154,086) (25,457) 14,360 (450,406)
Financing activities:
Equity contributed from Loral SpaceCom 62,385 -- -- --
Due to Loral SpaceCom 77,733 -- -- --
Due to Space Systems/Loral 9,750 -- -- --
Debt and equity financing costs -- -- -- (26,122)
Proceeds from issuance of common stock, net of Issuance
Costs -- -- 2,117 2,153
Treasury stock purchase -- -- -- (91)
Proceeds from issuance of debt -- -- -- 770,397
Repayment of senior notes and notes payable (1,223) (2,815) (254) (216,723)
Swap termination fee -- -- -- (5,288)
Payment of satellite incentives (246) (2,580) (324) (18,621)
Other (4,237) 1,068 (1,051) (1,689)
--------------- ------------ -------------- ------------------
Net cash provided by (used in) financing activities 144,162 (4,327) 488 504,016
--------------- ------------ -------------- ------------------
Net increase (decrease) in cash and cash equivalents (11,744) (17,940) (16,208) 37,821
Cash and cash equivalents at beginning of period 35,861 53,801 70,009 32,188
--------------- ------------ -------------- ------------------
Cash and cash equivalents at end of period $ 24,117 $ 35,861 $ 53,801 $ 70,009
=============== ============ ============== ==================
See notes to consolidated financial statements.
22
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
1. ORGANIZATION AND BUSINESS
The principal business of Loral CyberStar, Inc. (the "Company" or "Loral
CyberStar"), formerly known as Orion Network Systems, Inc., ("Orion" or the
"Predecessor Company"), and its subsidiary guarantors is providing
satellite-based communications services for private communications networks and
video distribution and other satellite transmission services. In 1998, Loral
CyberStar organized its business into two distinct operating segments as follows
(see Note 8):
Fixed Satellite Services: Leasing transponder capacity and providing
value-added services to customers for a wide variety of applications,
including the distribution of broadcast programming, news gathering,
business television, distance learning and direct-to-home ("DTH") services.
Loral Skynet, a division of Loral Spacecom Corporation, which is in turn a
subsidiary of Loral Space & Communications Ltd. ("Loral"), began managing
the Company's Fixed Satellite Services ("FSS") assets effective January 1,
1999.
Data Network Services: Business in development, providing managed
communications networks and Internet and intranet services, using
transponder capacity on the Loral Skynet Telstar and Loral CyberStar
fleets.
ACQUISITION OF ORION BY LORAL
On March 20, 1998, Orion was acquired by Loral through the merger (the
"Merger") of Loral Satellite Corporation, a wholly owned subsidiary of Loral,
with and into Orion. Loral consummated the acquisition by issuing 18 million
shares of its common stock and assuming existing Orion vested options and
warrants to purchase 1.4 million shares of Loral common stock representing an
aggregate purchase price of $472.5 million. Orion was the surviving corporation
of the Merger and thereby became a subsidiary of Loral. At the effective date of
the Merger, Loral contributed its investment in Orion to Loral Space &
Communications Corporation, a wholly owned subsidiary of Loral, and Orion
changed its name to "Loral Orion Network Systems, Inc." The name was
subsequently further changed to "Loral CyberStar, Inc." On December 31, 1999,
Loral CyberStar, Inc. merged with and into Loral Orion Services, Inc. and on the
same date Loral Orion Services, Inc. changed its name to Loral CyberStar, Inc.
The consolidated financial statements for the three months ended March 31,
1998 and as of and for the year ended December 31, 1997, respectively, reflect
the results of operations of the Predecesor Company. The consolidated financial
statements as of and for the year ended December 31, 1999 and as of and for the
nine months ended December 31, 1998 reflect the results of operations of Loral
CyberStar. Hereafter, references to the "Company" include both Loral
CyberStar,Inc. and its predecessor, Orion Network Sytems, Inc.
Following the Merger, the capital stock of the Company ceased to be
publicly traded. However, the Company continues to have registered bonds
outstanding and will continue to have filing requirements with the Securities
and Exchange Commission.
For accounting purposes, the Merger was accounted for as of March 31, 1998
using the purchase method. Accordingly, the consolidated balance sheet at
December 31, 1998 reflects the push-down of the purchase price allocations. The
purchase price represented $447.7 million in excess of the Company's net book
value, which was primarily allocated to costs in excess of net assets acquired
of $620.4 million and a fair value adjustment of $153.4 million to increase the
carrying value of Company's senior notes and senior discount notes. In addition,
Loral agreed to assume Orion's unvested employee stock options, which resulted
in a new measurement date and an unearned compensation charge of $4.3 million,
to be amortized over the vesting period of the options.
Had the acquisition of the Company occurred on January 1, 1998, the
unaudited pro forma sales, operating loss and net loss for the year ended
December 31, 1998 would have been $83.4 million; $59.3 million; and $108.1
million, respectively. These results, which are based on various assumptions are
not necessarily indicative of what would have occurred had the acquisition been
consummated on January 1, 1998.
23
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
1. ORGANIZATION AND BUSINESS (CONTINUED)
LORAL CYBERSTAR SUBSIDIARIES
All subsidiaries of Loral CyberStar ("Subsidiary Guarantors"), other than
inconsequential subsidiaries, have unconditionally guaranteed the Notes (as
defined below) on a joint and several basis. No restrictions exist on the
ability of Subsidiary Guarantors to pay dividends or make other distributions to
Loral CyberStar, except to the extent provided by law generally (e.g., adequate
capital to pay dividends under state corporate laws).
ACQUISITION OF ORION ATLANTIC LIMITED PARTNERSHIP INTERESTS IN THE EXCHANGE
Through January 31, 1997, Orion Satellite Corporation (whose name was
subsequently changed to Loral Orion Services, Inc.) was the sole general partner
in Orion Atlantic L.P. ("Orion Atlantic") and the Company had a combined 41 2/3
percent equity interest in Orion Atlantic. As a result of the Company's control
of Orion Atlantic, the Company's consolidated financial statements include the
accounts of Orion Atlantic. All of Orion Atlantic's revenues and expenses are
included in the Company's consolidated financial statements, with appropriate
adjustment to reflect the interests of the limited partners in Orion Atlantic's
losses prior to the Exchange as described below. The Company acquired all the
remaining interests in Orion Atlantic on January 31, 1997 during the Exchange as
described below. The Company's consolidated financial statements also include
the accounts of all other subsidiaries of the Company.
On January 31, 1997, the Company acquired all of the limited partnership
interests which it did not already own in the Company's former operating
subsidiary, Orion Atlantic, that owned the Telstar 11 satellite (formerly Orion
1) prior to its merger with Loral Orion Services, Inc. Specifically, the Company
acquired the Orion Atlantic limited partnership interests and other rights
relating thereto held by British Aerospace Communications, Inc., COM DEV
Satellite Communications Limited, Kingston Communications International Limited,
Lockheed Martin Commercial Launch Services, Inc., MCN Sat US, Inc., an affiliate
of Matra Hachette, and Trans-Atlantic Satellite, Inc., an affiliate of Nissho
Iwai Corp. (collectively, the "Exchanging Partners"). The Company accounted for
this transaction as an acquisition of minority interest, and as a result,
approximately $34.3 million was allocated to the cost of the Telstar 11
satellite and related equipment.
Pursuant to a Section 351 Exchange Agreement and Plan of Conversion (the
"Exchange Agreement"), the Exchanging Partners exchanged their Orion Atlantic
limited partnership interests for 123,172 shares of a newly created class of the
Company's Series C Preferred Stock (the "Exchange"). In addition, the Company
acquired certain rights held by certain of the Exchanging Partners to receive
repayment of various advances (aggregating approximately $41.6 million at
January 31, 1997). The 123,172 shares of Series C Preferred Stock issued in the
Exchange were convertible into approximately 7 million shares of the Company's
common stock. As a result of the Exchange, certain of the Exchanging Partners
became principal stockholders of the Company. The exchange is described in
greater detail under the caption "The Merger, the Exchange and the Debenture
Investments" in the Company's Registration Statement on Form S-4 (Registration
No. 333-19795).
The Exchange and the acquisition by the Company of the only outstanding
minority interest in the Company's subsidiary Asia Pacific Space and
Communications, Ltd. from British Aerospace Satellite Investments, Inc. on
January 8, 1997 (in exchange for approximately 86,000 shares of the Company's
common stock) resulted in the Company owning 100 percent of Orion Atlantic and
its other significant subsidiaries and, therefore, a greatly simplified
corporate structure.
THE ORION MERGER
The Exchange was conducted on a tax-free basis by means of an Orion Merger
(defined below) that was consummated on January 31, 1997. Pursuant to the
Exchange Agreement, Orion Oldco Services, Inc., formerly known as Orion Network
Systems, Inc. ("Old Orion"), formed the Company as a new Delaware corporation
with a certificate of incorporation, bylaws and capital structure substantially
identical in all material respects with those of Old Orion. Also pursuant to the
Exchange Agreement, the Company formed a wholly-owned subsidiary, Orion Merger
Company, Inc. ("Orion Merger Subsidiary"). Pursuant to an Agreement and Plan of
Merger, Orion Merger Subsidiary was merged with and into Old Orion, and Old
Orion
24
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
1. ORGANIZATION AND BUSINESS (CONTINUED)
became a wholly-owned subsidiary of the Company (the "Orion Merger"). On January
31, 1997, the effective time of the Orion Merger, all of the stockholders of Old
Orion received stock in the Company with substantially identical rights to the
Old Orion stock they held prior to the effective time of the Orion Merger.
Following the Orion Merger, the Company changed its name from Orion Newco
Services, Inc. to Orion Network Systems, Inc. and the Company's wholly-owned
subsidiary Orion Network Systems, Inc. changed its name to Orion Oldco Services,
Inc. The Exchange and Orion Merger are described in greater detail under the
caption "The Merger, the Exchange and Debenture Investments" in the Company's
Registration Statement on Form S-4 (Registration No. 333-19795).
FINANCINGS
On January 31, 1997, the Company completed a $710 million bond offering
(the "Bond Offering") comprised of approximately $445 million of Senior Note
Units, each of which consisted of one 11.25 percent Senior Note due 2007 (a
"Senior Note") and one Warrant to purchase 0.8463 shares of common stock, par
value $.01 per share ("Common Stock"), of the Company (a "Senior Note Warrant"),
and approximately $265.4 million of Senior Discount Note Units, each of which
consisted of one 12.5 percent Senior Discount Note due 2007 (a "Senior Discount
Note," and together with the Senior Notes, the "Notes") and one Warrant to
purchase 0.6628 shares of Common Stock of the Company (a "Senior Discount Note
Warrant", and together with Senior Note Warrants, the "Warrants"). Interest on
the Senior Notes are payable semi-annually in cash on January 15 and July 15 of
each year, with the first payment made on July 15, 1997. The Senior Discount
Notes will not pay cash interest prior to July 15, 2002. Thereafter, cash
interest will accrue until maturity at an annual rate of 12.5 percent payable
semi-annually on January 15 and July 15 of each year, commencing July 15, 2002.
The exercise price for the Warrants were $.01 per share of common stock. There
were 697,400 Warrants issued in connection with the Notes (see Note 6).
In addition, on January 31, 1997, the Company also completed the sale of
$60 million of its convertible junior subordinated debentures (the "Debentures")
to two investors, British Aerospace Holdings, Inc. ("British Aerospace") and
Matra Marconi Space UK Limited ("Matra Marconi Space"). British Aerospace
purchased $50 million of the Debentures and Matra Marconi Space purchased $10
million of the Debentures (collectively, the "Debentures Offering", and together
with the Bond Offering, the "Financings"). The Convertible Debentures were to
mature in 2012, and bore interest at a rate of 8.75 percent per annum payable
semi-annually in arrears solely in Common Stock of the Company. The Convertible
Debentures were subordinated to all other indebtedness of the Company, including
the Notes. Prior to the acquisition of the Company by Loral, all of the
debentures had been converted to common stock.
The net proceeds of the Bond Offering and Debentures Offering were used by
the Company to repay the Orion 1 credit Facility (as discussed in Note 5 below),
pre-fund the first three years of interest payments on certain of the Notes, and
to build and launch two additional satellites, Telstar 12 (formerly Orion 2) and
Orion 3.
The extraordinary loss on extinguishment of debt of $15.8 million in 1997
was the result of expensing unamortized deferred financing costs associated with
the Orion 1 Credit Facility which was refinanced with the proceeds from the Bond
Offering and termination of a interest rate cap agreement.
ACQUISITION OF TELEPORT EUROPE GMBH
On March 26, 1997, the Company acquired German-based Teleport Europe GmbH
(now known as Loral Orion-Europe GmbH) ("Loral Orion Europe"), a communications
company specializing in private satellite networks for voice and data services.
The Company purchased the shares of Loral Orion Europe held by the German
companies, Vebacom GmbH and
25
LORAL CYBERSTAR, INC.
(A WHOLLY OWNED SUBSIDIARY OF LORAL SPACE & COMMUNICATIONS CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS OTHERWISE INDICATED)
(CONTINUED)
1. ORGANIZATION AND BUSINESS (CONTINUED)
RWE Telliance AG, now known as o.tel.o, for approximately $9 million. In
addition, the Company acquired Loral Orion Europe's licenses and operating
agreements to provide satellite network services in 40 countries, including 17
countries in which the Company previously did not provide service. The net
purchase price of Loral Orion Europe was $8.4 million and was allocated as
follows (in thousands):
Working capital deficit, net of cash acquired.... $ (683)
Property and equipment ........................... 9,346
Other, net ...................................... (288)
----------
$ 8,375
==========
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION POLICY
The consolidated financial statements for the year ended December 31, 1999,
the nine months ended December 31, 1998, the three months ended March 31, 1998,
and for the year ended December 31, 1997, include the accounts of Loral
CyberStar, its wholly-owned subsidiaries and Orion Financial Partnership (OFP),
in which Loral CyberStar holds a 50 percent interest.
CASH AND CASH EQUIVALENTS
Loral CyberStar considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash and cash
equivalents includes (in thousands):
December 31,
-------------------------------
1999 1998
----------- -------------
Cash .................. $ 13,339 $ 3,919
Money market funds .... 1,943 4,985
Commercial paper ...... 8,835 26,957
----------- -------------
$ 24,117 $ 35,861
=========== =============
RESTRICTED AND SEGREGATED ASSETS
Restricted and segregated assets are classified as held to maturity and are
recorded at cost and consist of the following (in thousands):
December 31,
----------------------------------
1999